U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PUSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO ________________________
Commission File Number: 000-25973
JOYSTAR, INC.
----------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
California 68-0406331
---------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
95 Argonaut St. First Floor, Aliso Viejo, CA 92656
----------------------------------------
(Address of Principle Executive Offices)
(949) 837-8101
-------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X ]No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
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 registrant's revenues for its most recent fiscal year were
$6,932,277.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 30, 2007 was $32,187,511 based upon the market
price of the registrant's Common Stock of $0.95 as of March 30, 2007.
The number of the Company's shares of Common Stock outstanding as of March 30,
2007 was 48,973,918. The registrant has no outstanding non-voting common equity.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
JOYSTAR, INC.
FORM 10-KSB ANNUAL REPORT
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
Forward-Looking Statements
PART 1
Item 1. Description of Business 3
Item 2. Description of Property 20
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities 24
Item 6. Management's Discussion and Analysis or Plan of Operation 24
Item 7. Financial Statements 29
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
Item 8A. Controls and Procedures 30
Item 8B. Other Information 30
PART III
Item 9. Directors and Executive Officers of the Registrant 30
Item 10. Executive Compensation 32
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 33
Item 12. Certain Relationships and Related Transactions 34
Item 13. Exhibits 34
Item 14. Principal Accountant Fees and Services 34
Signatures
2
PART I
ITEM 1. BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements about the business,
financial condition and prospects of the Company that reflect assumptions made
by management and management's beliefs based on information currently available
to it. We can give no assurance that the expectations indicated by such
forward-looking statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties underlying such
expectations should materialize, the Company's actual results may differ
materially from those indicated by the forward-looking statements.
The key factors that are not within the Company's control and that may have
a direct bearing on operating results include, but are not limited to, the
acceptance by customers of the Company's products and services, the Company's
ability to develop new products and services cost-effectively, the ability of
the Company to raise or borrow capital in the future, the development by
competitors of products or services using improved or alternative technology,
the retention of key employees and general economic conditions.
There may be other risks and circumstances that management is unable to
predict. When used in this Form 10-KSB, words such as, "believes," "expects,"
"intends," "plans," "anticipates" "estimates" and similar expressions are
intended to identify forward-looking statements, although there may be certain
forward-looking statements not accompanied by such expressions. All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.
MANAGEMENT OVERVIEW
GENERAL DESCRIPTION OF OUR BUSINESS
Joystar, Inc., a California corporation ("Joystar", "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 Joystar 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 with over 4000 professional
travel agents in our network. Our brands include: Joystar Travel Network,
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 Joystar.
OUR BRANDS
JOYSTAR TRAVEL NETWORK. We specialize in selling cruises and vacation
packages, through a national sales force of over 4000 virtual agents, as well as
co-branded and private label travel websites. We provide our agents with the
technology, marketing tools, on-demand training, mentoring programs and expert
support services so they can concentrate on building their business and creating
customer loyalty. This business model has allowed Joystar to achieve significant
growth since our launch in late 2004. Our investments in infrastructure,
technology and automation have created a scalable environment for continued
rapid growth.
CONSUMER BRANDS
We are in beginning stages of leveraging our diverse virtual network of
travel agents and strong leisure supplier relationships to create a portfolio of
consumer travel brands. Each of our brands will cater to a specific target
audience and offer online access to air, car, and hotel reservations and expert
travel agent support for complex travel including cruises, vacation packages and
group travel.
3
VACATIONCOMPARE.COM. In December, we launched VacationCompare.com, a
comparison shopping marketplace that helps consumers make informed decisions for
their leisure travel planning. Similar to what meta search sites offer travelers
for comparing air, car and hotel websites, the VacationCompare.com comparison
service is geared to the 60 million Americans who begin their vacation and
cruise shopping online, but, because of the price and complexity, prefer to book
offline with the help of a live expert.
VactionCompare.com electronically passes consumers' "request for quotes"
to the independent travel agencies in its network. Each travel agency in the
VacationCompare.com network operates under the assumption they are competing
with other experts in the industry to win the customer's business on knowledge
and added-value service.
TRAVELSTAR.COM. We have been developing a group travel social networking
site that will offer passionate leisure travelers the ability to share travel
reviews, vacation photos and videos, and travel blogs. In addition to the social
networking features, the site will offer free tools for members to manage their
invitations and responses for small private group travel including family
reunions, girl getaways, and golf vacations. It will also offer the tens of
thousands of group leaders and corporate and incentive meeting planners in the
United States the tools to mange every aspect of the group travel planning
process including access to our network of group travel experts. Group leaders
and meeting planners will have the opportunity to earn free travel and share in
the revenue generated from the group trips they promote using our site.
Travelers worldwide will be able to browse from a database of "public"
specialty group trips that have been posted by our members. They will be able to
search for and join the group trips based on criteria including destination,
activity, lifestyle, religion, music, sporting events, charitable organizations
and other affinities. The beta site is expected to launch in the second quarter
of 2007.
BUSINESS STRATEGY
Our goal is to build the largest leisure travel agency in the world. To
accomplish this, we have fueled our organic growth by creating innovative
programs designed to attract and retain the industry's best and brightest travel
sellers. We began developing our technology infrastructure and hosting service
capabilities for the professional travel agent community in 2004. Today, the
Joystar Travel Network consists of over 4000 full-time and part-time leisure
travel agents who primary sell cruises and vacations.
We believe we are uniquely positioned to capitalize on our brand strength
as a host agency in the rapidly emerging virtual travel agency model. The
potential for this business continues to expand as travel agents switch to
virtual and hosted operations. The migration of the existing travel agency
community to this new way of doing business, combined with the emergence of new
entrants to the industry represents an especially large opportunity for Joystar
in both revenue from travel bookings and from the set-up, monthly and annual
renewal fees generated from our hosting services.
We intend to leverage the vast knowledge and travel industry experience of
our network to become the recognized leader for delivering extraordinary
vacation experiences. Our goal is to match a diverse population of leisure
travelers with our certified travel experts to deliver the best possible travel
planning service.
Our business strategy is as follows:
o Leverage the experience and knowledge base of our network of travel
experts;
o Innovate on behalf of travel agents, travelers and our supplier
partners;
o Expand our leisure group travel and corporate incentive travel
businesses;
o Expand our host agency service offerings to a much broader base of
entrepreneurs; and
o Leverage our scale in technology and operations.
We seek to leverage our brand and reputation as a trusted partner to the
existing travel agent community and our relationships with travel suppliers by
creating a complementary business opportunity targeted to home based and
internet entrepreneurs and baby boomers who will be attracted to a viable
home-based business in the travel industry. We will offer three types of
programs:
4
GROUP LEADERS: Group travel leaders will be trained and supported to
develop loyal followings from their friends and family, social clubs, civic
organizations, businesses, and religious groups and student groups. For their
part, and depending on the size of the group, group leader will have the
opportunity to earn free travel and a share of the commission generated.
AFFILIATE (REFERRAL) AGENTS: The sole responsibility of an affiliate is to
refer leisure travel customers to our agency network. This is a sales position
in that the potential customer must be properly "pre-sold" on the value of
working with one of the certified travel experts in our network for their
vacation and cruise planning. The goal of the affiliate is to drive leads
through a dedicated website and dedicated toll-free number that will track their
business. The leads will be "hot transferred" to a certified travel expert in
our virtual network who will handle the planning, booking and all related
customer service. Affiliates will receive a portion of the lifetime commission
generated from their "referred" clients.
BOOKING AGENTS: Booking agents are involved in all the planning, booking,
and customer service functions. Because their role involves much more
responsibility, including prospecting for leads, dealing with suppliers, and
customer care, booking agents receive a higher percentage of the commissions
generated. Once certified, booking agents will be able to receive leads
generated by our affiliates.
We aim to appeal to the broadest possible range of travelers through our
portfolio of brands. We target several different demographics, from the
value-conscious traveler through our VacationCompare brand to luxury travelers
demanding the personal service only an experienced travel agent can provide.
We intend to continue leveraging our substantial investment in technology,
operations, host agency brand building, supplier integration and relationships
when introducing agent support services, website features, adding supplier
products and services or adding value-added content for travelers. We have been
able to launch the VacationCompare.com relatively quickly and inexpensively by
leveraging our existing technology and product supply.
For additional information about our brands, see the disclosure set forth
under the caption "Description of Business."
SEASONALITY
TRAVEL AGENCY AND HOST AGENCY BUSINESS MODELS
Under the
agency model, we sell through a rapidly expanding network of independent
contractors and are the agency of record in the transactions booked by our
independent travel agents with airlines, hotels, car rental companies, vacation
providers and cruise lines.
Our travel agency business is comprised of the sale of airline tickets,
hotel, cruise, vacation packages, and car rental reservations. Cruise and
vacation package transactions make up the majority of this business. Gross
revenue per transaction is much higher for cruises and vacation packages as
compared to simple, stand alone products including air, car, and hotel. Cruises
and vacation packages accounted for over 80% of total gross bookings for the
year ended December 31, 2006.
RELATIONSHIPS WITH TRAVEL SUPPLIERS, DISTRIBUTION AND FULFILLMENT PARTNERS
We offer travel products and services provided from a variety of airlines,
lodging properties, car rental companies, cruise lines, and vacation package
providers. The success of our business depends on our ability to strengthen our
existing, as well as develop new relationships with travel suppliers.
TRAVEL SUPPLIERS. We strive to deliver value to our travel suppliers
through a wide range of innovative, targeted merchandising and promotional
strategies designed to increase their revenue, while simultaneously reducing
their marketing transaction and customer service costs.
DISTRIBUTION PARTNERS. GDS, also referred to as computer reservation
services, provide a centralized, comprehensive repository of travel suppliers
"content" -- such as availability and pricing of travel products. The GDSs act
as intermediaries between the travel suppliers and online and offline travel
agencies, allowing agents to reserve and book cruises, rooms or other travel
products. We use Amadeus as our primary GDS for our travel websites and offer
our travel agents GDS access Amadeus and Sabre.
5
FULFILLMENT PARTNERS. We outsource certain non core airline ticket
fulfillment, dynamic packaging, and hotel fulfillment to third-party suppliers.
This function includes the issuance of tickets and related services.
MARKETING AND PROMOTIONS
Our marketing programs are intended to build, strategically position and
maintain the value of our brands, drive traffic and conversion, and lower
ongoing partner (travel agents and affiliates) and customer (travelers, and
members) acquisition costs. Our long-term success depends on our continued
ability to attract experienced travel professionals to our network, create new
travel agents, online affiliates and group leaders, create repeat customers and
increase the overall number of complex travel transactions in a cost-effective
manner.
Our marketing channels primarily include travel agent, business
opportunity seeker and traveler email communications, search engine marketing
and online and offline advertising. We have agreements with affiliate partners
and our network of travel agents pursuant to which we pay a commission for
bookings. Travel agents and affiliate partners can make travel products and
services available through Joystar- branded, co-branded or their own private
label agreements.
OPERATIONS AND TECHNOLOGY
We provide service and support to travelers and travel agents via
telephone, e-mail and live chat. For purposes of operational flexibility, we
provide this support infrastructure with a combination of in-house employees and
virtual agents which are located in throughout the world. Our software
development and website design is managed by a combination of employees and
contractors in India, China, Kuala Lumpur, Pakistan, and Spain.
Our systems infrastructure and web and database servers are hosted by
third-party web hosting suppliers in the United States, which provide
communication links, as well as 24-hour monitoring and engineering support. The
web hosting facilities have their own generators and multiple back-up systems.
Our computer hardware for operating the websites is also located at these
facilities.
We continue to invest in building a scaleable, service-oriented technology
platform. This will result in long-term cost savings, improved flexibility and
faster go-forward innovation.
COMPETITION
Our business models are generally sensitive to changes in the industry and
fierce competitive landscape, including the emergence of new competitors.
TRAVEL AGENCY MODEL. Our travel agency competition, includes online and
offline travel agencies, tour operators, travel supplier direct websites and
their call centers, consolidators and wholesalers of travel products and
services and other companies offering travel search engines including
meta-search engines.
We compete based on quality and breadth of travel products, channel
features and usability, price, traveler service and quality of travel planning
content and advice. The emphasis on one or more of these factors varies,
depending on the brand or business and the related target demographic.
We have no intention to take on the established online travel giants for
simple products such as air, car, and hotel. Although we do make these products
and services available for our travel network to offer, we believe this model
faces increasing competition from supplier direct websites offering incentives
to travelers, such as loyalty programs or lower transaction fees.
HOST TRAVEL AGENCY MODEL. The competitive landscape in the host agency
model ranges from the thousands of small travel agency owners trying to augment
their sales through a small independent contractor sales force to a few Mega
Host Agencies. We compete on a variety of factors including, commission levels,
compensation programs, fees, technology, marketing programs, communication
abilities, training, service and support.
6
INTELLECTUAL PROPERTY RIGHTS
We regard our intellectual property rights, including our patents, service
marks, trademarks, domain names, copyrights, trade secrets and other
intellectual property, as critical to our success. For example, we rely heavily
upon the software code, informational databases and other components that make
up our travel planning service.
We rely on a combination of laws and contractual obligations with
employees, travelers, suppliers, affiliates and others to establish and protect
our trade secrets. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use our trade secrets or our intellectual
property without authorization which, if discovered, might require the
uncertainty of legal action to correct. In addition, there can be no assurance
that others will not independently and lawfully develop substantially similar
properties.
We have registered and continue to apply to register, or secure by
contract when appropriate, our trademarks as they are developed and used. We
also register domain names as we deem appropriate. While we seek to protect our
trademarks and domain names, effective trademark protection may not be available
or may not be sought by us for every trademark used in every country, and
contractual disputes may affect the use of trademarks governed by private
contract. Similarly, not every variation of a domain name may be available, or
may be registered by us, even if available. The failure to protect our
intellectual property in a meaningful manner or challenges to our intellectual
property rights, could materially adversely affect our business, result in
erosion of our brand names and/or limit our ability to control marketing on or
through the internet using our various domain names.
We have considered, and will continue to consider, the appropriateness of
filing for patents to protect future inventions, as circumstances may warrant.
However, many patents protect only specific inventions and there can be no
assurance that others may not create new products or methods that achieve
similar results without infringing upon patents owned by us.
From time to time, we may be subject to legal proceedings and claims in
the ordinary course of our business, including claims of alleged infringement by
us of the trademarks, copyrights, patents and other intellectual property rights
of third parties. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, protect our trade secrets or to
determine the validity and scope of proprietary rights claimed by others. Any
such litigation, regardless of outcome or merit, could result in substantial
costs and diversion of management and technical resources, any of which could
materially harm our business.
REGULATION
We must comply with laws and regulations relating to the travel industry
and the provision of travel services, including registration in various states
as "sellers of travel" and compliance with certain disclosure requirements and
participation in state restitution funds. In addition, our businesses are
subject to regulation by the U.S. Department of Transportation and must comply
with various rules and regulations governing the provision of air
transportation, including those relating to advertising and accessibility.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
We operate as one reportable segment. We generate our revenue through a
diverse partner and customer base, and there is no reliance on a single customer
or small group of customers; no customer represented 10% or more of our total
revenue in the periods presented in this Annual Report on Form 10-KSB.
ADDITIONAL INFORMATION
COMPANY WEBSITE AND PUBLIC FILINGS. The information on our company website
(www.joystar.com), as well as the websites of our brands, is not incorporated by
reference in this Annual Report on Form 10-KSB, or in any other filings with, or
in any information furnished or submitted to, the Securities and Exchange
Commission ("SEC").
We make available, free of charge through our website, our Annual Reports
on Form 10-KSB, Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K
filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after they
have been electronically filed with, or furnished to, the SEC.
7
CODE OF ETHICS. We posted our code of business conduct and ethics, which
applies to all employees, including all executive officers and senior financial
officers and directors, on www.joystar.com. Our code of business conduct and
ethics complies with Item 406 of SEC.
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of March 31, 2007, we employed approximately 30 full-time and part-time
employees and over 4000 independent contractors. Our employees are not
represented by any collective bargaining unit. We believe we generally have good
relations with our employees.
REGULATIONS OF THE INTERNET
Currently, few laws and regulations apply directly to the Internet and
commercial online services and, to the extent such laws exist or apply to us, we
believe we are in compliance with all of them. The following summary does not
purport to be complete discussion of all enacted or pending regulations and
policies that may affect our business. This summary focuses primarily on the
enacted federal, state and international legislation specific to businesses that
operate as we do. For further information concerning the nature and extent of
federal, state and international regulation of online businesses, you should
review public notices and rulings of the U.S. Congress, state and local
legislature and international bodies.
Due to the growth of the Internet and online commerce, coupled with
publicity regarding Internet fraud, new laws and regulations are continually
being considered (at the federal, state and international levels) regarding
property ownership, sales and other taxes, pricing and content, advertising,
intellectual property rights, libel, user privacy, and information security. New
laws or different applications of existing laws would likely impose additional
burdens on companies conducting business online and may decrease the growth of
the Internet or commercial online services. In turn, this could decrease the
demand for our products and services or increase our cost of doing business. We
cannot predict whether any of the proposed privacy legislation currently pending
will be enacted and what effect, if any, it would have on our company.
TAXES. Federal regulation imposing limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998 and extended in 2001.
The Internet Tax Non-Disclosure Act, as this legislation is known, exempts
certain types of sales transactions conducted over the Internet from multiple or
discriminatory state and local taxation through November 1, 2003. It is possible
this legislation will not be renewed when it terminates. Failure to renew this
legislation could allow state and local governments to impose taxes on
Internet-based sales, and these taxes could decrease the demand for our products
or services or increase our cost of operations.
PRIVACY. As an online business, customers provide us with personally
identifiable information (PII) that has been specifically and voluntarily given.
PII includes information that can identify a customer as a specific individual,
such as name, phone number, or e-mail address. This information is used only for
the purpose of responding to and fulfilling customer requests for our travel
products and services. We will only share customer PII with our authorized
travel service providers, and only as necessary in order to complete a
transaction that customers specifically request. We do not sell or rent PII to
anyone. We provide customers with choice and control over the collection and use
of their PII, as well as a means of updating, correcting, or removing any PII
stored in their customer profile. Customers are provided the opportunity to
specifically choose the promotional marketing communications they wish to
receive from our company. If they choose to opt-out any of the promotional
e-mail services that we provide, then we will only send e-mail that relates to a
specific travel purchase they have made through us.
CURRENT US FEDERAL PRIVACY REGULATION. Increasing concern over consumer
privacy, including regulations related to the use of the Internet for conducting
transactions and electronic commerce, has led to the introduction of proposed
legislation at the federal level. The most far-reaching of these current laws
are focused on financial institutions, health care providers, and companies that
voluntarily solicit information form children. For businesses that operate
online such as Joystar, the Unsolicited Electronic Mail Act of 1999 has been
enacted to protect individuals, families, and internet service providers form
unsolicited and unwanted electronic mail, commonly referred to as spamming.
Additionally, the Federal Trade Commission has a role in consumer privacy
protection and is involved with related enforcement activities.
8
CURRENT STATE PRIVACY REGULATION. Most states have enacted legislation to
regulate the protection of consumer's information on the Internet. Much of this
legislation is focused on financial institutions and health care providers. The
legislation that has become state law is a small percentage of the number still
pending, and is similar to what has been enacted at the federal level. The
Company cannot predict whether any of the proposed state privacy legislation
currently pending review will be enacted and what effect, if any, it would have
on our Company.
RISK FACTORS
You should carefully consider each of the following risks and
uncertainties associated with our company and the ownership of our securities.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.
WE RELY ON THE PERFORMANCE OF HIGHLY SKILLED PERSONNEL AND, IF WE ARE UNABLE TO
RETAIN OR MOTIVATE KEY PERSONNEL OR HIRE, RETAIN AND MOTIVATE QUALIFIED
PERSONNEL, OUR BUSINESS WOULD BE HARMED.
Our performance is largely dependent on the talents and efforts of highly
skilled individuals. Our future success depends on our continuing ability to
identify, hire, develop, motivate and retain highly skilled personnel for all
areas of our organization. In particular the contributions of William Alverson,
our Chairman and Chief Executive and Katherine West, our Executive Vice
President and Director are critical to the overall management of the company.
In addition, our future success will depend on the performance of our
senior management and key employees, many of whom joined Joystar recently.
Joystar cannot ensure that it will be able to retain the services of any member
of our executive management, senior management or key employees, the loss of
whom could seriously harm our business. In addition, competition for
well-qualified employees in all aspects of our business, including software
engineers and other technology professionals, is intense. Our continued ability
to compete effectively depends on our ability to attract new employees and to
retain and motivate our existing employees. If we do not succeed in attracting
well-qualified employees or retaining or motivating existing employees, our
business would be adversely affected.
OUR FAILURE TO ATTRACT AND RETAIN TRAVELERS AND TRAVEL AGENTS IN A
COST-EFFECTIVE MANNER COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Our long-term success depends on our continued ability to increase the
overall number of traveler transactions in a cost-effective manner. In order to
increase the number of traveler transactions, we must attract new visitors to
our brands and create repeat clients. Similarly, our host travel agency travel
business is dependent on enlisting new travel agents and attracting their travel
booking activity online to our corporate travel websites as well as retaining
existing travel agents. One manner in which we cost-effectively attract
travelers is through affiliate programs. If the number of travelers being driven
to our websites through affiliates participating in these programs were to
decrease significantly, costs relating to our sales and marketing commitments
could increase. In addition, we believe that rates for desirable offline and
online advertising and marketing placements are likely to increase in the
foreseeable future. No assurances can be provided that we will be successful in
acquiring new travelers in a cost-effective manner.
OUR EXPANSION PLACES A SIGNIFICANT STRAIN ON OUR MANAGEMENT, TECHNICAL,
OPERATIONAL AND FINANCIAL RESOURCES.
Since the launch of our host agency in 2004, we have grown rapidly and
significantly and anticipate accelerated growth as we expand our product and
service offerings, travel agent network, and customer base. Such expansion
increases the complexity of our business and places a significant strain on our
management, operations, technical performance, financial resources, and internal
financial control and reporting functions.
There can be no assurance that we will be able to manage our expansion
effectively. Our current and planned personnel, systems, procedures and controls
may not be adequate to support and effectively manage our future operations,
especially as we employ personnel in multiple geographic locations. We may not
be able to hire, train, retain, motivate and manage required personnel, which
may limit our growth. If any of this were to occur, it could damage our
reputation, limit our growth, negatively affect our operating results, and hard
our business.
9
DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY, SUCH AS THOSE CAUSED BY
TERRORISM, WAR, INCLEMENT WEATHER, HEALTH CONCERNS, BANKRUPTCIES AND/OR GENERAL
ECONOMIC DOWNTURNS, COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Our business, financial condition and results of operations are affected
by the health of the worldwide travel industry. Accordingly, downturns or
weaknesses in the travel industry could adversely affect our business. Travel
expenditures are sensitive to business and personal discretionary spending
levels and tend to decline during general economic downturns. Events or weakness
in the travel industry that could negatively affect our business include price
escalation in travel-related industries, travel related strikes, airline
bankruptcies or liquidations and fuel price escalation. Additionally, our
business is sensitive to safety concerns, and thus may decline after incidents
of terrorism, during periods of political instability or geopolitical conflict
in which travelers become concerned about safety issues, as a result of
inclement weather such as the hurricanes that affected the markets around the
Gulf of Mexico in 2005 or when travel might involve health-related risks, such
as avian flu. Such concerns could result in a protracted decrease in demand for
our travel services. This decrease in demand, depending on its scope and
duration, together with any future issues affecting travel safety, could
significantly and adversely affect our business, financial condition and results
of operations over the short and long-term. In addition, the disruption of the
existing travel plans of a significant number of travelers upon the occurrence
of certain events, such as terrorist activity or war, could result in the
incurrence of significant loss of commission revenue.
WE OPERATE IN A VERY COMPETITIVE ENVIRONMENT AND FACE INCREASING COMPETITION
FROM A VARIETY OF COMPANIES WITH RESPECT TO PRODUCTS AND SERVICES WE OFFER.
The market for the services we offer is intensely competitive. We compete
with both established and emerging traditional and online sellers of travel
services with respect to each of the services we offer. Some of our competitors,
including travel suppliers such as cruise lines and hotels, may offer services
and products on more favorable terms such as no fees and with unique access to
loyalty programs. Many of these competitors, such as airlines, hotel and rental
car companies, are also focusing on driving online demand to their own websites
in lieu of intermediaries like us. The introduction of new technologies and the
expansion of existing technologies may increase competitive pressures. Increased
competition may result in reduced operating margins, as well as loss of travel
agent partners, travelers, transactions and brand recognition. We cannot assure
you that we will be able to compete successfully against current, emerging and
future competitors or provide differentiated products and services to our travel
agent partners and traveler base. Increased competition could result in reduced
operating margins, loss of segment share and damage to our brand. There can be
no assurance that we will be able to compete successfully against current and
future competitors or that competition will not have a material adverse effect
on our business, results of operations and financial condition.
OVER THE LAST SEVERAL YEARS, AIRLINES HAVE GENERALLY REDUCED OR ELIMINATED
COMMISSIONS AND PAYMENTS TO TRAVEL AGENTS AND OTHER TRAVEL INTERMEDIARIES; IF
OTHER TRAVEL SUPPLIERS REDUCED COMMISSIONS TO TRAVEL INTERMEDIARIES, THESE
REDUCTIONS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Our agency revenue is derived from compensation paid by travel suppliers
for bookings made by our travel network and through our websites. We generally
negotiate these commissions with our travel suppliers. Over the last several
years, airlines have generally reduced or eliminated commissions and payments to
travel agents and other travel intermediaries. No assurances can be given that
other travel suppliers will not reduce current industry compensation or our
compensation, which could reduce our travel agency revenue and margins thereby
adversely affecting our business, financial condition and results of operations.
WE DEPEND ON OUR RELATIONSHIPS WITH TRAVEL SUPPLIERS AND ANY ADVERSE CHANGES IN
THESE RELATIONSHIPS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
An important component of our business success depends on our ability to
strengthen our existing, as well as develop new, relationships with travel
suppliers. Adverse changes in existing relationships, or our inability to enter
into new arrangements with these parties on favorable terms, if at all, could
reduce the amount, quality and breadth of attractively priced travel products
and services that we are able to offer, which could adversely affect our
business, financial condition and results of operations.
10
Travel suppliers are increasingly seeking to lower their travel
distribution costs by promoting direct online bookings through their own
websites. In some cases, supplier direct channels offer advantages to consumers,
such as loyalty programs or lower transaction fees. In addition, travel
suppliers may choose not to make their travel products and services available
through our distribution channels. To the extent that consumers continue to
increase the percentage of their travel purchases through supplier direct
websites and/or if travel suppliers choose not to make their products and
services available to us, our business may suffer.
OUR BUSINESS UNITS USE SEPARATE OPERATIONAL AND FINANCIAL SYSTEMS THAT HAVE NOT
BEEN INTEGRATED AND THAT RELY HEAVILY ON MANUAL PROCEDURES.
Our business relies on manual procedures for critical business systems and
financial reporting processes. We expect to incur significant costs in our
ongoing efforts to integrate and automate these systems into an efficient,
effective and unified operation.
The continued lack of automation and the ongoing reliance on manual
procedures in critical business processes and financial reporting functions
increases the risk of errors. If we are not able to successfully implement the
changes necessary to operate a unified system, or automate critical financial
reporting processes then:
o We may not be able to take advantage of efficiencies of scale,
o We may incur excess costs that could affect our margins,
o We may lose partners due to inefficiencies with our current systems,
o We may negatively affect our ability to report our financial results
accurately and on a timely basis.
If any of these events were to occur, it could have a material adverse
effect on our reputation or results of operations.
IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS
OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL
RESULTS OR PREVENT FRAUD. THIS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND
OUR BRAND.
We may not be able to establish or maintain adequate internal controls
over financial reporting. Due to lack of historical operating data, many of our
internal controls and reporting systems are being designed as our business model
develops. We rely on existing travel industry reporting systems that were
originally implemented for different business models and may not function as
intended. Although we have hired a Chief Financial Officer with extensive
knowledge and experience evaluating and managing these controls and processes
and we are taking steps to strengthen our internal controls, we cannot be
certain these measures will ensure that we implement and maintain adequate
controls over our financial processes and reporting in the future. We also
cannot be certain that the interim steps we have taken, pending full
implementation of these measures, to preserve our ability to accurately record,
process, and summarize financial data and prepare our financial statements and
reporting, will be effective. Many of these interim steps are time and labor
intensive and rely on manual procedures, which makes them difficult to maintain
for an extended period and increases the risk of errors.
Any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations.
OUR INTERNAL CONTROL OVER FINANCIAL REPORTING MAY NOT BE CONSIDERED EFFECTIVE
WHICH COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS,
AND IN TURN HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to furnish a report by our management on our internal control over financial
reporting. Such report will contain, among other matters, an assessment of the
effectiveness of our internal control over financial reporting, including a
statement as to whether our internal control over financial reporting is
effective. This assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by management. Such
report will also contain a statement that our auditors have issued an
attestation report on management's assessment of such internal controls.
11
We are currently performing the system and process documentation and
evaluation needed to comply with Section 404, which is both costly and
challenging. Although we have not identified any material weaknesses as of the
date of this filing, management may, during this process, identify one or more
material weaknesses in our internal control over financial reporting; if such
occurs, we will be unable to assert such internal control is effective. If we
are unable to assert that our internal control over financial reporting is
effective (or if our auditors are unable to attest that our management's report
is fairly stated or they are unable to express an opinion on our management's
evaluation or on the effectiveness of the internal controls), we could lose
investor confidence in the accuracy and completeness of our financial reports,
which in turn could have an adverse effect on our stock price.
OUR SUCCESS DEPENDS ON MAINTAINING THE INTEGRITY OF OUR SYSTEMS AND
INFRASTRUCTURE. SYSTEM INTERRUPTION AND THE LACK OF INTEGRATION AND REDUNDANCY
IN OUR INFORMATION SYSTEMS MAY AFFECT OUR BUSINESSES.
A fundamental requirement for online commerce and communications is the
secure transmission of confidential information, such as credit card numbers or
other personal information, over public networks. Our security measures may be
inadequate and, if any compromise of security were to occur, it could have a
detrimental effect on our reputation and adversely affect our ability to
maintain our existing travelers and/or attract new travelers.
We may experience occasional system interruptions that make some or all
systems unavailable or prevent us from efficiently fulfilling orders or
providing services to our travel agents or third parties. We rely on our travel
agents and third party computer systems and service providers to facilitate and
process a portion of our transactions. Any interruptions, outages or delays in
our systems or third party providers' systems, or deterioration in their
performance, could impair each company's ability to process transactions for its
travelers and the quality of service that we can offer to our travel agents and
travelers. We do not have backup systems for certain critical aspects of our
operations, many other systems are not fully redundant and our disaster recovery
planning may not be sufficient. Fire, flood, power loss, telecommunications
failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer
viruses, physical or electronic break-ins and similar events or disruptions may
damage or interrupt computer or communications systems at any time. Any of these
events could cause system interruption, delays and loss of critical data, and
could prevent us from providing services to our travelers and/or third parties
for a significant period of time. In addition, we may have inadequate insurance
coverage or insurance limits to compensate for losses from a major interruption,
remediation may be costly and have a material adverse effect on our operating
results and financial condition.
WE MAY EXPERIENCE OPERATIONAL AND FINANCIAL RISKS IN CONNECTION WITH ANY
POTENTIAL ACQUISITIONS. IN ADDITION, BUSINESSES WE MAY ACQUIRE MAY INCUR
SIGNIFICANT LOSSES FROM OPERATIONS OR EXPERIENCE IMPAIRMENT OF CARRYING VALUE.
Our future growth may depend, in part, on acquisitions. To that extent, we
may face the operational and financial risks that commonly accompany that
strategy. We would also face operational risks, such as failing to assimilate
the operations and personnel of the acquired businesses, disrupting their
ongoing businesses, impairing management resources and their relationships with
employees and travelers as a result of changes in their ownership and management
Further, the evaluation and negotiation of potential acquisitions, as well as
the integration of an acquired business, will divert management time and other
resources. Some acquisitions may not be successful and their performances may
result in the impairment of their carrying value.
Certain financial and operational risks related to acquisitions that may
have a material impact on our business are:
o Use of cash resources and incurrence of debt and contingent
liabilities in funding acquisitions,
o Stockholder dilution if an acquisition is consummated through an
issuance of our securities,
o Amortization expenses related to acquired intangible assets and
other adverse accounting consequences,
o Costs incurred in identifying and performing due diligence on
potential acquisition targets that may or may not be successful,
o Difficulties and expenses in assimilating the operations, products,
technology, information systems or personnel of the acquired
company,
o Impairment of relationships with employees, retailers and affiliates
of our business and the acquired business,
o The assumption of known and unknown liabilities of the acquired
company,
o Entrance into markets in which we have no direct prior experience,
and
o Impairment of goodwill arising from our acquisitions.
12
OUR RESULTS OF OPERATIONS ARE DIFFICULT TO PREDICT AND MAY FLUCTUATE
SUBSTANTIALLY FROM THE ESTIMATES OF SECURITIES ANALYSTS OR EXPECTATIONS OF OUR
INVESTORS.
In the event that our operating results fall below the expectations of
securities analysts or investors, the trading price of our stock price may
decline significantly. In addition to the risks identified herein, our business
is sensitive to general economic conditions, the health of the worldwide travel
industry, consumer confidence, consumer retail spending, trends in technology,
competition, levels of personal discretionary income, weather, acts of war or
terrorism, safety concerns and acts of God. Our business is also subject to the
effects of seasonality of leisure travel with revenue typically and highest in
the first quarter and lowest in the fourth quarter of the year.
WE HAVE A LIMITED OPERATING HISTORY AND OUR STOCK PRICE IS HIGHLY VOLATILE.
We have a very short operating history and a rapidly evolving and
unpredictable business model. The trading price of our common stock fluctuates
significantly. Trading prices of our common stock may fluctuate in response to a
number of events and factors, such as:
o quarterly variations in operating results;
o transactions in our common stock by major investors and certain
analyst reports, news, and speculation;
o fluctuations in the stock market in general and market prices for
travel and internet-related companies in conditions or trends in the
travel and e-commerce industries;
o general economic conditions;
o new services, innovations, and strategic developments by our
competitors or us, or business combinations and investments by our
competitors or us;
o changes in financial estimates by us or securities analysts and
recommendations by securities analysts;
o changes in travel industry and internet regulation;
o additions or departures of key personnel;
o corporate restructurings, including layoffs or closures of
facilities; and
o changes in the valuation methodology of, or performance by, other
companies in the travel or e-commerce industries.
Any of these events may cause our stock price to rise or fall and may
adversely affect our business and financing opportunities. As a result, we may
experience extreme price and volume fluctuations that are unrelated or
disproportionate to changes in our operating performance. In the past, following
periods of volatility in the general market, or a particular company's
securities, securities class actions have been brought against affected
companies. This litigation, if instituted against us, could result in
substantial costs and diversion of our management's attention and resources.
Future volatility in our stock price could force us to increase our cash
compensation to employees or grant larger stock awards than we have
historically, which could hurt our operating results or reduce the percentage
ownership of our existing stockholders, or both.
CHANGING LAWS, RULES AND REGULATIONS AND LEGAL UNCERTAINTIES MAY ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our business, financial condition and results of operations could be
adversely affected by unfavorable changes in or interpretations of existing, or
the promulgation of new laws, rules and regulations applicable to us and our
businesses, including those relating to the internet and online commerce,
consumer protection and privacy, escheat and sales, use, occupancy, value-added
and other taxes, could decrease demand for products and services, increase costs
and/or subject us to additional liabilities. For example, there is, and will
likely continue to be, an increasing number of laws and regulations pertaining
to the internet and online commerce, which may relate to liability for
information retrieved from or transmitted over the internet, user privacy,
taxation and the quality of products and services. Furthermore, the growth and
development of online commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on online businesses
generally.
In addition, the application of various domestic and international sales,
use, occupancy, value-added and other tax laws, rules and regulations to our
historical and new products and services is subject to interpretation by the
applicable taxing authorities. While we believe that we are compliant with these
tax provisions, there can be no assurances that taxing authorities will not take
a contrary position, or that such positions will not have an adverse effect on
our businesses, financial condition and results of operations. If the tax laws,
rules and regulations were amended or if current interpretations of the laws
were to change adversely to us, particularly with respect to occupancy or
value-added taxes, the results could have an adverse affect on our businesses,
financial condition and results of operations.
13
OUR PROCESSING, STORAGE, USE AND DISCLOSURE OF PERSONAL DATA COULD GIVE RISE TO
LIABILITIES AS A RESULT OF GOVERNMENTAL REGULATION, CONFLICTING LEGAL
REQUIREMENTS OR DIFFERING VIEWS OF PERSONAL PRIVACY RIGHTS.
In the processing of our traveler transactions, we receive and store a
large volume of personally identifiable information. This information is
increasingly subject to legislation and regulations in numerous jurisdictions
around the world. This government action is typically intended to protect the
privacy of personal information that is collected, processed and transmitted in
or from the governing jurisdiction. We could be adversely affected if
legislation or regulations are expanded to require changes in our business
practices or if governing jurisdictions interpret or implement their legislation
or regulations in ways that negatively affect our business, financial condition
and results of operations. As privacy and data protection have become more
sensitive issues, we may also become exposed to potential liabilities as a
result of differing views on the privacy of travel data. These and other privacy
developments that are difficult to anticipate could adversely affect our
business, financial condition and results of operations.
WE RELY ON THE INTERNET INFRASTRUCTURE WHICH MAY BE UNABLE TO SUPPORT INCREASED
LEVELS OF DEMAND.
The internet infrastructure may not expand fast enough to meet the
increased levels of demand. In particular, the expected benefits from our online
operations may be reduced if internet usage does not continue to grow. In
addition, activities that diminish the experience for internet users, such as
spyware, spoof e-mails, viruses and spam directed at internet users, as well as
viruses and "denial of service" attacks directed at internet companies and
service providers, may discourage people from using the internet, including for
commerce. If consumer use diminishes or grows at a slower rate, then our
business and results of operations could be adversely affected.
WE MAY BE FOUND TO HAVE INFRINGED ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS THAT
COULD EXPOSE US TO SUBSTANTIAL DAMAGES AND RESTRICT OUR OPERATIONS.
We could face claims that we have infringed the patents, copyrights or
other intellectual property rights of others. In addition, we may be required to
indemnify travel suppliers for claims made against them. Any claims against us
could require us to spend significant time and money in litigation, delay the
release of new products or services, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the subject of the
infringement claims. These licenses, if required, may not be available on
acceptable terms or at all. As a result, intellectual property claims against us
could have a material adverse effect on our business, operating results and
financial condition.
OUR WEBSITES RELY ON INTELLECTUAL PROPERTY, AND WE CANNOT BE SURE THAT THIS
INTELLECTUAL PROPERTY IS PROTECTED FROM COPYING OR USE BY OTHERS, INCLUDING
POTENTIAL COMPETITORS.
We regard much of our content and technology as proprietary and try to
protect our proprietary technology by relying on trademarks, copyrights, trade
secret laws and confidentiality agreements. In connection with our license
agreements with third parties, we seek to control access to and distribution of
our technology, documentation and other proprietary information. Even with all
of these precautions, it is possible for someone else to copy or otherwise
obtain and use our proprietary technology without our authorization or to
develop similar technology independently. Effective trademark, copyright and
trade secret protection may not be available in every country in which our
services are made available through the internet, and policing unauthorized use
of our proprietary information is difficult and expensive. We cannot be sure
that the steps we have taken will prevent misappropriation of our proprietary
information. This misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation might result in
substantial costs and diversion of resources and management attention.
We currently license from third parties some of the technologies
incorporated into our websites. As we continue to introduce new services that
incorporate new technologies, we may be required to license additional
technology. We cannot be sure that such technology licenses will be available on
commercially reasonable terms, if at all.
14
SPECIAL RISK FACTORS
RISKS RELATED TO OUR FINANCIAL RESULTS
Future revenues and profits, if any, will depend upon various factors,
including whether our travel agent programs and leisure travel products will
sustain market acceptance. We have incurred operating losses related to the
development of our technology infrastructure, consumer websites and travel agent
programs since our inception and there are no assurances we will be successful
marketing our hosting programs for travel agents or the travel products or of
future revenue or profitability.
We may not achieve our business objectives and the failure to achieve such
goals would have an adverse impact on us. Our operations are subject to the
risks and competition inherent in the establishment of a business enterprise.
o Our capital requirements depend on many factors, including:
o The revenues generated from hosting services and sales of travel
products;
o The costs required to develop new travel agent programs and travel
products;
o The costs of obtaining and defending patents, trademarks and
copyrights of our travel products;
o The costs associated with expanding our sales and marketing efforts;
o The expenses we incur in selling our programs and products;
o The costs associated with any expansion of operations;
o The costs associated with capital expenditures; and
o The number of and timing of any business acquisitions or other
strategic transactions.
RISKS RELATED TO OUR BUSINESS
Our inability to be successful in responding to the following conditions
and failure to accomplish the objectives presented by them may have a material
adverse effect on our business, operating results and financial condition.
As a result of the numerous factors that could potential impact our
operating results and the rapidly changing nature of the markets in which we
compete, our quarterly and annual revenues and operating results are likely to
fluctuate from period to period. These fluctuations may be caused by a number of
factors, many of which are beyond our control. These factors include the
following:
o The risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development;
o Our inability to obtain new customers at reasonable cost, retain
existing customers or encourage repeat purchases.
o Decreases in the number of visitors to our websites or our inability
to convert visitors to our websites into customers;
o Our inability to adequately maintain, upgrade and develop our
websites, the systems that we use to process customers' orders and
payments or our computer network.;
o Our inability to retain existing cruise lines, hotels, rental car
companies and other suppliers of travel services ("travel
suppliers")or to obtain new travel suppliers;
o Our inability to obtain travel products on satisfactory terms from
our travel suppliers;
o The ability of our competitors to offer new or enhanced websites,
services or products;
o Fluctuating gross margins due to a changing mix of revenues;
o The termination of existing relationships with key service providers
or failure to develop new ones;
o The amount and timing of operating costs relating to expansion of
our operations;
o Economic conditions specific to the Internet, online commerce and
the travel industry;
o Attract additional travel suppliers and consumers to our service;
o Maintain and enhance our brand;
o Expand our service offerings;
o Operate, expand and develop our operations and systems efficiently;
o Maintain adequate control of our expense;
o Respond to technological changes; and
o Respond to competitive market conditions
Our inability to be successful in responding to factors set forth above or
accomplishing the objectives presented by them, may have a material adverse
effect on our business, operating results and financial condition.
15
OUR LIMITED OPERATING HISTORY AND THE GREATER SIZE AND RESOURCES OF COMPETITORS
MAY HAVE A SIGNIFICANT IMPACT ON OUR OPERATIONS.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Some
of our competitors may be able to secure services and products from travel
suppliers on more favorable terms, devote greater resources to marketing and
promotional campaigns and commit more resources to website and systems
development than we are able to devote. In addition, the introduction of new
technologies and the expansion of existing technologies may increase competitive
pressures. Increased competition may result in reduced operating margins, as
well as loss of market share and brand recognition. We cannot assure you that we
will be able to compete successfully against current and future competitors.
Competitive pressures faced by us could have a material adverse effect on our
business, operating results and financial condition.
ESTABLISHING, MAINTAINING AND ENHANCING OUR BRAND WILL BE A CRITICAL ASPECT OF
OUR EFFORTS TO ATTRACT AND EXPAND OUR ONLINE TRAFFIC.
We believe that establishing, maintaining and enhancing our brand will be
a critical aspect of our efforts to attract and expand our online traffic. The
number of Internet sites that offer competing services, many of which already
have well-established brands in online services or the travel industry
generally, increases the importance of establishing and maintaining brand
recognition. Promotion of the Joystar brand will depend largely on our success
in providing a high-quality travel agent hosting experience and high level of
customer service. In addition, to attract and retain travel agents and customers
and to respond to competitive pressures, we intend to increase our spending
substantially on marketing and advertising with the intention of expanding our
brand recognition. However, we cannot assure you that these expenditures will be
effective to promote our brand or that our marketing efforts generally will
achieve our goals.
If we are unable to provide high-quality hosting services or customer
support, if we fail to promote and maintain our brand or if we incur excessive
expenses in these efforts, our business, operating results and financial
condition would be materially adversely affected. If we are unable to introduce
and sell new products and services, our business may be harmed.
We need to broaden the range of travel products and services and increase
the availability of products and services that we offer in order to enhance our
service. We will incur substantial expenses and use significant resources trying
to expand the range of products and services that we offer. However, we may not
be able to attract sufficient travel suppliers and other participants to provide
desired products and services to our consumers. In addition, consumers may find
that delivery through our service is less attractive than other alternatives. If
we launch new products and services and they are not favorably received by
consumers, our reputation and the value of the Joystar brand could be damaged.
Our relationships with consumers and travel suppliers are mutually
dependent since consumers will not use a service that does not offer a broad
range of travel services. Similarly, travel suppliers will not use a service
unless consumers actively make travel purchases through it. We cannot predict
whether we will be successful in expanding the range of products and services
that we offer. If we are unable to expand successfully, our business, operating
results and financial condition may be materially adversely affected. We may be
unable to plan and manage our operations and growth effectively.
Mr. William Mr. Alverson, our chief executive officer and director, and
Ms. Katherine T. West control approximately 32.28% of our issued and outstanding
shares of common stock the interests of Mr. Alverson and Ms. West may not be, at
all times, the same as those of other shareholders. Since Mr. Alverson and Ms.
West are not simply passive investors but are also our executive officer and two
directors, their interests as an executive and a director, at times, be adverse
to those of passive investors. Where those conflicts exist, our shareholders
will be dependent upon Mr. Alverson and Ms. West exercising, in a manner fair to
all of our shareholders, their fiduciary duties as an officer and/or as a member
of our board of directors. Also, Mr. Alverson and Ms. West will have the ability
to significantly influence the outcome of most corporate actions requiring
shareholder approval, including any potential merger of Joystar with or into
another company, the sale of all or substantially all of our assets and
amendments to our articles of incorporation. This concentration of ownership
with Mr. Alverson and Ms. West may also have the effect of delaying, deferring
or preventing a change in control of Joystar which may be disadvantageous to
minority shareholders.
16
RISKS RELATED TO OUR COMMON STOCK
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:
o Actual or anticipated variations in our quarterly operating results.
o Announcements of technological innovations or new services by us or
our competitors.
o Changes in financial estimates by securities analysts.
o Conditions or trends in the Internet or online commerce industries.
o Changes in the economic performance or market valuations of
otherInternet, online commerce or travel companies.
o Announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments.
o Additions or departures of key personnel.
o Release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common
stock.
o Potential litigation
Because we have a limited operating history, you may consider any one of
these factors to be material. Our stock price may fluctuate widely as a result
of any of the above listed factors, as well as others. In addition, the
securities markets have from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
There is no assurance of an established public trading market, which would
adversely affect the ability of investors in our company to sell their
securities in the public markets.
Although our common stock trades on the Over-the-Counter Bulletin Board
(the "OTCBB"), a regular trading market for the securities may not be sustained
in the future. The NASD has enacted recent changes that limit quotations on the
OTCBB to securities of issuers that are current in their reports filed with the
Securities and Exchange Commission. The effect on the OTCBB of these rule
changes and other proposed changes cannot be determined at this time. The OTCBB
is an inter-dealer, Over-The-Counter market that provides significantly less
liquidity than the NASD's automated quotation system (the "NASDAQ Stock
Market"). Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for The Nasdaq Stock Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult to
obtain and holders of common stock may be unable to resell their securities at
or near their original offering price or at any price. Market prices for our
common stock will be influenced by a number of factors, including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by competitors of
new products or services or significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the technologies industries
o generally; and
o general economic and other national conditions.
The limited public market and trading market may cause volatility in the market
price of our common stock.
Our common stock is currently traded on a limited basis on the OTCBB under
the symbol "JYSRE.OB" The quotation of our common stock on the OTCBB does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many smaller
companies like us. Our common stock is thus subject to volatility. In the
absence of an active trading market:
o investors may have difficulty buying and selling or obtaining market
quotations;
o market visibility for our common stock may be limited; and a lack of
visibility for our common stock may have a depressive effect on the
market for our common stock.
17
Our stock price has historically been volatile and the future market price
for our common stock may continue to be volatile. Further, the limited market
for our shares will make our price more volatile. This may make it difficult for
you to sell our common stock for a positive return on your investment.
The public market for our common stock has historically been very
volatile. For example since January 1, 2004 the closing market price for our
common stock has ranged from $2.81to $0.25. Any future market price for our
shares may continue to be very volatile. This price volatility may make it more
difficult for you to sell shares when you want at prices you find attractive. We
do not know of any one particular factor that has caused volatility in our stock
price. However, the stock market in general has experienced extreme price and
volume fluctuations that often are unrelated or disproportionate to the
operating performance of companies. Broad market factors and the investing
public's negative perception of our business may reduce our stock price,
regardless of our operating performance. Market fluctuations and volatility, as
well as general economic, market and political conditions, could reduce our
market price. As a result, this may make it difficult or impossible for you to
sell our common stock for a positive return on your investment.
The Company's common stock may be considered a "penny stock" and may be
difficult to sell.
To be considered to be a "penny stock," securities must meet one or more
of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g)
of the Securities Exchange Act of 1934, as amended. These include but are not
limited to the following: (i) the stock trades at a price less than $5.00 per
share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is
NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than
$5.00 per share; or (iv) is issued by a company with net tangible assets less
than $2.0 million, if in business more than a continuous three years, or with
average revenues of less than $6.0 million for the past three years. The
principal result or effect of being designated a "penny stock" is that
securities broker-dealers cannot recommend the stock but must trade in it on an
unsolicited basis. Section 15(g) of the Securities Exchange Act of 1934, as
amended, and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account.
Potential investors in the Company's common stock are urged to obtain and
read such disclosure carefully before purchasing any shares that are deemed to
be "penny stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of the Company's
common stock to resell their shares to third parties or to otherwise dispose of
them in the market or otherwise.
Shares eligible for future sale may adversely affect the market price of
our common stock, as the future sale of a substantial amount of our restricted
stock in the public marketplace could reduce the price of our common stock.
From time to time, certain of our stockholders may be eligible to sell all
or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act ("Rule 144"), subject to certain limitations. In general,
pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitations, by a non-affiliate of our company that
has satisfied a two-year holding period. Any substantial sale of common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse
effect on the market price of our securities.
18
The market price of the Company's common stock may be adversely affected
by several factors.
The market price of our common stock could fluctuate significantly in
response to various factors and events, including:
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in its financial results.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting it at such time as the board of
directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if its
stock price appreciates.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
a) Revenue Recognition
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.
19
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. Override commissions are recognized each period based upon our
projected and actual attainment of predetermined target sales levels. Where
historical financial data is not available to project the target sales levels,
we record the override commission upon receipt of the commission from the
supplier.
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.
The Company receives overrides from certain travel suppliers in the form
of commissions as well as co-op marketing earnings base 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.
b) Reserves
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 year ended December 31, 2006 the company recognized a reserve
equal to 25% of the gross commissions generated. The company will be monitoring
receivables and adjusting the reserve levels on a regular basis, as required.
Item 2. DESCRIPTION OF PROPERTY
-----------------------
The Company maintains its corporate offices in Aliso Viejo, California.
The Company occupies approximately 6,135 square feet pursuant to the lease
agreement entered on February 15, 2005 and which expires on March 31, 2008. The
Company pays $1.80 per square foot for the first 0-12 months, full service
gross; $1.85 per square foot, full service gross for the next 13-24 months, and
$1.90 per square, full service gross for the next 25-36 months. The lease
agreement is for a term of 36 months with an option to extend for a period of
three years.
Rental expense for this location was $155,368 and $120,400 for the years
ended December 31, 2006 and 2005, respectively.
20
The Company occupies approximately 2,884 square feet (Net Rentable Area)
pursuant to the lease agreement entered on October 15, 2005. The premises are
located in Aventura, Florida. The Company pays annually in the amount of $29.00
times the Net Rentable Area of the premises for the first 0-12 months. For the
next 13-24 months, the Company pays annually in the amount of $30.00 times the
Net Rentable Area of the premises. For the months 25-36, the Company has agreed
to pay the amount of $31.00 times the Net Rentable Area of the premises. The
lease agreement is for a term of 36 months, and expires on October 15, 2008.
Rental expense for this location was $111,099 for fiscal year 2006.
We believe that our existing facilities are adequate to meet our current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms, although we have no assurance that
future terms would be as favorable as our current terms.
The Company has not invested in any real property at this time nor does
the Company intend to do so. The Company has no formal policy with respect to
investments in real estate or investments with persons primarily engaged in real
estate activities.
Item 3. LEGAL PROCEEDINGS
-----------------
In the ordinary course of business, Joystar may be party to legal
proceedings and claims involving property, personal injury, contract, alleged
infringement of third party intellectual property rights and other claims. The
amounts that may be recovered in such matters may be subject to insurance
coverage.
Rules of the Securities and Exchange Commission require the description of
material pending legal proceedings, other than ordinary, routine litigation
incident to the registrant's business, and advise that proceedings ordinarily
need not be described if they primarily involve damages claims for amounts
(exclusive of interest and costs) not individually exceeding 10% of the current
assets of the registrant and its subsidiaries on a consolidated basis.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2006.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PUBLIC MARKET
Joystar's common stock trades under the symbol JYSRE.OB on the NASD Over
The Counter Bulletin Board (OTCBB). There were 814 shareholders of record as of
April 10, 2007. The closing market price of the Company's common stock as of
April 10, 2007 was $0.95.
The company's high and low closing bid and close information for the
fiscal years ended December 31, 2006, 2005 and 2004, is listed below as provided
by the NASD OTC Bulletin Board. Particularly since our common stock is traded
infrequently, such over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, markdown, or commission and may not represent actual
transactions or a liquid trading market.
Year Ended December 31, 2006
High Low
---- ---
Quarter ended December 31, 2006* $1.13 $0.80
Quarter ended September 30, 2006 $0.89 $0.45
Quarter ended June 30, 2006 $1.52 $0.69
Quarter ended March 31, 2006 $1.39 $0.37
Year Ended December 31, 2005
High Low
---- ---
Quarter ended December 31, 2005 $0.34 $0.23
Quarter ended September 30, 2005 $0.58 $0.28
Quarter ended June 30, 2005 $0.62 $0.37
Quarter ended March 31, 2005 $0.78 $0.55
Year Ended December 31, 2004
High Low
---- ---
Quarter ended December 31, 2004 $1.59 $0.72
Quarter ended September 30, 2004 $1.34 $0.68
Quarter ended June 30, 2004 $1.98 $1.33
Quarter ended March 31, 2004 $2.81 $1.88
*As of December 11, 2006
21
DIVIDENDS
The Company does not expect to pay any dividends at this time. The payment
of dividends, if any, will be contingent upon the Company's revenues and
earnings, if any, capital requirements, and general financial condition. The
payment of any dividends will be within the discretion of the Company's Board of
Directors and may be subject to restrictions under the terms of any debt or
other financing arrangements that the Company may enter into in the future. The
Company presently intends to retain all earnings, if any, for use in the
Company's business operations and accordingly, the Board does not anticipate
declaring any dividends in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
In April 2004, our Board of Directors adopted our 2003 Equity Compensation
Plan ("Plan"), which was amended by the Company in August of 2006 to increase
the amount of shares of Common Stock which the Company was authorized to issued
under the plan from 2,500,000 shares to 3,500,000 shares. The Plan provides the
Company's board of directors to grant to the Company's directors, officers,
employees and consultants stock options and shares of common stock under the
Plan.
The Plan provides that the exercise price for ISOs and NSOs is not less
than the fair market value per share of our common stock at the date of grant.
The Company cannot reprice outstanding options granted under the 2003 Plan
without the consent of its stockholders. The option exercise price must be paid
in full at the time the notice of exercise of the option is delivered to us and
must be tendered in cash, or by personal or certified check. The Plan's
Administrator has the discretion to permit a participant to exercise by
delivering a combination of shares and cash. The term of each option may not
exceed a term of 10 years from the date of grant. However, if ISOs are granted
to persons owning more than 10% of our voting stock, the exercise price may not
be less than 110% of the fair market value per share at the date of grant, and
the term of the ISOs may not exceed five years.
Other than the Plan, we maintain no other equity compensation plan
pursuant to which we may grant equity awards to eligible persons.
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended March 31, 2006, the Company issued 246,455
common shares for services for a total of $78,371, plus deferred compensation of
$63,500. The Company also issued 5,951,455 common shares for cash received of
$2,049,102, $300,000 of which had previously been subscribed.
During the three months ended June 30, 2006, the Company issued 2,845,275
common shares for services for a total of $1,137,683, plus deferred compensation
of $63,500, $420,000 of which had been previously subscribed. The Company also
issued 65,666 common shares for cash received of $325,200.
During the three months ended September 30, 2006, the Company issued
328,894 common shares for services for a total of $147,765, plus deferred
compensation of $54,000, $420,000 of which had been previously subscribed. The
Company also issued 987,143 common shares for cash received of $520,553.
During the three months ended December 31, 2006, the Company issued
456,645 common shares for services for a total of $332,053, plus deferred
compensation of $52,500. The Company also issued 4,034,043 common shares for
cash and received net proceeds of $1,339,041. An additional $195,500 were
subscribed during the period.
As part of the shares issued for cash during the three months ended
December 31, 2006, we sold in a private placement of up to $2,500,000, a total
of 3,212,000 shares (the "Shares") of our common stock, no par value per share,
at a purchase price of $0.625 per share to institutional and accredited
investors, for a total purchase price of $2,007,500. In addition to the Shares,
on the closing date, we issued and delivered Series A and B Warrants to the
investors (collectively the "Warrants"). One Series A Warrant and one Series B
Warrant was issued for each four Shares issued, or a total of 803,000 Series A
Warrants and 803,000 Series B Warrants. Series A Warrants are exercisable into
common stock at $0.85 per share and Series B Warrants are exercisable at $1.00
per share. The Series A and B Warrants are exercisable until five (5) years
after the closing date. We paid 10% commissions in cash in the amount of
$200,750 and issued 321,200 common stock purchase warrants to First Montauk
Securities Corp. of Red Bank, New Jersey, member NASD, who acted as a selling
agent for the financing. We received total net proceeds of approximately
$1,100,000, after deducting the legal fees and commissions. The net proceeds
will be used by us for working capital purposes.
As of January 27, 2006, we sold $1,650,000 of the units consisting of a
total of 4,000,000 shares of our common stock, no par value per share, at a
purchase price of $0.35 per and share and warrants to purchase two shares of
common stock at $0.50 exercise price to accredited investors. The warrants
expire in two years from the date of issuance. The subscribers do not have any
registration rights to register the shares and the warrants purchased in the
private placement. The Company received total net proceeds of approximately
$1,650,000, since no commissions were paid in cash. The net proceeds are to be
used by the Company for working capital purposes. The units were sold to
accredited investors only, including an officer of the Company.
22
As of July 18, 2005, Joystar, Inc. sold in its private placement of up to
$1,100,000, a total of 2,082,143 shares of its common stock, no par value per
share, at a purchase price of $0.35 per share to institutional and accredited
investors. Additionally, William M. Alverson, the Company's CEO and one other
officer and director converted their respective loans to the Company totaling
$575,000 to equity under the same terms. In addition to common stock shares,
each subscriber received one warrant to purchase the Company's common stock for
each two shares purchased. The warrants have the exercise price of $0.50 per
share and expire in five years from the date of issuance. The warrants are
subject to call provisions as described in the warrant agreement. The
subscribers have certain registration rights to register the shares and the
warrants purchased in the placement. The Company paid 10% commission payable in
cash and broker warrants to First Montauk Securities Corp. of Red Bank, New
Jersey, member NASD, who acted as a selling agent for the financing. The Company
received a total net proceeds of $728,750, after deducting the legal fees and
commissions, and eliminated the existing shareholders' loans in the total amount
of $575,000. The net proceeds were used by the Company for working capital
purposes.
The shares and warrants were offered and sold by the Company to investors
whom the Company had reasonable grounds to believe were "accredited investors"
within the meaning of Rule 501 of Regulation D under the Securities Act of 1933,
as amended (the "Securities Act"). The investors were provided access to
business and financial about the Company and had such knowledge and experience
in business and financial matters that it was able to evaluate the risks and
merits of an investment in the Company. Each certificate evidencing securities
issued to the investors included a legend to the effect that the securities were
not registered under the Securities Act and could not be resold absent
registration or the availability of an applicable exemption from registration.
No general solicitation or advertising was used in connection with the
transaction. The issuance of the shares and warrants was exempt from the
registration requirements of the Securities Act by reason of Section 4(2) of the
Securities Act and the rules and regulations, including Regulation D thereunder,
as transactions by an issuer not involving a public offering.
The shares issued in the private placements set forth above were issued
In reliance upon the exemption from registration set forth in Section 4(2) of
The Securities Act and Regulation D (Rules 505 and/or 506) promulgated under
The Securities Act. The shares were offered and sold to investors who were
"accredited investors" as defined in the Securities Act.
During the year ended December 31, 2004, the Company issued 642,223 shares
of common stock in a private placement for a total sales price of $692,185 an
average sales price of $1.08 per share. During 2003 and 2004 the Company has
received subscriptions to purchase 537,333 shares of common stock for $704,800
and authorized 150,000 shares subscribed for additional officers compensation
$90,000 at December 31, 2004. Such 150,000 shares have not been issued yet.
During the year ended December 31, 2004 the Company issued 1,475,133
shares of common stock for services valued at the fair market value price of the
Company's stock on the dates issued $1,507,942 an average of $1.02 a share.
The shares issued in the private placements set forth above were issued in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act and Regulation D (Rules 505 and/or 506) promulgated under the
Securities Act. The shares were offered and sold to investors who were
"accredited investors" as defined in the Securities Act.
23
Loans payable to shareholder at December 31, 2003, $83,295 were converted
to 60,000 shares of common stock during the year ended December 31, 2004.
As of November 8, 2004, the Company commenced its private placement
offering of up to $1,000,000 of units consisting of four shares of common stock
and one warrant to purchase a share of common stock at an exercise price of
$1.25 per share. Each unit is being sold at $2.00 purchase price. The units are
offered by the Company to accredited investors only in reliance on Section
505/506 of the Regulation D of the Securities Act of 1933. The Company issued
100,000 units (400,000 shares, $200,000) that were subscribed as of December 31,
2004 in February and March 2005.
The shares issued in the private placements set forth above were issued in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act and Regulation D (Rules 505 and/or 506) promulgated under the
Securities Act. The shares were offered and sold to investors who were
"accredited investors" as defined in the Securities Act.
The Company acquired all of the issued and outstanding common stock of
Joystar, Inc., a Nevada corporation ("Joystar") in exchange for the issuance by
the Company of a total of 13,880,599 newly issued restricted shares of common
voting stock dated as of June 10, 2003.
The shares of the Company's common stock were issued and sold in reliance
upon the exemption provided by Section 4(2) and Section 506 of Regulation D of
the Securities Act of 1933. The offers and sales in the Company's private
placement were made to accredited investors only.
Item 6. 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".
OVERVIEW
Joystar, 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. The effect of having such a
massive 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 refer to Joystar, Inc. and its brands collectively as "Joystar," 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."
Tens of thousands of travel agents who are closing their storefront
agencies and moving to a home-based operation are creating a value migration in
the rapidly emerging host travel agency model. Because of our strong value
proposition, 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
4,000 travel agents making it one of the fastest growing and largest leisure
travel network in the industry.
Throughout 2006, Joystar's commission levels with our preferred suppliers
increased substantially. With the acquisition of the Miami Cruise Center, the
enhanced commission levels that Joystar offers travel agents are some of the
highest in the industry.
TRENDS
The travel industry and particularly the travel agency business model, has
experienced significant change in this decade. The advent of the Internet and
online travel agencies has forever changed the way travel products are
distributed. Travel agents were forced to retool their business models which
included the elimination of high costs associated with operating a store fronts
and identifying markets where their knowledge and service would ensure they
remained relevant in the eyes of travelers.
24
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
currently 25,000 professional, home-based agents. This number is expected to
grow to approximately 50,000 agents by 2010.
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 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.
We also intend to continue innovating on behalf of our preferred supplier
partners. As an example, we launched Starbase, a customer relationship
management system for our agents to better manage their businesses. Starbase
streamlines the interaction and booking process between our agents, customers
and suppliers. Through this "direct connect" technology, our agents can complete
the booking process with some of our cruise lines and vacation suppliers easier
and in a more cost effective for our suppliers. It also automatically notifies
Joystar's internal accounting of bookings and cancellations and provides agents
with real time commission tracking. In the absence of this direct connect
technology, these processes are completed manually via a proprietary
extranet.
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. We base our estimates on historical
experience, where applicable and other assumption that we believe are reasonable
under the circumstances. Actual results may differ from our estimates under
different assumptions or conditions.
25
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.
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 bookings represent the total retail 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.
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.
FISCAL YEAR ENDED DECEMBER 31, 2006 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2005
GROSS TRAVEL BOOKINGS
Gross travel bookings for the year ended December 31, 2006 increased 316%
to $65,594,211 compared to $15,750,481 for the year ended December 31, 2005.
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 year ended December 31, 2006 increased 257% to $6,932,277
compared to $1,942,526 for the year ended December 31, 2005.
The increase in both gross travel bookings and revenues are due to
continued substantial growth of our travel agent network and higher preferred
supplier commission levels.
26
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 year ended December 31, 2006 were
$5,466,958 compared to $1,853,000 for the year ended December 31, 2005. The
increase of $3,613,605 was primarily due to the increased payments to our travel
agents as a result of their increased sales levels. 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. The remainder of the expense relates to personnel
costs, including staffing in our agent support services and preferred supplier
relations.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses for the year ended December 31, 2006
increased to $4,119,326 from $3,687,826 for the year ended December 31, 2005.
The increase was primarily due to $267,936 in option expense associated with the
adoption of FAS 123R. 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 2006, moved our software development to an
India-based operation with our own employees. We employ web developers and
designers in Kuala Lumpur, Pakistan, India and Spain. We also began outsourcing
the development of certain large scale projects to China 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 year ended December 31, 2006 were
$198,121. 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.
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 $7,801,193 at December 31. 2006.
Net other income for the year ended December 31, 2006 was $5,312 compared
to an expense of $9,641 in the year ended December 31, 2005. This change was
primarily due to the elimination of interest expense as the loans from two
officers were repaid.
The Company left development stage as of January 1, 2005 when it started
to make substantially more sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $2,102,861 at December 31, 2006 as
compared to $218,948 at December 31, 2005.The Company has funded certain
expenses by issuing shares for compensation and services. During the year ended
December 31, 2006 the Company issued $1,539,130 in shares for services
PROFITABILITY/LOSS
Net loss for the year ended December 31, 2006 was $10,648,509 compared to
a net loss of $3,885,479 for the year ended December 31, 2005.
The increase in net loss was primarily due to the provision of the accrued
liability of $7,801,193 related to warrants and stock purchase rights. The
Company's operating loss for the year ended December 31, 2006 was $2,800,150
Compared to an operating loss of $3,875,838 for the year ended December 31,
2005.
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 25% of the gross commissions generated for the year ended
December 31, 2006. The company will be monitoring receivables and adjusting the
reserve levels on a regular basis, as required.
27
FULL YEAR 2006 HIGHLIGHTS:
o Joystar's Block Group Cruise Space program grew to over 25,000
cabins across 12 major cruise lines. Joystar travel agents and
clients can take advantage of inventories, favorable pricing,
availability and amenities that may not be available through other
sales channels.
o Joystar's gross bookings surpassed $65 million. High-revenue margin
cruises and vacation packages represent 90% of the Company's sales
with a large portion of the growth coming from its group and
incentive travel division.
o Joystar signed a distribution agreement with Amadeus, a global
leader in technology and distribution solutions for the travel and
tourism industry. The relationship provides Joystar's network of
travel agency partners and clients with access to more than 95% of
the world's scheduled airline seats; 56,700 hotel properties; 42 car
rental companies and other provider groups including cruise, ferry,
rail, insurance and tour operators.
o Joystar listed as "Host with The Most" by James Shillinglaw,
Editor-in-Chief of leading travel industry trade, Agent @ Home
Magazine.
o Joystar recognized as a Carnival Cruise Lines National Account,
Celebrity and Royal Caribbean International Key Account; a Regent
Seven Seas Cruises Top account; a Cunard Inner Circle Agency; a
Princess I-Excel Agency. These preferred supplier relationships give
Joystar access to top account commission levels and special
promotions.
o Joystar recognized for its sales performance and inducted into
Norwegian Cruise Line's Captain's Club Agency program. Benefits of
the expanded relationship include top account commission levels and
special promotions.
o Joystar signed an agreement with Holland America Line offering the
Company top account commission levels and special promotions.
Joystar's relationship with the cruise line continues under the
banner of a Holland America Centurion Agency.
o Joystar rewarded with an increase in commission levels and special
promotions by Oceania Cruises. Joystar is one of Oceania's valued
travel agency partners and is considered a top producer.
o Joystar achieved exclusive Club 500 status with Funjet Vacations
based on sales production through the Company's network of
professional sellers of travel. Funjet Vacation is the flagship
brand of the Mark Travel Corporation.
o Joystar formed a strategic partnership with Bedsonline to promote
the company's 20,000 plus hotel and accommodation types. The program
includes national account commission levels, automation and
marketing initiatives.
o Joystar attains Crystal Apple status, the highest level with Apple
Vacations.
o Joystar receives Star Award from Sandals for 2006 production levels.
o Joystar recognized by Travel Impressions, a wholly owned subsidiary
of American Express, as "Best of the Best" travel agency partner.
o Joystar acknowledged as "Top 200" travel agencies by Classic
Vacations, a subsidiary of Expedia, Inc.
o Joystar recognized as a Premiere Agency Partner by The Globus family
of brands
28
Item 7. FINANCIAL STATEMENTS
--------------------
The financial statements of the Company required to be
included in Item 7 are listed in this index, and follow this page:
Report of Independent Certified Public Accountant F-1
Financial Statements
Balance Sheets F-2
Statements of Operations F-3
Statement of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
29
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors and Stockholders
Joystar, Inc.
We have audited the accompanying balance sheets of Joystar, Inc.
(the "Company") as of December 31, 2006 and 2005, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit includes consideration of
internal controls over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Joystar, Inc. as of
December 31, 2006 and 2005, and the results of its operations and cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed further in Note
3, the Company continues to incur significant losses. The Company's viability is
dependent upon its ability to obtain future financing and the success of its
future operations. These factors raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plan in regard to these
matters is also described in Note 3. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Mendoza Berger & Company, LLP
Irvine, California
April 18, 2007
F-1
Joystar, Inc.
Balance Sheets
December 31, December 31,
2006 2005
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 2,102,861 $ 218,948
Accounts receivable 2,701,253 398,827
Prepaid expenses 76,757 48,572
------------ ------------
Total current assets 4,880,871 666,347
Property and equipment, net 267,036 138,723
Intangible assets, net of amortization 50,525 54,205
Other assets 18,970 --
------------ ------------
Total assets $ 5,217,402 $ 859,275
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 1,743,324 $ 520,457
Accrued salaries 75,770 46,786
Accrued expenses 128,865 128,865
Accrued liabilities 534,491 412,258
Accrued rent 34,825 35,000
Loans from shareholders 472 472
Accrued liability related
to warrants and stock purchase rights 7,801,193 --
------------ ------------
Total current liabilities 10,318,940 1,143,838
------------ ------------
Commitments -- --
Stockholders' equity
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, no par value, 50,000,000 shares authorized;
48,772,340 and 34,103,309 shares issued and outstanding at
December 31, 2006 and December 31, 2005 respectively 14,071,359 7,952,026
Stock issued for deferred compensation (122,500) (356,000)
Stock subscribed not issued, 356,000 shares at
December 31, 2006 and 2,584,476 shares at
December 31, 2005 respectively 313,501 834,800
Accumulated (deficit) (19,363,898) (8,715,389)
------------ ------------
Total stockholders' equity (deficit) (5,101,538) (284,563)
------------ ------------
Total liabilities and stockholders' equity $ 5,217,402 $ 859,275
============ ============
The accompanying notes are an integral part of these financial statements
F-2
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
For the Years ended December 31, 2006 December 31, 2005
------------ ------------
Revenue $ 6,932,277 $ 1,942,526
Selling and marketing 5,466,958 1,853,353
General and administrative 4,119,326 3,687,826
Technology 198,621 277,185
------------ ------------
Total operating expenses 9,784,905 5,818,364
------------ ------------
Operating loss (2,852,628) (3,875,838)
------------ ------------
Other income/(expense) 5,312 (9,641)
Loss on fair value of warrants
and stock purchase rights (7,801,193) --
------------ ------------
Other income/(expense) (7,795,881) (9,641)
------------ ------------
Loss before income taxes (10,648,509) (3,885,479)
Income tax provision -- --
------------ ------------
Net loss $(10,648,509) $ (3,885,479)
============ ============
Loss per share- basic
and diluted $ (0.25) $ (0.14)
============ ============
Weighted average number of
common shares-
basic and diluted 42,493,109 27,579,406
============ ============
The accompanying notes are an integral part of these financial statements
F-3
JOYSTAR, INC.
STATEMENT OF STOCKHOLDERS' 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, 2004 23,228,633 $4,178,663 $ (621,250) $794,800 $(4,829,910) $(477,697)
Stock issued for services 4,731,577 1,485,131 -- -- -- 1,485,131
Stock issued for cash 4,664,213 1,748,632 -- (590,000) -- 1,158,632
Stock issued for note payable to shareholder 742,411 259,834 -- -- -- 259,834
Stock issued for accrued payroll 571,429 200,000 -- -- -- 200,000
Stock issued for interest 27,546 9,641 -- -- -- 9,641
Stock issued for assets 137,500 70,125 -- -- -- 70,125
Subscribed stock not issued to officers
(1,500,000 shares) -- -- -- 330,000 -- 330,000
Subscribed stock not issued (857,143 shares) -- -- -- 300,000 -- 300,000
Deferred compensation earned -- -- 265,250 -- -- 265,250
Net loss -- -- -- -- (3,885,479) (3,885,479)
----------- ----------- ------------ ----------- ------------ -----------
Balance December 31, 2005 34,103,309 $ 7,952,026 $ (356,000) $ 834,800 $(8,715,389) $ (284,563)
Stock issued for services 3,630,814 1,617,501 -- (414,000) -- 1,203,501
Stock issued for cash 11,038,307 4,233,896 -- (303,000) -- 3,930,896
Subscribed stock not issued to
officers (685,965 shares) -- -- -- 195,500 -- 195,500
Subscribed stock (400 shares) -- -- -- 201 -- 201
Deferred compensation earned -- -- 233,500 -- -- 233,500
Share based compensation -- 267,936 -- -- -- 267,936
Net loss -- -- -- -- (10,648,509) (10,648,509)
----------- ----------- ------------ ----------- ------------ -----------
Balance December 31, 2006 48,772,430 $14,071,359 $ (122,500) $ 313,501 $(19,363,898) $(5,101,538)
=========== =========== ============ =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
JOYSTAR, INC.
STATEMENTS OF CASH FLOW
For the year ended For the year ended
December 31, 2006 December 31, 2005
----------------- -----------------
Cash flows from operating activities
Net loss $(10,648,509) $ (3,885,479)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 57,618 18,522
Share based compensation 501,436 -
Stock issued for services 1,203,501 1,750,381
Stock issued for interest -- 9,641
Stock subscribed for compensation 195,500 330,000
Changes in assets and liabilities
Increase in prepaid expenses (28,185) (35,572)
Increase in receivables (2,302,426) (395,462)
Increase in other assets (18,970) -
Increase in accounts payable 1,222,867 375,121
(Decrease)Increase in accrued expenses (175) 128,865
Increase in accrued salaries and payroll taxes 151,217 283,036
Increase in accrued liability relating
to warrants and other stock purchase rights 7,801,193 --
------------ ------------
Net cash used by operations (1,864,933)) (1,420,947)
------------ ------------
Cash flows from investing activities
Acquisition of property and equipment (182,251) (103,078)
------------ ------------
Net cash used by investing activities (182,251) (103,078)
Cash flows from financing activities
Loans from shareholders -- 472
Issuance of common stock for cash 3,930,896 1,158,632
Stock subscribed but not issued 201 300,000
------------ ------------
Net cash provided by financing activities 3,931,097 1,459,104
------------ ------------
Increase(Decrease) in cash 1,883,913 (64,921)
Cash at the beginning of the year 218,948 283,869
----------- ------------
Cash at the end of the year $ 2,102,861 $ 218,948
========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock for services $ 1,203,501 $ 1,750,381
Shares issued for shareholder loan $ -- $ 361,359
Shares issued for interest $ -- $ 9,641
Shares issued for fixed assets and customer list $ -- $ 70,125
Subscribed shares issued $ -- $ 590,000
Subscribed shares issued to officers $ 195,500 $ 330,000
Share based compensation $ 501,436 --
The accompanying notes are an integral part of these financial statements
F-5
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 1 -- ORGANIZATION
DESCRIPTION OF BUSINESS
Joystar, Inc., (a California corporation) specializes in selling complex travel
products including cruises, vacation packages and group travel through its
national sales force of independent travel agents and independent travel
agencies in the United States. These travel products and services are offered
both online and offline through a diversified portfolio of brands including:
Joystar-branded travel websites, private label websites, and
VacationCompare.com. We refer to Joystar, Inc. and its brands collectively as
"Joystar," the "Company," "us," "we" and "our" in these financial statements.
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.
F-6
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. Override commissions are recognized each period based upon our
projected and actual attainment of predetermined target sales levels. Where
historical financial data is not available to project the target sales levels,
we record the override commission upon receipt of the commission from the
supplier.
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
F-7
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.
The Company receives overrides from certain travel suppliers in the form of
commissions as well as co-op marketing earnings base 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
year ended December 31, 2006 the company recognized a reserve equal to 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.
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.
F-8
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.
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 years
ended December 31, 2005 and December 31, 2006 was $920 and $3,680.
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 years ended December 31, 2006 and 2005.
F-9
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.
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 expense of $348,327 and $189,601 during the years ended December 31,
2006 and 2005, 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,
2006 includes: a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, 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 granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of FAS 123R.
F-10
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 common stock
equivalents, including warrants to purchase common stock which would dilute
earnings per share.
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 $7,801,193 at December 31. 2006.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and various current
liabilities. The estimated fair value of these instruments approximates their
carrying value.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recent accounting pronouncements that have been adopted
and have concluded that they will not have any material impact on its financial
statements.
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.
F-11
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.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
Office furniture/computers $211,270 $139,313
Booking engine software 57,940 28,385
Web sites 80,739
-------- --------
349,949 67,698
Less: accumulated depreciation 82,913 28,975
-------- --------
$267,036 $138,723
======== ========
5. CAPITAL STOCK
COMMON STOCK
During the year ended December 31, 2005, the Company issued 4,664,213 shares of
common stock in a private placement for a total sales price of $1,748,632 an
average sales price of $0.37 per share.
F-12
During the year ended December 31, 2005 the Company issued 4,731,577 shares of
common stock for services valued at the fair market value price of the Company's
stock on the dates issued for a total of $1,485,131 an average of $0.31 a share.
The Company issued 742,411 shares of common stock for notes payable to
stockholders of $259,834 and 571,429 shares of common stock for accrued payroll
liability of $200,000 . The conversion price of $0.35 per share was based on the
fair market value of the stock at the time the conversion was made. The Company
issued 27,546 shares of common stock for interest of $9,641 and 137,500 shares
of common stock for assets $70,125.
During the year ended December 31, 2005 the Company issued $590,000 of common
stock subscribed in prior years. An additional $630,000 of common stock was
subscribed during 2005.
During the three months ended March 31, 2006, the Company issued 246,455 common
shares for services for a total of $78,371, plus deferred compensation of
$63,500. The Company also issued 5,951,455 common shares for cash received of
$2,049,102, $300,000 of which had previously been subscribed.
During the three months ended June 30, 2006, the Company issued 2,845,275 common
shares for services for a total of $1,473,312, plus deferred compensation of
$63,500, $420,000 of which had been previously subscribed. The Company also
issued 65,666 common shares for cash received of $325,200.
During the three months ended September 30, 2006, the Company issued 328,894
common shares for services for a total of $147,765, plus deferred compensation
of $54,000. The Company also
issued 987,143 common shares for cash received of $520,553.
During the three months ended December 31, 2006, the Company issued 456,645
common shares for services for a total of $332,053, plus deferred compensation
of $52,500. The Company also issued 4,034,043 common shares for cash and
received net proceeds of $1,339,041. An additional $195,500 were subscribed
during the period.
As part of the shares issued for cash during the three months ended December 31,
2006, we sold in a private placement of up to $2,500,000, a total of 3,212,000
shares (the "Shares") of our common stock, no par value per share, at a purchase
price of $0.625 per share to institutional and accredited investors, for a total
purchase price of $2,007,500. In addition to the Shares, on the closing date, we
issued and delivered Series A and B Warrants to the investors (collectively the
"Warrants"). One Series A Warrant and one Series B Warrant was issued for each
four Shares issued, or a total of 803,000 Series A Warrants and 803,000 Series B
Warrants. Series A Warrants are exercisable into common stock at $0.85 per share
and Series B Warrants are exercisable at $1.00 per share. The Series A and B
Warrants are exercisable until five (5) years after the closing date. We paid
10% commissions in cash in the amount of $200,750 and issued 321,200 common
stock purchase warrants to First Montauk Securities Corp. of Red Bank, New
Jersey, member NASD, who acted as a selling agent for the financing. We received
total net proceeds of approximately $1,100,000 after deducting the legal fees
and commissions. The net proceeds will be used by us for working capital
purposes.
At December 31, 2005 the Company had 2,550,014 warrants outstanding to purchase
shares of common stock at exercise prices ranging from $0.35 to $0.50 per
shares. The warrants have lives of one to five years remaining.
At December 31, 2006 the Company has 13,257,302 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 up to an aggregate of 3,500,000 shares of Common Stock.
F-13
On December 13, 2005, the Company authorized for two of its officers to receive
1,500,000 shares of common stock. The shares were valued at $330,000 or $0.22
per share. The shares are considered subscribed and not issued at December 31,
2005. The Company has charged $330,000 to compensation expense during the year
ended December 31, 2005.
The following table summarizes annual activity for all stock options
for each of the two years ended December 31:
2006 2005
---------------------------------- ------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER OF SHARES PRICE NUMBER OF SHARES PRICE
---------------- -------------- ---------------- --------------
Outstanding, beginning
of year 3,733,000 $ 0.51 150,000 $ 0.66
Granted 405,000 0.78 3,583,000 0.50
Exercised (400) 0.50 -- --
Forfeited and expired -- -- -- --
---------- -------- ---------- --------
Outstanding, end of year 4,137,600 $ 0.53 3,733,000 $ 0.51
========== ======== ========== ========
Options exercisable, end of
year 897,000 $ 0.55 812,000 $ 0.53
Weighted average fair value
of options granted during the
year $ 0.01 $ 0.02
========== ========
The fair value of the stock options granted during the years ended
December 31, 2006 and 2005, was approximately $3,000 and $101,000 or
$0.01 and $0.02 per stock option, respectively, and was determined
using the Black Scholes option pricing model. The factors used for the
years ended December 31, 2006 and 2005, were the option exercise price
of $0.50 to $1.15 per share, a 5 year life of the options, volatility
measure of 85%, a dividend rate of 0% and a risk free interest rate
ranging from of 4.95% and 4.28% for 2006 and from 4.38% and 3.77%,
respectively.
The following table summarizes information about stock options
outstanding at December 31, 2006, with exercise prices equal to the
fair market value on the date of grant with no restrictions on
exercisability after vesting:
F-14
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 $1.15 4,137,600 4.00 $ 0.53 897,000 $ 0.55
=================== ================= ================ ============== ==============================
As of December 31, 2006, there was approximately $534,000 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.
The following table illustrates the effect on net loss and loss per
share if the fair value recognition provisions of FAS 123(R) to options
granted under our stock option plan had been applied in the previous
year:
FOR THE YEAR ENDED
DECEMBER 31, 2005
------------------
Net loss as reported $ (3,885,479)
Less: stock based employee compensation
expense included in reported net loss --
Add: compensation expense determined
under fair value method, net of tax (101,238)
------------------
$ (3,986,717)
==================
Net loss per common share, basic and diluted:
As reported $ (0.14)
==================
Pro forma net loss per common share $ (0.14)
------------------
7. INCOME TAXES
The components of the deferred tax asset are as follows:
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
Deferred tax assets:
Net operating loss carry-forward $ 4,629,000 $ 3,471,000
Less: valuation allowance (4,629,000) (3,471,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
F-15
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 $8,715,000 and of unused Federal and State net
operating loss carry-forwards at December 31, 2006 and December 31, 2005,
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, 2005 and 2004, 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, 2006 DECEMBER 31, 2005
----------------- -----------------
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
for 36 months with an option to renew for 36 months. 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.
Future payments on the operating lease are as follows:
F-16
2007 $ 222,901
2008 86,040
-----------
$ 308,941
===========
Rental expense was $266,462 and $120,399 for the years ended December 31, 2006
and 2005, respectively.
F-17
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL MATTERS
-----------------
There have been no change in auditors nor disagreements on accounting and
financial matters with the auditors and accountants.
Item 8-A. CONTROLS AND PROCEDURES
-----------------------
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 December 31, 2006, 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.
During the year ended December 31, 2006, 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.
Item 8B. OTHER INFORMATION
-----------------
None
9. SUBSEQUENT EVENTS
During the three month period ended March 31, 2007, the Company issued
160,794 shars of common stock for services.
During the thee month period ended March 31, 2007, the Company issued
options to purchase 250,000 shares, vesting over a five year period, at purchase
prices ranging from $1.00 to $2.00 per share to the Company's new CFO.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The Directors and Executive Officers of the Company, and their ages, are as
follows:
Name Age Position
---- --- --------
William Alverson 42 Director, Chief Executive Officer and
Chief Financial Officer
Katherine West 37 Director and Executive Vice President
Sandra D'Arcy 59 Chief Operating Officer
Jerry Galant 57 Chief Financial Officer
William Fawcett 52 Director
The term of office of each director of our company ends at the next annual
meeting of our stockholders or when such director's successor is elected and
qualifies. No date for the annual meeting of stockholders is specified in our
bylaws or has been fixed by the Board of Directors. Pursuant to our bylaws, the
date of the annual meeting is to be determined by the current Board of
Directors.
The following information sets forth the backgrounds and business
experience of the directors, executive officers and key employees:
William M. Alverson, Chief Executive Officer and Director. Mr. Alverson
has been an officer and director of the Company since its inception. Mr.
Alverson has spent the last fifteen years working in the financial and travel
services industries. He began his career as a financial advisor at American
Express. He also served as Chairman and Chief Executive Officer at a financial
services firm where he guided private companies through their first rounds of
financing and public listings. In 1995, Mr. Alverson founded and served as
Chairman and CEO of Travelmax, Inc. Under his leadership, that company grew from
seven to 220 employees handling the back office support to over 44,000 travel
agents nationwide. Since then he has been active in financing and consulting to
both private and public companies including Baby Genius, Inc. and
FreeRealTime.com.
30
Katherine West, Executive Vice President and Director. West has been the
Officer and Director of the Company since the inception of Joystar, Inc. Mrs.
West supervises the Vice President of Agent Services and Vice President of
Travel Services. Additionally, she is responsible for the day to day management
and supervision of customer service, human resources, accounting, budget,
payroll and contracts. Mrs. West began her management career in the travel
industry in 1989 with Thrifty Car Rental where she was responsible for the
franchise's operations, reporting, forecasting, and accounting & tax
preparation. From 1992 to 1996 she held the position of Senior Account Executive
with Metromedia Communications, Inc. During her career with the telecom giant,
she consistently exceeded revenue targets with a primary focus on small to
mid-sized businesses and trade associations. She is married to William M.
Alverson, the founder of the Company.
Sandra D'Arcy joined the company in June 2006. Mrs. D'Arcy is an
accomplished executive in the travel industry. Before joining Joystar, Mrs.
D'Arcy spent ten years in the top operational position at travel industry giant
Hotels.com. As Executive Vice President reporting to the CEO, she interfaced
with all aspects of travel operations including sales, marketing, human
resources, finance, accounting, and vendor resource management.
Jerry Galant, Chief Financial Officer, joined the Company in March 2007.
Mr. Galant is a financial executive with over 30 years of experience. From
January 2005, through December, 2006, Mr. Galant was a CFO of HomeAway.com, the
leading vacation rental listing site. From July 2002 until December 2004, Mr.
Galant was a Director of Research for Huberman Financial. From October 2001
until June 2002, Mr. Galant served as the CFO of Travelhero.com, an online site
specializing in hotel reservations. Mr. Galant is a graduate of University of
Pennsylvania in Economics (B.A., 1971) and Harvard University (M.B.A., 1975).
William Fawcett, was appointed by the Board of Directors of Joystar as the
director of the Company in November, 2004. Mr. Fawcett has an MBA from Harvard
Business School, is a graduate of Loyola Law School and also graduated with
honors from Boston College. Mr. Fawcett is on the Dean's Graduate School
Advisory Board for Concordia University and is a professor for Concordia's
Master of Business Administration (MBA) Entrepreneurial program. In addition to
being an outside Director for Joystar, he also serves on the Board of Directors
of Case Post, Inc. Fawcett has been the recipient of the Jordan Whitney Award
for Infomercial Excellence, the Aurora Award for the Best Infomercial in 1997,
Two Clios for production of direct-response TV commercials, a Cannes Film Award
for Best Sports Documentary and a Spanish Infomercial Telemundo Award Best in
Class. Other major accomplishments include writing with Peter Uberroth and Phil
Donohue, "Sober Graduation," the model for high schools; the
Nationally-acclaimed off-Broadway women's show "Breaking Free," and produced,
wrote and directed "Celebrity Salute to City of Hope" infomercial.
COMMITTEES
The Company does not currently have standing audit, nominating or
compensation committees of the Board of Directors, or committees performing
similar functions.
CODE OF BUSINESS CONDUCT AND ETHICS
Our code of business conduct and ethics, as approved by our board of
directors, is annexed as Exhibit 14.1 to our 10KSB filed with the SEC on April
14, 2004. It is also available on our website at www.joystar.com.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
relating to amendments to or waivers from provisions of the code that relate to
one or more of the items set forth in Item 406(b) of Regulation S-B, by
describing on our Internet Website, within five business days following the date
of a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.
Information on our Internet website is not, and shall not be deemed to be,
a part of this report or incorporated into any other filings we make with the
Securities and Exchange Commission.
Recent Developments
On November 16, 2006, we sold in a private placement of up to $2,500,000,
a total of 3,212,000 shares (the "Shares") of our common stock, no par value per
share, at a purchase price of $0.625 per share to institutional and accredited
investors, for a total purchase price of $2,007,500. In addition to the Shares,
on the closing date, we issued and delivered Series A and B Warrants to the
investors (collectively the "Warrants"). One Series A Warrant and one Series B
Warrant was issued for each four Shares issued, for a total of 803,000 Series A
Warrants and 803,000 Series B Warrants. Series A Warrants are exercisable into
common stock at $0.85 per share and Series B Warrants are exercisable at $1.00
per share. The Series A and B Warrants are exercisable until five (5) years
after the closing date.
31
We paid 10% commissions in cash in the amount of $200,750 and issued
321,200 common stock purchase warrants to First Montauk Securities Corp. of Red
Bank, New Jersey, member NASD, who acted as a selling agent for the financing.
We received total net proceeds of $1,766,750, after deducting the legal fees and
commissions. The net proceeds will be used by us for working capital purposes.
The shares and warrants were offered and sold by us to investors whom we
had reasonable grounds to believe were "accredited investors" within the meaning
of Rule 501 of Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"). The investors were provided access to business and financial
about us and had such knowledge and experience in business and financial matters
that it was able to evaluate the risks and merits of an investment in our
company. Each certificate evidencing securities issued to the investors included
a legend to the effect that the securities were not registered under the
Securities Act and could not be resold absent registration or the availability
of an applicable exemption from registration. No general solicitation or
advertising was used in connection with the transaction.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission, or the SEC. These officers, directors and
stockholders are required by SEC regulations to furnish us with copies of all
such reports that they file.
Based solely upon a review of copies of such reports furnished to us
during the fiscal year ended December 31, 2006 and thereafter, or any written
representations received by us from reporting persons that no other reports were
required, we believe to the best of our knowledge, that, during our fiscal 2006,
all Section 16(a) filing requirements applicable to our reporting persons were
met, however, some of the filings may have been filed late.
Item 10. Executive Compensation
----------------------
The following table sets forth information concerning the annual and
long-term compensation for services rendered during the last three fiscal years
to our company in all capacities as an employee by our Chief Executive Officer
and our other executive officers whose aggregate cash compensation exceeded
$100,000 (collectively, the "named executive officers") during fiscal 2006 shown
below.
Summary Compensation Table
Long-Term
Compensation Awards
Annual Compensation ----------------------- Payouts
---------------------- All
Name and Restricted Number of LTIP Other
Principal Position Salary Bonus Stock Awards Options Payouts($) Compensation
------------------------------- --------- ---------- ----------- -------------- ------------ ----------- ------------
William M. Alverson, Chief 2006 $180,000 600,000 600,000(1) --
Executive Officer, former 2005 $180,000 -- 1,000,000(1) 400,000 -- --
Chief Financial Officer, 2004 $180,000 -- 100,000(2) -- -- --
President and Director
Katherine West, Executive 2006 $144,000 250,000 250,000(1) --
Vice President and Director 2005 $120,000 -- 500,000(1) 250,000 -- --
2004 $ 88,500 -- 50,000(2) 50,000 -- --
(1) On December 13, 2005, our Board of Directors authorized 1,000,000 shares of
common stock to be issued to Mr. Alverson and 500,000 shares of common stock to
be issued to Ms. West for services rendered in fiscal year ended December 31,
2005 valued at $220,000 and $110,000, respectively pursuant to our 2003 Equity
Compensation Plan. Pursuant to an Employment Agreement dated December 13,
2005, our Board of Directors authorized 600,000 shares of common stock to be
issued to Mr. Alverson and 250,000 shares of common stock to be issued to Ms.
West for services rendered in fiscal year ended December 31, 2006 valued at
$138,000 and $57,500, respectively pursuant to our 2003 Equity Compensation
Plan.
(2) On August 27, 2004, we authorized 100,000 shares of common stock to be
issued to Mr. Alverson and 50,000 shares of common stock to be issued to Ms.
West for services rendered in fiscal year ended December 31, 2004 valued at
$60,000 and $30,000, respectively.
(3) During the periods reflected, certain of the officers and noted employees
named in this table received perquisites and other personal benefits not
reflected in the amounts of their respective annual salaries or bonuses. The
dollar amount of these benefits did not, for any individual in any year, exceed
the lesser of $50,000 or 10% of the total annual salary and bonus reported for
that individual in any year, unless otherwise noted.
32
COMPENSATION OF DIRECTORS
Directors that are non-officers of our company do not receive a cash
retainer annually nor do they receive any remuneration for attendance at a board
meeting, other than reimbursement for travel expenses.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The employment agreement with our Chief Executive Officer, William M.
Alverson, became effective December 15, 2005. Our Board of Directors approved
the major terms of the employment agreement which includes an annual salary of
$180,000 for Mr. Alverson and the annual issuance of 600,000 shares of common
stock and an option to purchase 400,000 shares of our common stock. The options
vest annually. The new employment agreement with Katherine T. West, our
Executive Officer has not yet been finalized.. The Company's Board of Directors
has approved the major terms of such employment agreement with Ms. West which
includes an annual salary of $144,000, the annual issuance of 250,000 shares of
common stock and an option to purchase 250,000 shares of our common stock. The
options vest annually.
Item 11. Securities Ownership of Certain Beneficial Owners and Management
----------------------------------------------------------------
The following table sets forth information regarding the beneficial ownership of
our common stock as of March 30, 2007 by:
o each person known by us to be the beneficial owner of more than 5%
of our Common Stock;
o each of our directors;
o each of our executive officers; and
o our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting and investment power. Under SEC rules, a person is deemed to
be the beneficial owner of securities which may be acquired by such person upon
the exercise of options and warrants or the conversion of convertible securities
within 60 days from the date on which beneficial ownership is to be determined.
Each beneficial owner's percentage ownership is determined by dividing the
number of shares beneficially owned by that person by the base number of
outstanding shares, increased to reflect the beneficially-owned shares
underlying options, warrants or other convertible securities included in that
person's holdings, but not those underlying shares held by any other person.
Unless indicated otherwise, the address for each person named is c/o
Joystar, Inc., 95 Argonaut St., First Floor, Aliso Viejo, CA 92656.
Percent of
Number of Outstanding
Name and Address Voting Shares Voting Shares
---------------- ------------- -------------
William M. Alverson 15,092,328 (1)(3) 32%
Director, President &
Secretary
95 Argonaut St. First Floor
Aliso Viejo, CA 92656
Katherine T. West 15,092,328 (2)(3) 32%
Director, Ex.VP
95 Argonaut St. First Floor
Aliso Viejo, CA 92656
Sandra D'Arcy 16,000 0%
Chief Operating Officer
95 Argonaut St. First Floor
Aliso Viejo, CA 92656
William Fawcett 0 0%
Director
95 Argonaut St. First Floor
Aliso Viejo, CA 92656
Jerry Galant 0 0%
Chief Financial Officer
95 Argonaut St. First Floor
Aliso Viejo, CA 92656
Kyaw Myint J. 9,376,957 19%
60 Overlook Road
Lattingtown, NY 11560
All directors and officers 15,108,328 32%
as a group (3 persons)
33
(1) Includes 2,757,510 shares of common stock held by Katherine T. West with
respect to which shares Mr. Alverson, her husband, disclaims beneficial
ownership.
(2) Includes 12,334,818 shares of common stock held by William Alverson with
respect to which shares Ms. West, his wife, disclaims beneficial
ownership.
(3) Does not include a total of 850,000 shares of common stock authorized to
be issued to Mr. Alverson (600,000 shares) and Ms. West (250,000 shares)
for services rendered in fiscal year 2006. The shares are considered
subscribed and not issued at December 31, 2006.
The Company had 48,973,918 shares of common stock issued and outstanding as of
March 30, 2007. The Company had 145 shareholders as of March 30, 2007.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The Company had an unsecured loan dated December 15, 2004, payable to
William M. Alverson, its Chief Executive Officer in the amount of $259,834, due
on demand with interest at 6%.
In March, 2005, Katherine T. West, the Company's director and Executive
Vice President loaned the Company an amount equal to $105,997.
During the year ended December 31, 2005 both of the above loans and
accrued interest, totaling $371,000 were converted to 1,059,999 shares of common
stock. The conversion price of $0.35 per share was based on the same terms of a
private placement sold to institutional and accredited investors.
PART IV
Item 13. Exhibits
--------
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 CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
Exhibit 32.2 CERTIFICATION CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
Item 14. Principal Fees and Services.
----------------------------
Set forth below are fees paid to the Company's independent accountants for
the past two years for the professional services performed for the Company.
Set forth below are fees paid to the Company's independent accountants for
the past two years for the professional services performed for the Company.
Audit Fees: During 2006 and 2005 the Company paid Mendoza Berger & Company
LLP a total of $16,754 and $15,605 for professional services rendered in
connection with performance of our independent audits for the years ending
December 31, 2005 and 2004, respectively.
All Other Fees: During 2006 and 2005 the Company paid Mendoza Berger &
Company LLP a total of $21,405 and $28,833 for professional services rendered in
connection with the reviews of the form 10-QSB's for the years ended December
31, 2006 and 2005, respectively.
Tax Fees: None
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
JOYSTAR, INC.
Dated: April 17, 2007 By: /s/ William M. Alverson
--------------------------------
William M. Alverson,
Chief Executive Officer
and Secretary
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ William M. Alverson Chief Executive Officer Date: 4/17/07
------------------------ and Director
William M. Alverson (principal executive)
/s/ Jerry Galant Chief Financial Officer Date: 4/17/07
------------------------
Jerry Galant (principal
financial officer
/s/ Katherine T. West Director Date: 4/17/07
------------------------
Katherine T. West
/s/ William Fawcett Director Date: 4/17/07
------------------------
William Fawcett
35