UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2007
(_) Transition report pursuant of Section 13 or 15(d) of the Securities
Exchange Act of 1939 for the transition period _______ to _______
COMMISSION FILE NUMBER 000-25973
TRAVELSTAR, INC.
(Exact name of registrant as specified in its charter)
California 68-0406331
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
95 Argonaut St. Aliso Viejo, CA 92656, Telephone (949) 837-8101
--------------------------------------------------------------------------------
(Address of Principal Executive Offices, including Registrant's zip code
and telephone number)
--------------------------------------------------------------------------------
Former address
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant's common stock as of March 31, 2008:
48,933,624 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheet 3
(b) Statements of Operations 4
(c) Statement of Stockholders' Equity (deficit) 5
(d) Statements of Cash Flows 6
(e) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
Item 3. Controls and Procedures 20
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults On Senior Securities 22
Item 4. Submission of Items to a Vote 22
Item 5. Other Information 22
Item 6. 22
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 23
2
TRAVELSTAR, INC.
BALANCE SHEETS
March 31, 2008
(Unaudited)
------------
ASSETS
Current assets
Cash and cash equivalents $ 176,705
Accounts receivable 3,345,436
Prepaid expenses 54,257
------------
Total current assets 3,576,398
Property and equipment, net 475,318
Intangible assets, net of amortization 34,908
Other assets 18,970
------------
Total assets $ 4,105,594
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,252,961
Deferred Merchant Bookings --
Accrued salaries --
Accrued expenses 128,865
Accrued liabilities 758,730
Accrued rent 36,325
Loans from shareholders 472
------------
Total current liabilities 3,177,353
------------
Commitments --
Stockholders' equity
Preferred stock, no par value, 10,000,000
shares authorized; none issued --
Common stock, no par value, 200,000,000
shares authorized;
48,933,624 and 48,772,430 shares issued
and outstanding at March 31, 2008
and March 31, 2007 respectively 19,714,553
Stock subscribed not issued, 356,000 shares at
March 31, 2008 and March 31, 2007 313,501
Accumulated (deficit) (19,099,813)
------------
Total stockholders' equity (deficit) 928,241
------------
Total liabilities and stockholders' equity $ 4,105,594
============
The accompanying notes are an integral part of these financial statements
3
n
TRAVELSTAR, INC.
STATEMENTS OF OPERATIONS
For the Three Months ended
March 31, 2008 March 31, 2007
(Restated)
------------ ------------
Revenue $ 1,938,449 $ 2,472,733
Operating Expenses:
Selling and marketing 1,693,104 2,203,781
General and administrative 709,673 682,485
Technology 30,199 24,815
------------ ------------
Total operating expenses 2,432,976 2,911,081
------------ ------------
Operating loss (494,527) (438,348)
------------ ------------
Other income/(expense)
Interest income -- 18,624
Gain/(Loss)on fair value of warrants
and stock purchase rights -- 1,422,384
------------ ------------
Other income/(expense) 312 1,441,008
------------ ------------
Income/(Loss) before income taxes (494,215) 1,002,660
Income tax provision -- --
------------ ------------
Net Income/(loss) $ (494,215) $ 1,002,660
============ ============
Net Income/(Loss) per share
Basic $ 0.02 $ 0.02
Diluted $ 0.02 $ 0.02
============ ============
Weighted average number of common shares-
Basic 50,951,830 48,873,505
Diluted 50,951,830 55,107,387
============ ============
The accompanying notes are an integral part of these financial statements
4
TRAVELSTAR, INC. (FORMERLY JOYSTAR, INC.)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months ended March 31, 2008
COMMON STOCK
Stock Total
Subscribed Stockholders'
Number of not Accumulated Equity
Shares Amount Issued (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------
Balance December 31, 2007 50,927,434 $ 19,690,918 $ 313,501 $(18,605,598) $ 1,398,821
Stock Issued for services 34,286 9,714 -- -- 9,714
Share based compensation -- 13,921 -- -- 13,921
Net loss -- -- -- (494,215) (494,215)
------------ ------------ ------------ ------------ ------------
Balance March 31, 2008 (Unaudited) 50,961,720 $ 19,714,553 $ 313,501 $(19,099,813) $ 928,241
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
TRAVELSTAR, INC.
STATEMENTS OF CASH FLOW
For the three months ended
March 31, 2008 March 31, 2007
(Restated)
----------- -----------
Cash flows from operating activities
Net Income/ (loss) $ (494,215) $ 1,002,660
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 44,402 19,885
Share based compensation 13,921 12,252
Stock issued for services 9,714 86,969
Shares issued for deferred compensation -- 52,500
Non-cash expense -- --
Changes in assets and liabilities
(Increase) in prepaid expenses -- --
(Increase) in receivables 164,683 (778,339)
(Decrease)Increase in accounts payable (6,338) 1,056,354
Increase in deferred merchant bookings 6,803 381,143
Increase in accrued salaries/rent and payroll taxes 88,673 125,029
Increase/(Decrease) in accrued liability relating
to warrants and other stock purchase rights -- (1,407,726)
----------- -----------
Net cash provided by/(used in) operations (158,437) 550,727
----------- -----------
Cash flows from investing activities
Acquisition of property and equipment (137,639) (138,580)
----------- -----------
Net cash used in investing activities (137,639) (138,580)
Cash flows from financing activities
Issuance of common stock for cash -- 200
----------- -----------
Net cash provided by financing activities -- 200
----------- -----------
Increase in cash (309,998) 412,347
Cash at the beginning of the period 619,666 2,246,929
----------- -----------
Cash at the end of the period $ 309,668 $ 2,659,276
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock for services $ 9,714 $ 86,969
Shares issued for deferred compensation $ -- $ 52,500
Share based compensation $ 13,921 $ 12,252
The accompanying notes are an integral part of these financial statements
6
TRAVELSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007
NOTE 1 -- ORGANIZATION
GENERAL DESCRIPTION OF OUR BUSINESS
Travelstar, Inc., a California corporation ("Travelstar", "we" or the "Company")
sells complex leisure travel including cruises, vacations and group travel
through a rapidly expanding virtual network of leisure travel agents. We empower
thousands of travel agents with the tools and information they need to
efficiently research, plan, book and extraordinary travel experiences. Through
our Travelstar branded, co-branded and private label websites, we offer
travelers real time access and booking capabilities to every major airline,
lodging property, car rental company, vacation provider, and cruise line in the
world. We are one of the leading host agencies in the world. Our brands include:
Joystar, VacationCompare.com, and Travelstar.com.
We are uniquely positioned to capitalize on our early mover advantage and brand
strength as the premier host travel agency in the travel industry. The virtual
travel agency model is expanding rapidly as travel agency owners and individual
agents switch from bricks & mortar models to virtual, hosted operations. The
migration of the existing travel agency community which sells billions of
dollars of complex travel annually, combined with the emergence of new entrants
attracted to the prospect of owning and operating a home based travel business
represents an especially large opportunity for Travelstar.
We refer to Travelstar, Inc. and its brands collectively as "Travelstar," the
"Company," "us," "we" and "our" in these financial statements. All adjustments
(consisting only of normal recurring adjustments) have been made which, in the
opinion of management, are necessary for a fair presentation.
Results of operations for the three months ended March 31, 2008 and 2007 are not
necessarily indicative of the results that may be expected for any future
period.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, have been omitted. These financial statements
should be read in conjunction with the audited financial statements and notes
for the year ended December 31, 2007.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
We use estimates and assumptions in the preparation of our financial statements
in accordance with accounting principles generally accepted in the United States
("GAAP"). Our estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
date of our financial statements. These estimates and assumptions also affect
the reported amount of net income during any period. Our actual financial
results could differ significantly from these estimates. Our significant
estimates underlying our financial statements include revenue recognition,
accounting for merchant payables, recoverability of long-lived and intangible
assets and goodwill, income taxes, and stock-based compensation.
7
REVENUE RECOGNITION
We offer travel products and services through two business models: the travel
agency model and the host agency model.
Under the travel agency model, we act as the agent in the transaction, passing
reservations booked by the traveler to the relevant travel provider. We receive
commissions or ticketing fees from the travel supplier and/or traveler. We
record revenue based principally on Staff Accounting Bulletin ("SAB") No. 104
"Revenue Recognition." We recognize revenue when it is earned and realizable
based on the following criteria: persuasive evidence of an arrangement exists,
services have been rendered, the price is fixed or determinable and
collectibility is reasonably assured.
The prevailing accounting guidance with respect to the presentation of revenue
on a gross versus a net basis is contained in Emerging Issues Task Force No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent ("EITF
99-19")." The consensus of this literature is that the presentation of revenue
as "the gross amount billed to a customer because it has earned revenue from the
sale of goods or services or the net amount retained (that is, the amount billed
to a customer less the amount paid to a supplier) because it has earned a
commission or fee" is a matter of judgment that depends on the relevant facts
and circumstances. If the conclusion drawn is that we perform as an agent or a
broker without assuming the risks and rewards of ownership of goods, revenue
should be reported on a net basis.
In making an evaluation of this issue, some of the factors that should be
considered are: whether we are the primary obligor in the arrangement (strong
indicator); whether we have general inventory risk (before customer order is
placed or upon customer return) (strong indicator); and whether we have latitude
in establishing price. EITF 99-19 clearly indicates that the evaluations of
these factors, which at times can be contradictory, are subject to significant
judgment and subjectivity.
Our travel agency revenue comes from cruise transactions, vacation package
transactions, airline ticket transactions, hotel transactions as well as car
rental reservations. We record travel agency revenue on a net basis when the
traveler books the transaction, as we have no significant post-delivery
obligations. We record an allowance for cancellations and on this revenue based
on historical experience. Under our host agency model, we offer technology,
marketing, and support services to a growing network of independent travel
agencies.
We recognize agency revenues on hotel, cruise and car rental reservations at the
earlier of notification of the amount of the commission from a commission
clearinghouse or a supplier or on receipt of the commissions from an individual
supplier.
The Company recognizes revenue for additional payments from travel suppliers
that are commonly referred to as "overrides" or "co-op marketing dollars".
Typically these payments are contingent upon the Company producing a certain
threshold level of bookings or sales with these suppliers. The Company monitors
agreements that it has with various suppliers.
Override commissions are recognized each period based upon our actual attainment
of predetermined target sales levels. During the years ended December 31, 2006
and 2007, the Company recognized override revenues, based on its evaluation of
the actual attainment of various supplier production goals, as of the end of
each interim period. While the Company believes that its recognition of override
revenue was accurate, this policy required the Company to track and measure a
large number of complex agreements.
Commencing in January 2007 the Company chose to modify this policy to only
recognize override revenue that had either actually been received or for which
the Company was notified by a supplier that the override had been earned, and
that payment was forthcoming. The Company does not believe that the change in
policy would have resulted in a material difference in the revenue amounts
recognized for the years ended December 31, 2006 and 2007.
Our merchant revenues are derived from transactions where we are the merchant of
record and determine the price. We have agreements with suppliers for blocks of
inventory that we sell and these sales generate the majority of our total
merchant revenues. We do not have purchase obligations for unsold inventory.
Recognition of merchant revenue occurs on the date the traveler uses the
inventory, such as the date of airline departure or hotel stay.
The Company generates membership service revenues derived from the operation of
the host-agency model in which the Company provides support services to travel
agents. These revenues include fee-based month-to-month non-obligatory payments,
set-up fees and ongoing membership dues for members in renewal periods paid
annually.
8
The Company receives overrides from certain travel suppliers in the form of
commissions as well as co-op marketing earnings based on the Company's gross
travel bookings with the supplier, recognized each period based upon the
Company's actual attainment of predetermined target sales levels.
Accounting estimates are an integral part of the financial statements prepared
by management and are based on management's current judgments. Those judgments
are normally based on knowledge and experience about past and current events and
on assumptions about future events. Commission revenue for reservations is paid
to the company by the travel suppliers, typically upon completion of the travel
associated with the reservation. Because the average time lag between booking
date and commission payment date is approximately six months, the company
recognizes a reserve against revenues for bookings that may not produce a
collectible commission due to possible cancellations or other factors. For the
years ended December 31, 2007 and 2006 the company recognized a reserve ranging
from 15-25% of the gross commissions generated. The company will be monitoring
receivables and adjusting the reserve levels on a regular basis, as required.
Our host agency revenue includes the set-up, monthly and annual renewal fees we
receive from our travel agency partners and are recorded in the period we
receive them.
SEASONALITY
We generally experience seasonal fluctuations in the demand for our travel
products and services. For example, leisure travel bookings are generally the
highest in the first quarter and gradually decline over the subsequent three
quarters. The first quarter is highest due to "Wave Season", when an estimated
70% of the yearly cruise line inventory is booked. There is a gradual drop off
in the second and third quarters as travelers plan and book their spring, summer
and winter vacations. In the fourth quarter, the number of leisure bookings
decreases significantly. We have been able to offset the quarterly decline in
bookings and revenue typical to the industry through the aggressive growth of
our travel agent network
OTHER
We record revenue from all other sources either upon delivery or when we provide
the service.
CASH AND CASH EQUIVALENTS
Our cash and cash equivalents include cash and liquid financial instruments with
original maturities of 90 days or less when purchased.
ACCOUNTS RECEIVABLE
Accounts Receivable primarily consist of commissions due from travel suppliers
for reservations made by the Company's travel agents. The Company recognizes
revenue and books a receivable in the quarter when the reservation has been made
by the travel agent. Typically travel suppliers pay commissions after the travel
has been completed.
The amount reflected as of December 31, 2007 and 2006 represents the net amount
that the Company believes is collectible as of that date, based on an analysis
of our collection experience in 2007 and 2006 and anticipated collections in
2007 and 2006.
During the first three months of 2008 and 2007 the Company collected commissions
of approximately $1,734,000 and $1,489,000 respectively, principally consisting
of receivables generated during 2007 and 2006.
PROPERTY AND EQUIPMENT
We record property and equipment at cost, net of accumulated depreciation and
amortization. We also capitalize certain costs incurred related to the
development of internal use software in accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and EITF No. 00-02, "Accounting for Website Development Costs."
We capitalize costs incurred during the application development stage related to
the development of internal-use software. We expense costs incurred related to
the planning and post-implementation phases of development as incurred.
We compute depreciation using the straight-line method over the estimated useful
lives of the assets, which range from three to five years for computer equipment
and capitalized software development, and three to seven years for furniture and
other equipment. We amortize leasehold improvement using the straight-line
method, over the shorter of the estimated useful life of the improvement or the
remaining term of the lease.
9
INTANGIBLE ASSET
The Company acquired a client list for $55,125 in order to promote sales. The
Company believes that the client list has a minimal useful life of five years
and is amortizing it over that time. If it should lose value prior to the five
years the Company will write it off earlier. The amortization for the three
months ended March 31, 2008 and March 31, 2007 was $4,593 and $920 respectively.
Management reviews, on an annual basis, the carrying value of its intangible
asset in order to determine whether impairment has occurred. Impairment is based
on several factors including the Company's projection of future discounted
operating cash flows. If an impairment of the carrying value were to be
indicated by this review, the Company would perform the second step of the
impairment test in order to determine the amount of impairment, if any. There
was no impairment charge during the three months ended March 31, 2008 and 2007.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," we record income
taxes under the liability method. Deferred tax assets and liabilities reflect
the expected future tax consequences of temporary differences between the
carrying amounts of assets and liabilities for book and tax purposes. We
determine deferred income taxes based on the differences in accounting methods
and timing between financial statement and income tax reporting. Accordingly, we
determine the deferred tax asset or liability for each temporary difference
based on the tax rates that we expect will be in effect when we realize the
underlying items of income and expense. We consider many factors when assessing
the likelihood of future realization of our deferred tax assets, including our
recent earnings experience by jurisdiction, expectations of future taxable
income, and the carryforward periods available to us for tax reporting purposes,
as well as other relevant factors. We may establish a valuation allowance to
reduce deferred tax assets to the amount we expect to realize. Due to inherent
complexities arising from the nature of our businesses, future changes in income
tax law, tax sharing agreements or variances between our actual and anticipated
operating results, we make certain judgments and estimates. Therefore, actual
income taxes could vary from these estimates.
During the year ended December 31, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No. 109,
"Accounting for Income Taxes" by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
Interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained based solely on its technical
merits as of the reporting date. The "more-likely-than-not" threshold represents
a positive assertion by management that a company is entitled to the economic
benefits of a tax position. If a tax is not considered "more-likely-than-not" it
is to be sustained based solely on its technical merits. No benefits of the tax
position are to be recognized. Moreover, the "more-likely-than-not" threshold
must continue to be met in each reporting period to support continued
recognition of a benefit. With the adoption of FIN 48, companies are required to
adjust their financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained. Any necessary adjustment upon adoption
would be reported as a change in accounting principle at December 31, 2006.
ADVERTISING EXPENSE
We incur advertising expense consisting of offline costs, including print
advertising, and online advertising expense to promote our brands. We expense
the production costs associated with advertisements in the period in which the
advertisement first takes place. We expense the costs of communicating the
advertisement as incurred each time that the advertisement is shown. We incurred
advertising expenses of $80,255 and $122,785 during the three month periods
ended March 31, 2008 and 2007, respectively.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, Share-Based Payment. Prior to January 1, 2006, the Company
accounted for share-based payments under the recognition and measurement
provisions of APB Opinion NO. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock Based Compensation. In accordance with APB 25, no compensation cost was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The Company adopted FAS 123R using the modified prospective transition method.
Under this method, compensation cost recognized in the year ended December 31,
2007 includes: a) compensation cost for all share-based payments granted prior
to, but which were vested as of January 1, 2007, based on the grant date fair
value estimated in accordance with the original provisions of FAS 123, and b)
compensation cost for all share-based payments which vest granted subsequent to
January 1, 2007, based on the grant-date fair value estimated in accordance with
the provisions of FAS 123R. During the three months ended March 31 2008, the
Company recognized $13,921 compared to $12,252 for the three months ended March
31, 2007 in compensation expense for the issuance of stock options to employees.
10
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings Per Share" which requires the Company to present basic and
diluted earnings per share, for all periods presented. The computation of loss
per common share (basic and diluted) is based on the weighted average number of
shares actually outstanding during the period. The computation of diluted
earnings per share does not assume conversion, exercise, or contingent exercise
of securities that would not have an anti-dilutive effect on earnings. The
Company has common stock equivalents, including warrants to purchase common
stock and stock options for employees which would dilute earnings per share. The
Company had the following amounts of warrants and stock options for employees
issued and outstanding which are excluded from the calculation of diluted loss
per share:
As of March 31, 2008 March 31, 2007
----------------- -----------------
Outstanding warrants 5,257,302 13,257,302
Outstanding options 3,928,000 3,888,000
The following table reconciles basic earnings per share and diluted earnings per
share and the related weighted average number of shares outstanding for the
three months ended March 31, 2007:
DISCLOSURE FOR RECONCILIATION
OF BASIC AND DILUTED
EARNINGS PER SHARE
For the Three Months Ended March, 31, 2007
-------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ----------- --------
Net income 1,022,660
BASIC EPS $ 1,022,660 48,873,505 $ 0.02
Income available to common stockholders ========
Options 737,934
Warrants 5,495,948
----------- -----------
DILUTED EPS
Income available to common
stockholders + assumed conversions $ 1,022,660 55,107,387 $ 0.02
=========== =========== ========
Stock warrants to purchase 1,256,572 shares of common stock at $1.00 per share
were outstanding during the quarter ended March 31, 2007 but were not included
in the computation of diluted EPS because the warrants' exercise price was
greater than the market price of the common shares as of March 31, 2007. The
warrants were still outstanding on March 31, 2007 and expire in 2008 and 2011.
No vested stock options were outstanding during the quarter for which the
exercise price was greater than the market price of the common shares as of
March 31, 2007.
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially does not have sufficient authorized shares available to settle its
open stock-based contracts, the initial fair value of the applicable contracts
(consisting primarily of non-employee stock warrants and rights to purchase
common stock- (see Note 5) has been classified as "accrued liability related to
warrants and stock purchase rights" on the accompanying balance sheet and
measured subsequently at fair value (based on a Black-Scholes computation), with
gains and losses included in the statement of operations. The accrued liability
had a balance of $0 at March 31, 2008 and $6,873,647 at March 31, 2007.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE ACCOUNTING
In September 2006, the Financial Accounting Standards Board ("FASB")
issued FASB Statement No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The provisions of FAS 157 were adopted January 1, 2008. In
February 2008, the FASB staff issued Staff Position No. 157-2 "Effective Date of
FASB Statement No. 157" ("FSP FAS 157-2"). FSP FAS 157-2 delayed the effective
date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are
effective for the Company's fiscal year beginning January 1, 2009.
11
FAS 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS 157 are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that
are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
Level 3 Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and
unobservable (supported by little or no market activity).
The following table sets forth the Company's financial assets and
liabilities measured at fair value by level within the fair value hierarchy. As
required by FAS 157, assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement.
FAIR VALUE AT MARCH 31, 2008
---------------------------------------------
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
--------- --------- --------- ---------
Cash equivalents $ 37,992 $ 37,992 $ -- $ --
--------- --------- --------- ---------
$ 37,992 $ 37,992 $ -- $ --
========= ========= ========= =========
Liabilities:
None
The Company's cash instruments are classified within Level 1 of the fair
value hierarchy because they are valued using quoted market prices. The cash
instruments that are valued based on quoted market prices in active markets are
primarily money market securities and U.S. Treasury securities.
The Company had no financial assets or liabilities which were being
measured at Level 2 or 3.
In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value, with the objective of improving financial reporting
by mitigating volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting
provisions. The provisions of FAS 159 were adopted January 1, 2008. The Company
did not elect the Fair Value Option for any of its financial assets or
liabilities, and therefore, the adoption of FAS 159 had no impact on the
Company's consolidated financial position, results of operations or cash flows.
CERTAIN RISKS AND CONCENTRATIONS
Our business is subject to certain risks and concentrations including dependence
on relationships with our travel agent partners and travel suppliers, dependence
on third party technology providers, exposure to risks associated with online
commerce security and credit card fraud. We are highly dependent on our
relationships with major cruise lines and packaged vacation companies. We also
depend on global distribution system partners and third party service providers
for certain fulfillment services.
Financial instruments, which potentially subject us to concentration of credit
risk, consist primarily of cash and cash equivalents. We maintain some cash and
cash equivalents balances with financial institutions that are in excess of
Federal Deposit Insurance Corporation insurance limits.
3. GOING CONCERN
The accompanying financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United States of America,
contemplates the continuation of the Company as a going concern. The Company has
sustained significant losses and has used capital raised through the issuance of
stock and debt to fund activities. Continuation of the Company as a going
concern is contingent upon establishing and achieving profitable operations.
Such operations will require management to secure additional financing for the
Company in the form of debt or equity.
Management believes that actions currently being taken to revise the Company's
funding requirements will allow the Company to continue. However, there is no
assurance that the necessary funds will be realized by securing debt or through
stock offerings.
12
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
2008 2007
--------- ---------
Office furniture/computers $ 342,179 $ 301,920
Booking engine software 67,265 67,265
Web sites 307,170 119,344
--------- ---------
716,614 488,529
Less: accumulated depreciation (241,296) (101,878)
--------- ---------
$ 475,318 $ 386,651
========= =========
5. CAPITAL STOCK
COMMON STOCK
During the three months ended March 31, 2008, the Company issued 34,286 common
shares for services for a total of $9,714.
At March 31, 2008 the Company has 5,257,302 warrants outstanding to purchase
shares of common stock at exercise prices ranging from $0.35 to $$1.00. The
warrants have lives of one to five years remaining.
6. STOCK OPTIONS
The Board of Directors has approved in April, 2003 a Company stock option plan,
which was amended by the Company in July, 2003. All the shares (480,000 shares)
under 2002 Equity and Stock Option Plan were issued in June, 2003. In July,
2003, the Company approved 2003 Equity Compensation Plan which provides for the
grant to directors, officers, employees and consultants of the Company of stock
based awards and options to purchase up to an aggregate of 2,500,000 shares of
Common Stock. On August 16, 2006 the plan was amended to provide for grants of
options stock based awards up to an aggregate of 3,500,000 shares of Common
Stock. On December 17, 2007, the plan was further amended to provide for grants
of options and stock based awards up to an aggregate of 5,000,000 shares of
common stock.
The following table summarizes activity for all stock options for the period
ended March 31, 2008:
2008
----------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- ---------
Outstanding, beginning of period 4,670,600 $ 0.53
Granted --
Exercised -- --
Forfeited and expired (294,000) $ 1.41
----------- ---------
Outstanding, end of period 4,376,600 $ 0.48
=========== =========
Options exercisable, end of period 1,598,800 $ 0.53
Weighted average fair value of
options granted during the year $ 0.00
===========
The fair value of the stock options granted during the three months ended March
31, 2008 was approximately $0.00 or $0.00 per stock option, and was determined
using the Black Scholes option pricing model. Since no options were granted
during the three months ended March 31, 2008, it was not necessary to value any
stock options. The factors used for the three months ended March 31, 2007, were
the option exercise price of $0.98 to $1.50 per share, a 5 year life of the
options, volatility measure of 47.5%, a dividend rate of 0% and a risk free
interest rate of 4.54% for 2007.
13
The following table summarizes information about stock options outstanding at
March 31, 2008, with exercise prices equal to the fair market value on the date
of grant with no restrictions on exercisability after vesting:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ----------------- ----------------- ---------------- -------------- --------------- --------------
$0.50 to $1.50 4,376,600 3.75 $ 0.48 1,598,800 $ 0.53
=================== ================= ================ ============== =============== ==============
As of March 31, 2008, there was approximately $411,000 in unrecognized
compensation cost related to unvested stock options. The amount unrecognized
compensation cost will be recognized over its weighted average life of
approximately four years.
7. INCOME TAXES
The components of the deferred tax asset are as follows:
MARCH 31, DECEMBER 31,
2008 2007
----------- ------------
Deferred tax assets:
Net operating loss carry-forward $4,815,000 $ 4,815,000
Less: valuation allowance (4,815,000) (4,815,000)
----------- ------------
Net deferred tax assets $ -- $ --
=========== ============
The Company's operations are headquartered in the State of California and are
subject to California state income taxes. The Company had available
approximately $9,712,157 and $9,712,157 and of unused Federal and State net
operating loss carry-forwards at December 31, 2007 and December 31, 2006,
respectively that may be applied against future taxable income. These net
operating loss carry-forwards expire through 2024 for Federal purposes. There is
no assurance that the Company will realize the benefit of the net operating loss
carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely that some or all of the deferred tax assets will not be realized. At
December 31, 2006 and 2005, valuations for the full amount of the net deferred
tax asset were established due to the uncertainties as to the amount of the
taxable income that would be generated in future years.
Reconciliation of the differences between the statutory tax rate and the
effective income tax rate is as follows:
DECEMBER 31, 2007 DECEMBER 31, 2006
----------------- -----------------
Statutory federal tax (benefit) rate (34.00)% (34.00)%
Statutory state tax (benefit) rate (5.83)% (5.83)%
---------- ----------
Effective tax rate (39.83)% (39.83)%
Valuation allowance 39.83% 39.83%
---------- ----------
Effective income tax rate 0.00% 0.00%
========== ==========
8. COMMITMENTS
LEASE COMMITMENTS
The Company acquired office space in California in February 2005. The lease was
36 months with an option to renew for 36 months. In February 2008, the Company
reduced its California office space by 2,345 rentable square feet entering into
a 37 month lease with one month free of charge and an option to renew for a
period of three years.
The Company entered into a lease for its office in Florida in October 2005.
The lease is for 36 months and there is no renewal option on the lease.
Rental expense was $48,597 and $21,586 for the quarters ended March 31, 2008 and
2007, respectively.
14
9. RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the preparation of audit of the December 31, 2006 audit of
the Company's financial statements and letters of comment received from the
Securities and Exchange Commission, we determined that there were errors in the
accounting treatment and reported amounts in our previously filed financial
statements. As a result, we determined to restate our financial statements for
the year ended December 31, 2006.
In connection with the restatement, we are designing internal procedures and
controls for purposes of the preparation and certification of our financial
statements going forward. In this process, we identified certain errors in
accounting determinations and judgments, which have been reflected in the
restated financial statements.
These restated financial statements include adjustments related to the
following:
Cash and Accrued expenses: During the year ended December 31, 2006, the Company
issued cash disbursements totaling $144,068. These cash disbursements were
reconciling items for an extended period of time and management determined that
the disbursements should have been voided and reissued. Accordingly, the
balances for cash and accrued expenses have been increased by $144,068 at March
31, 2007. The March 31, 2007, financial statements, have been restated to
reflect these adjustments. The above adjustment did not affect previously
reported cash balances as of December 31, 2005.
Accrued liability related to warrants and stock purchase rights and loss on fair
value of warrants and stock purchase rights: During 2006, the Company had issued
more shares of its common stock and other common stock equivalents including
warrants and stock options which exceeded the authorized shares of common stock
that the Company could issue. The Company excluded its issued and outstanding
stock options from the calculation of the accrued liability. Management later
determined that the issued and outstanding stock options should included in the
calculation of the liability. Accordingly, $14,880 was added to the accrued
liability and the loss on fair value of warrants and stock purchase rights was
recognized as of and for the three months ended March 31, 2007. The March 31,
2007, financial statements, have been revised to reflect these adjustments. The
above adjustment did not affect previously reported cash balances as of December
31, 2005.
The following financial statement line items were corrected for the three months
ended March 31, 2007:
As originally
presented Restated
Gain on fair value of warrants
And stock purchase rights $1,437,264 $1,422,384
Earnings before income taxes $1,017,540 $1,002,660
Net Earnings $1,017,540 $1,002,660
Earnings per Share $ 0.02 $ 0.02
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
---------------------------------------------------------
The information contained in this section has been derived from our
financial statements and should be read together with our consolidated financial
statements and related notes included elsewhere in this annual report. The
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those expressed or
implied in these forward-looking statements as a result of various factors,
including those set forth at the end of this section under "Factors That May
Impact Our Results of Operations".
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this prospectus contains
forward-looking statements. The presentation of aspect of our future found
herein is subject to a number of risks and uncertainties that could cause actual
results to differ materially from those reflected in such statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. Without limiting
the generality of the foregoing, words such as "may", "will", "expect",
"believe", "anticipate", "intend", or "could" or the negative variations thereof
or comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those statements. Important
facts that could prevent us from achieving any stated goals include, but are not
limited to, the following:
(a) volatility or decline of the our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to raise
additional capital or financing to implement our business plans;
(e) failure to commercialize our technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties
(h) insufficient revenues to cover operating costs.
There is no assurance that we will be profitable, and we may not be able to
successfully develop, manage or market our products and services. We may not be
able to attract or retain qualified executives and technology personnel and our
products and services may become obsolete. Government regulation may hinder our
business. Additional dilution in outstanding stock ownership may be incurred due
to the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in our businesses.
16
OVERVIEW
Travelstar, Inc. sells complex leisure travel products through our virtual
network of travel agents, company branded and private label websites. We empower
travel entrepreneurs and leisure travelers with the tools and information they
need to efficiently research, plan, and book travel.
We refer to Travelstar, Inc. and its brands collectively as "Travelstar," the
"Company," "us," "we" and "our" in this management's discussion and analysis of
financial condition and results of operations. For additional information about
our brands, see the disclosure set forth in Part I, Item 1, Business, under the
caption "Management Overview."
TRENDS
Today, similar to the way real estate agents, mortgage bankers, stock brokers
and insurance agents have been able to effectively telecommute, tens of
thousands of experienced travel sellers operate their businesses virtually.
According to a recent report issued by Credit Suisse/First Boston, there are an
estimated 35,000 professional, home-based agents. This number is expected to
grow to approximately 50,000 agents by 2010, however, no assurances can be made
that such expectations will be met.
In the United States, telecommuting has been growing at 15% a year since 1990.
It is believed that approximately 80% of Fortune 1000 companies are likely to
employ telecommuters within this decade.
Factors that will continue to affect the future of telecommuting worldwide
include the availability of bandwidth and fast Internet connections in a given
country; social methodologies for balancing work control and work freedom; the
perceived values and economies in telecommuting; and the opportunities and need
for working collaboratively across large distances, including globally.
According to the Direct Sales Association, the number of Americans operating a
home-based business has grown from 8.5 million in 1996 to 14.1 million in 2005.
The baby-boomer population is estimated at over 70 million domestically and 450
million worldwide. This group is expected to spend both their discretionary time
and income on travel related products and services.
STRATEGY
We intend to aggressively innovate on behalf of travelers, suppliers and travel
agents including building a scalable, service-oriented technology platform
which will extend across our consumer brands. We expect this to increase the
income opportunity+ for our travel network as we will be providing them consumer
leads and also drive profitability for the company as we will create travel
bookings at a lower commission payout than our existing host travel agent
programs.
Currently, cruise vacations represent over two-thirds of our travel products
sold. Although we expect continued significant increase in our cruise business,
our goal is to grow our land-based vacation packages and tours to represent 75%
of total gross bookings.
Our preferred supplier development team is negotiating with major vacation
suppliers to increase our commissions to the levels we have attained with our
major cruise suppliers. We believe this will attract high producing vacation
agents to our network and drive sales and product mix.
SEASONALITY
We generally experience seasonal fluctuations in the demand for our travel
products and services. For example, leisure travel bookings are generally the
highest in the first quarter and gradually decline over the subsequent three
quarters. The first quarter is highest due to wave season, when an estimated 70%
of the yearly cruise line inventory is booked. There is a gradual drop off in
the second and third quarters as travelers plan and book their spring, summer
and winter vacations. In the fourth quarter, the number of leisure bookings
decreases significantly. We have been able to offset the quarterly decline in
bookings and revenue typical to the industry through the aggressive growth of
our travel agent network.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
To understand our financial position and results of operations, it is important
to understand our critical accounting policies and estimates and the extent to
which we use judgment and estimates in applying those policies. We prepared our
financial statements and accompanying notes in accordance with generally
accepted accounting principles in the United States. Preparation of the
financial statements and accompanying notes requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements and revenue and expenses during the periods reported.
17
Accounting estimates are an integral part of the financial statements prepared
by management are based on management's current judgments. These judgments are
normally based on knowledge and experience about past and current events and on
assumptions about future events. Actual results may differ from our estimates
under different assumptions or conditions.
There are certain critical estimates that we believe require significant
judgment in the preparation of our financial statements. We consider an
accounting estimate to be critical if:
o It requires us to make assumption because information was not available at
the time or it included matters that were highly uncertain at the time we
were making the estimate, and
o Changes in the estimate or different estimates that we could have selected
may have had a material impact on our financial condition or results of
operations.
Commission revenue for reservations is paid to the Company by travel suppliers,
typically upon completion of the travel associated with the reservation. Because
the average time lag between booking date and commission payment date is
approximately six months, the Company recognizes a reserve against revenues for
bookings that may not produce a collectible commission due to possible
cancellations or other factors. For the year ended December 31, 2007, the
Company recognized a reserve equal to 25% of the gross commissions earned. The
Company will be monitoring receivables and adjusting the reserve levels on a
regular basis, as required.
For more information on each of these policies, see Note 2 -- Significant
Accounting Policies, in the notes to financial statements. We discuss
information about the nature and rationale for our critical accounting estimates
below.
STOCK-BASED COMPENSATION
We record stock-based compensation expense net of estimated forfeitures. In
determining the estimated forfeiture rates for stock-based awards, we
periodically conduct an assessment of the actual number of equity awards that
have been forfeited to date as well as those expected to be forfeited in the
future. We consider many factors when estimating expected forfeitures, including
the type of award, the employee class and historical experience. The estimate of
stock awards that will ultimately be forfeited requires significant judgment and
to the extent that actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the
period such estimates are revised.
NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2 -- Significant
Accounting Policies, in the notes to financial statements.
OPERATING METRICS
Gross travel bookings represent the total dollar value of transactions booked
for both agency and merchant transactions, recorded at the time of booking
reflecting the total price due for travel, including taxes, fees and other
charges, and are generally not reduced for cancellations and refunds. The term
"gross travel bookings" is a "non-GAAP financial measure", as such term is
defined by the Securities and Exchange Commission, and may differ from non-GAAP
financial measures used by other companies. The measure of "gross travel
bookings" is in no way derived from the financial statements. Revenue recorded
in the Company's financial statements represents a percentage of commissions or
ticketing fees paid by travel suppliers on travel bookings, membership services
revenue and override commissions from travel suppliers. The Company believes
that the measure "gross travel bookings" is useful for investors to evaluate the
Company's future ongoing performance because they enable a more meaningful
comparison of the activity levels of the Company's travel agent network with its
historical results from prior periods.
RESULTS OF OPERATIONS
Please refer to the financial statements, which are a part of this report, for
further information regarding the results of operations of the Company.
18
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2007
GROSS TRAVEL BOOKINGS
Gross travel bookings for the three months ended March 31, 2008 increased to
$20,801,585 compared to adjusted gross bookings of $19,521,292 for the three
months ended March 31, 2007. Gross travel bookings refers to the total dollar
value, inclusive of all taxes and fees, of all travel services purchased by
consumers. The term "gross travel bookings" is a "non-GAAP financial measure, as
such term is defined by the Securities and Exchange Commission, and may differ
from non-GAAP financial measures used by other companies. The measure of "gross
travel bookings" is in no way derived from the financial statements. Revenue
recorded in the Company's financial statements represents a percentage of
commissions or ticketing fees paid by travel suppliers on travel bookings,
membership services revenue and override commissions from travel suppliers. The
Company believes that the measure "gross travel bookings" is useful for
investors to evaluate the Company's future ongoing performance because they
enable a more meaningful comparison of the activity levels of the Company's
travel agent network with its historical results from prior periods.
REVENUE
Revenues for the three months ended March 31, 2008 were $1,938,449 compared to
$2,472,733 for the three months ended March 31, 2007. During the three months
ended March 31, 2008, the Company took a reserve against revenues of 15%.
Offsetting the decrease is the fact that the Company no longer recognizes
advertising revenue, supplier overrides, tour conductor revenue from group sales
and membership revenue until payment is received.
Therefore, these revenues were not included in the results for the three
months ended March 31, 2008. Based on these changes, the revenue for the three
months ended March 31, 2007 would have been approximately $1,834,644.
See the discussion of reserves in Note 2 to the Financial Statements.
SELLING AND MARKETING
Selling and marketing expenses relate to direct advertising and distribution
expense, including traffic generation from Internet, search engines, private
label and affiliate programs. The remainder of the expense relates to personnel
costs, including staffing in our Agent Support Services and Preferred Supplier
Relations to enhance supplier commission levels.
Marketing and sales expenses for the three months ended March 31, 2008 were
$1,693,104 compared to $2,203,781 for the three months ended March 31, 2007. The
decrease of $510,677 was primarily due to a decrease in payments to our travel
agents. Selling and marketing expenses relate to travel agent commissions,
direct advertising and distribution expense, including traffic generation from
Internet, search engines, private label and affiliate programs.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses for the three months ended March 31, 2008
increased to $695,752 from $682,482 for three months ended March 31, 2007. The
increase of $13,267 was due to expenses for professional fees. We expect
absolute amounts spent on corporate personnel and professional service to
increase over time as we develop new business units requiring additional
headcount and continue incurring incremental costs associated with being a
public company.
TECHNOLOGY AND CONTENT
Technology and content expense includes product development expenses such as
payroll and related expenses and depreciation of technology infrastructure,
travel agent intranets, travel agent website, and consumer and social networking
site development costs. In 2007 we began outsourcing the development of certain
large scale projects including the development of our consumer travel comparison
marketplace, VacationCompare.com and our group travel social networking site,
Travelstar.com.
Technology and content expenses for the three months ended March 31, 2008 were
$30,199 compared to $24,815 for the three months ended March 31, 2007. Given the
increasing complexity of our business, geographic expansion, increased supplier
integration, service-oriented architecture improvements and other initiatives,
we expect absolute amounts spent in technology and content to increase over
time. The Company recently hired a Chief Technology Officer.
19
ACCRUED LIABILITY RELATED TO WARRANTS AND STOCK PURCHASE RIGHTS
The Company accounts for freestanding derivative financial instruments
potentially settled in its own common stock under Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." As the Company
potentially does not have sufficient authorized shares available to settle its
open stock-based contracts, the initial fair value of the applicable contracts
(consisting primarily of non-employee stock warrants and rights to purchase
common stock) (see Note 5) has been classified as "accrued liability related to
warrants and stock purchase rights" on the accompanying balance sheet and
measured subsequently at fair value (based on a Black-Scholes computation), with
gains and losses included in the statement of operations. The accrued liability
has a balance of $14,880 as of March 31, 2007. The balance at March 31, 2008 was
reduced to $0 due to the approval of the increase in the authorized shares of
the company.
Net other income for the three months ended March 31, 2008 was $312 Compared to
$1,441,008 in the three months ended March 31, 2007 which primarily reflected
the additional income as a result of the reversal of the Accrued Liability
Related to Warrants and Stock Purchase Rights when the increase in the amount of
authorized shares of the Company was approved.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $202,393 at March 31, 2008 compared to
$2,659,276 at March 31, 2007. The Company has recovered cash from trade accounts
receivable. The Accounts Receivable had a balance of $3,345,436 at the end of
the period. During the three months ended March 31, 2008 the Company issued
$9,714 in shares for services.
PROFITABILITY/LOSS
Net loss for the three months ended March 31, 2008 was $494,215 compared to net
income of $1,002,660 for the three months ended March 31, 2007.
The increase in net income during the three months ended March 31, 2007 was due
to a reduction in the provision of the accrued liability of related to warrants
and stock purchase rights. The Company's operating loss for the three months
ended March 31, 2008 was $494,527 compared to an operating loss of $438,348 for
the three months ended March 31, 2007.
Our business continues to be dominated by complex leisure travel. Commission
revenue for these types of bookings is paid to the company by travel suppliers,
typically upon completion of the travel. Because the average time lag between
booking travel and receiving the commission is approximately six months, we
determined it prudent to recognize a reserve against revenues for the
possibility of cancellations or other factors. Therefore, we recognized a
reserve equal to 15% of the gross commissions generated for the three months
ended March 31, 2008. The company will be monitoring receivables and adjusting
the reserve levels on a regular basis, as required.
Item 3. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
A system of disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended [the "Exchange Act"]) are
controls and other procedures that are designed to provide reasonable assurance
that the information that the Company is required to disclose in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives, and management necessarily is
required to use its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. In addition, the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Moreover, over
time, controls may become inadequate because of changes in conditions, or the
degree of compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a control system, misstatements due to error or fraud
may occur and not be detected.
Notwithstanding the issues described below, the current management has concluded
that the consolidated financial statements for the periods covered by and
included in this Quarterly Report on Form 10-QSB are fairly stated in all
material respects in accordance with generally accepted accounting principles in
the United States for each of the periods presented herein.
20
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document
and test the Company's internal control over financial reporting and include in
this Annual Report on Form 10-KSB a report on management's assessment of the
effectiveness of our internal control over financial reporting.
The Company's management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with United States of America generally
accepted accounting principles. A Company's internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the Company are
being made only in accordance with authorization of management and directors of
the Company and (iii) provide reasonable assurance regarding the prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on our consolidated financial
statements.
In connection with the preparation of this Report on Form 10QSB, to evaluate the
effectiveness of the design and operation of our disclosure controls and
procedures, the Company's management completed its assessment of the
effectiveness of the Company's internal control over financial reporting, guided
by the criteria set forth by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission in "Internal Control-Integrated Framework". Management
has concluded as a result that its disclosure controls and procedures are
considered sufficient and effective at the reasonable assurance level as of
March 31, 2008.
The Company plans to hire a Chief Financial Officer and is utilizing several
full time accounting contractors serving in senior and staff level accounting
positions. The Company is actively recruiting high-level competent accounting
personnel.
While we are taking immediate steps and dedicating substantial resources to
implement the internal controls based on the criteria established in Internal
Control - Integrated Framework issued by the COSO, they will not be considered
fully implemented until the new and improved internal controls operate for a
period of time, are tested and are found to be operating effectively.
The Company's registered public accountant has not conducted an audit of the
Company's controls and procedures regarding internal control over financial
Reporting since it is not yet required pursuant to the timetable set up by the
SEC.
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of March 31, 2008, that the design and operation of
our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended March 31, 2008, there were no changes in our internal
controls over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal proceedings NONE
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2008, the Company issued 20,000 shares of
common stock valued at $0.25 per share and 14,286 shares of common stock valued
at $0.33 per share for services rendered. No shares were issued for cash.
The shares of the Company's common stock were issued and sold in reliance upon
the exemption provided by Section 4(2) and/or Regulation D of the Securities Act
of 1933.
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Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote
NONE
Item 5. Other Information NONE
Item 6.
(a) Exhibits
--------
The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below.
Exhibit No. Description
----------- -----------
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act
b) Reports on 8K during the quarter: NONE
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRAVELSTAR, INC.
Date: May 20, 2008
By: /s/ William Alverson
---------------------------------
Chief Executive Officer
By: /s/ Katherine West
---------------------------------
Chief Financial Officer
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