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 June 30, 2006
( ) 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
JOYSTAR, 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 [ ]
The number of shares of the registrant's common stock as of June 30, 2006:
43,212,160 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets 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 10
Item 3. Controls and Procedures 12
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults On Senior Securities
Item 4. Submission of Items to a Vote
Item 5. Other Information
Item 6. 14
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 15
2
JOYSTAR, INC.
BALANCE SHEETS
(Unaudited)
June 30, 2006 December 31, 2005
------------- -----------------
ASSETS
Current assets:
Cash $ 691,416 $ 218,948
Other receivables 4,047,673 398,827
Prepaid expenses 68,572 48,572
------------ ------------
Total current assets 4,807,661 666,347
Property and equipment, net 185,922 138,723
Intangible asset 52,365 54,205
------------ ------------
Total assets $ 5,045,948 $ 859,275
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 167,316 $ 198,814
Accounts payable-merchants 2,297,284 321,643
Accrued salaries 91,706 46,786
Accrued expenses 128,865 128,865
Accrued payroll taxes 567,684 412,258
Accrued rent 34,450 35,000
Loans from shareholder 472 472
------------ ------------
Total current liabilities 3,287,777 1,143,838
Commitments and contingency --
Stockholders' equity:
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, no par value, 50,000,000
shares authorized; 43,212,160 and
34,103,309 shares issued and outstanding
at March 31, 2006 and December 31, 2005
respectively 10,818,904 7,952,026
Stock issued for deferred compensation (229,000) (356,000)
Stock subscribed not issued,
shares at June 30, 2006 and 2,584,476
shares at December 31, 2005, respectively 114,800 834,800
Accumulated (deficit) (8,946,533) (8,715,389)
------------ ------------
Total stockholders' equity (deficit) 1,758,171 (284,563)
------------ ------------
Total liabilities and stockholders'
equity $ 5,045,948 $ 859,275
============ ============
The accompanying notes are an integral part of these financial statements
3
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the six For the six For the three For the three
months ended months ended months ended months ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Revenue $ 4,736,251 $ 486,000 $ 2,553,579 $ 365,000
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 2,899,948 803,455 1,419,710 520,982
General and administrative 1,984,524 1,151,168 1,017,684 646,975
Technology and content 82,923 -- 25,832 --
------------ ------------ ------------ ------------
Total operating expenses 4,967,395 1,954,623 2,463,226 1,167,957
------------ ------------ ------------ ------------
Operating loss (231,144) (1,468,623) 90,353 (802,957)
Interest expense -- 9,641 -- 9,641
------------ ------------ ------------ ------------
Loss before income taxes (231,144) (1,478,624) 90,353 (812,598)
Income tax provision -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) $ (231,144) $ (1,478,624) $ 90,353 $ (812,598)
============ ============ ============ ============
Loss per share $ (0.01) $ (0.06) $ (0.00) $ (0.03)
============ ============ ============ ============
Weighted average number of common
shares outstanding 39,782,316 24,031,395 41,829,599 24,618,082
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
JOYSTAR, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK Stock issued Stock Total
--------------------------- for Subscribed Stockholders'
Number of Deferred not Accumulated Equity
Shares Amount Compensation Issued (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 34,103,309 7,952,026 (356,000) 834,800 (8,715,389) (284,563)
Stock issued for services 3,091,730 1,137,683 -- (420,000) -- 717,683
Cost of issueing stock included
in services -- (345,107) -- -- -- (345,107)
Stock issued for cash 6,017,121 2,074,302 -- (300,000) -- 1,774,302
Deferred compensation earned -- -- 127,000 -- -- 127,000
Net loss -- -- -- -- (231,144) (231,144)
------------ ------------ ------------ ------------ ------------ -----------
Balance June 30, 2006 (Unaudited) 43,212,160 $ 10,818,904 $ (229,000) $ 114,800 $(8,946,533) $1,758,171
============ ============ ============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements
5
JOYSTAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six For the six
months ended months ended
June 30, 2006 June 30, 2005
------------- -------------
Cash flows from operating activities:
Net loss $ (231,144) $ (1,478,264)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 26,358 6,739
Stock issued for services 499,576 531,353
Stock issued for interest -- 9,641
Non-cash expense 102 --
Changes in assets and liabilities:
Increase in prepaid expenses (20,000) 4,609
Increase in other receivables (3,648,846) (25,072)
(Decrease) increase in accounts payable 1,944,142 45,985
Increase in accrued salaries 44,920 2,061
Increase in payroll taxes 155,426 164,786
Increase in accrued rent (550) 7,952
------------ ------------
Net cash used by operations (1,230,016) (730,210)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (71,717) (16,081)
------------ ------------
Net cash used by investing activities (71,717) (16,081
------------ ------------
Cash flows from financing activities:
Loans from shareholders -- 470
Issuance of common stock 1,774,302 550,270
------------ ------------
Net cash provided by financing activities 1,774,302 550,740
------------ ------------
Increase in cash 472,569 (195,551)
Cash at the beginning of the year 218,847 283,869
------------ ------------
Cash at the end of the period $ 691,416 $ 88,318
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for services $ 499,576 $ 531,353
Income taxes paid $ -- $ --
Interest paid $ -- $ --
Subscribed shares issued $ 720,000 $ 590,000
Shares issued for accrued prior year
compensation $ 127,000 $ 172,038
The accompanying notes are an integral part of these financial statements
6
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
Joystar, Inc., a California corporation (the "Company") was incorporated on
February 5, 1998. The Company specializes in selling complex travel products
including cruises, vacation packages and group travel through its national sales
force of independent travel agents.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation. The
Company has re-classified certain accounts of June 30, 2005 to be consistent
with June 30, 2006 classifications.
Results of operations for the six months ended June 30, 2006 and 2005 are not
necessarily indicative of the results that may be expected for any future
period. The balance sheet at December 31, 2005 was derived from audited
financial statements.
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, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE RECOGNITION
--------------------
The Company passes reservations booked by customers to the relevant
travel supplier and receives a commission or ticketing fee from the
travel supplier for its services. The supplier sets the price to be
paid by the consumer and the travel supplier appears as merchant of
record for the transactions. The revenues are typically recognized at
the time the reservation is booked.
7
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets,
which is seven years for furniture and equipment and three years for
computer equipment.
INTANGIBLE ASSET
----------------
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 six months ended June 30, 2006.
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
------------
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
8
NET LOSS 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 Company has no common stock equivalents, which
would dilute earnings per share.
RECLASSIFICATIONS
-----------------
The Company has reclassified certain amounts relating to prior period
June 30, 2005 results to conform to our June 30, 2006 results. The
reclassifications did not affect our financial position, cash flows,
revenue, operating loss or net loss of the prior period.
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. 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.
4. COMMON STOCK
------------
During the six months ended the Company issued 3,091,730 shares of
common stock for services for $1,137,683 of which $420,000 shares
had been subscribed and 6,017,121 shares of common stock for cash
for $2,074,302 of which $300,000 shares had been subscribed.
At June 30, 2006 the Company has 9,714,288 warrants outstanding to
purchase shares of common stock at $0.50 per share and 2,763,873
warrants outstanding to purchase shares of common stock at $0.35 per
share.
During the six months ended June 30, 2006, two officers earned
$127,000 in deferred stock compensation.
9
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.
General
Joystar specializes in selling complex travel products including cruises,
vacation packages and group travel through its national sales force of
independent travel agents. The effect of having such a large and growing network
of independent and home-based travel retailers all booking under the Joystar
agency umbrella is significantly increasing our sales and revenue, and building
strong brand recognition.
We have been very successful in attracting profession travel agents and at the
same time, eroding our competitors' market share. Since going to market with our
hosting programs in August 2004, Joystar has signed up over 3,000 travel agents
making us one of the fastest growing and largest leisure travel network in the
industry.
Throughout the first six months of 2006, Joystar's membership revenue and
commission levels with our preferred suppliers increased substantially. As we
continue to add travel agents into our network, commissions and overrides
increase with higher bookings with our preferred suppliers, we believe this will
have a positive impact on the increased profitability of the Company.
10
According to a report issued by Credit Suisse/First Boston, there are
currently 20,000 professional travel agents working from their homes. This
number is expected to grow to approximately 50,000 agents by 2010. In the
management's opinion, Joystar is on track to have an approximate twenty percent
market share by the end of 2006 and aims to increase that to thirty percent
market share by the end of 2007.
In 2005, we engaged an NASD member firm to provide investment banking services.
The Company raised approximately 3.5 million dollars in the last two quarters of
2005 and the first six months of 2006. We intend to raise an additional 5
million dollars in the next twelve months and apply for a listing on either the
American Stock Exchange or NASDAQ in the fourth quarter. There are no assurances
that this will occur.
Our business is dependent on the health and growth of the travel industry.
Travel is highly sensitive to traveler safety concerns, and thus declines after
acts of terrorism that affect the safety of travelers. The terrorist attacks of
September 11, 2001, resulted in a decrease in new travel bookings worldwide and
may reduce our revenues in future quarters. The long-term effects of these
events could include, among other things, a protracted decrease in demand for
air travel due to fears regarding additional acts of terrorism, military
responses to acts of terrorism and increased costs and reduced operations by
airlines due, in part, to new security directives adopted by the Federal
Aviation Administration. These effects, depending on their scope and directives,
which we cannot predict at this time, together with any future terrorist
attacks, could significantly impact our long-term results of operations or
financial condition.
RESULTS OF OPERATIONS
Gross travel bookings for the six months ended June 30 2006 increased 712% to
$33,056,000 Compared to $4,644,000 for the six months ended June, 30 2005.
Revenues for the six months increased 974% to $4,736,000 compared to $486,000
for the six months ended June 30, 2005. The increase of $4,250,000 is due to the
substantial increase in professional agent membership and commission levels and
overrides from our preferred suppliers.
Revenues increased sequentially 17% to $2,553,579 compared to $2,182,672 for the
quarter ended March 31, 2006. This represents the seventh sequential quarter of
double-digit revenue growth
Revenue margins (defined as net revenue as a percentage of gross bookings) for
the six months ended June 30,2006 increased to 14% compared to 10.5% for the six
months ended June30, 2005. The 33% increase is due to substantial increases in
commissions, overrides, and membership fees. We believe revenue margins will
continue to increase as our paid membership continues to grow and as we
negotiate better commissions and overrides with more and more travel suppliers.
Net income for the three months ended June30, 2006 was $90,353 compared to a net
loss of $812,298 for the three months ended June 30,2005. This represents the
first profitable quarter in the Company's history. Net losses for the six months
ended June 30, 2006 decreased 640% to $231,144 compared to $1,478,624 for the
six months ended June 30,2005.
Selling and Marketing
Selling and marketing expenses relate to primarily to agent commissions and
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 six months ended June 30, 2006 were
$2,900,000 compared to $803,000 for the six months ended June 30, 2005. The
increase was due entirely to commissions paid to our travel agent network
on the increased revenues generated.
General and Administrative
General and Administrative expenses for the six months ended June 30, 2006 were
$1,985,000 compared to $1,151,000 for the six months ended June 30, 2005. The
increase of $834,000 was due primarily to increased headcount and payrolls
($580,000)in our new Miami office, increased accounting and legal (17,000),
increase rent ($61,000)due to new office in Miami, and an increase in travel
expenses ($31,000).
11
Technology and Content
Technology and content expense includes product development expenses such as
payroll and related expenses and depreciation of website development costs.
Technology and content expenses for the six months ended June 30, 2006 were
$82,000 as we increased our software development and engineering teams, and
increased our level of site innovation. 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.
LIQUIDITY AND SOURCES OF CAPITAL
--------------------------------
During the six months ended June 30, 2006 the Company issued 6,017,121 shares of
common stock for cash $2,074,302 of which $300,000 had been received in the
prior year as subscribed stock. The Company intends to raise an additional 5
million dollars during the next twelve months. The Company expects to finance
the capital needed with additional issuances of its securities. In order to fund
the Company's growth, the Company has engaged an NASD member firm to provide
investment banking services. There is no assurance that the Company will be able
to secure such financing.
At June 30, 2006 the Company had a cash balance of $691,416 as compared to a
cash balance of $218,948 at December 31, 2005.
Item 3. Controls and Procedures
Our President and Treasurer/Chief Financial Officer (the "Certifying Officers")
are responsible for establishing and maintaining disclosure controls and
procedures and internal controls and procedures for financial reporting for the
Company. The Certifying Officers have designed such disclosure controls and
procedures and internal controls and procedures for financial reporting to
ensure that material information are made known to them, particularly during the
period in which this report was prepared. The Certifying Officers have evaluated
the effectiveness of the Company's disclosure controls and procedures and
internal controls and procedures for financial reporting as of June 30, 2006 and
believes that the Company's disclosure controls and procedures and internal
controls and procedures for financial reporting are effective based on the
required evaluation. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
12
PART II. OTHER INFORMATION
Item 1. Legal proceedings NONE
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds NONE
Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote NONE
Item 5. Other Information NONE
13
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 10.1 Subscription Agreement
* Exhibit 10.2 Warrant Agreement
* Exhibit 10.3 Escrow Agreement
* Exhibit 10.4 Standstill Agreement
* Exhibit 10.5 Agreement for the purchase and sale of assets between
Vacation and Cruise Resources, Inc. and Joystar, Inc.
dated August 11, 2005.
* Exhibit 10.6 Employment Agreement with William M. Alverson.
Exhibit 31 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
b) Reports on 8K during the quarter:
Forms 8-K filed on January 25, 2006 and January 30, 2006.
* Previously filed with the Securities and Exchange Commission.
14
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.
JOYSTAR, INC.
Date: August 14, 2006
By: /s/ William Alverson
---------------------------------
Chief Executive Officer and Chief
Financial Officer
15