UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2005
( ) Transition report pursuant of Section 13 or 15(d) of the Securities
Exchange Act of 1939 for the transition period _______ to _______
COMMISSION FILE NUMBER 000-25973
JOYSTAR, INC.
(Exact name of registrant as specified in its charter)
California 68-0406331
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
95 Argonaut St. Aliso Viejo, CA 92656, Telephone (949) 837-8101
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(Address of Principal Executive Offices, including Registrant's zip code
and telephone number)
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Former address
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock as of June 30, 2005:
27,857,383 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Balance Sheets 3
(b) Statements of Operations 4
(c) Statement of Stockholders' Equity (deficit) 5
(d) Statements of Cash Flows 6
(e) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Item 3. Controls and Procedures 12
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults On Senior Securities
Item 4. Submission of Items to a Vote
Item 5. Other Information
Item 6.
(a) Exhibits
(b) Reports on Form 8K
SIGNATURES AND CERTIFICATES 14
2
JOYSTAR, INC.
BALANCE SHEETS
(UNAUDITED)
------------------------------------------------------------------------------------------
June 30, December 31,
2005 2004
----------- -----------
ASSETS
Current assets:
Cash $ 88,318 $ 283,869
Other receivables 25,172 100
Prepaid expenses 11,657 16,265
----------- -----------
Total current assets 125,147 300,234
Property and equipment, net 46,669 37,327
----------- -----------
Total assets $ 171,816 $ 337,561
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 190,401 $ 144,416
Accrued salaries 2,061 172,038
Accrued payroll taxes 376,708 203,970
Accrued rent 35,000 35,000
Loans from shareholder 471 259,834
----------- -----------
Total current liabilities 604,641 815,258
Commitments and contingency -- --
Stockholders' equity:
Preferred stock, no par value, 10,000,000
shares authorized; none issued -- --
Common stock, no par value, 50,000,000
shares authorized; 27,857,383 and 23,228,633
shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively 6,155,299 4,178,663
Stock issued for deferred compensation (484,750) (621,250)
Stock subscribed not issued, 227,333 shares and
887,333 shares at June 30, 2005 and December
31, 2004, respectively 204,800 794,800
Accumulated deficit (6,308,174) (4,829,910)
----------- -----------
Total stockholders' (deficit) (432,825) (477,697)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 171,816 $ 337,561
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
JOYSTAR, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
For the six For the six For the three For the three
months ended months ended months ended months ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Gross Revenues:
Travel commissions $ 187,408 $ 41,059 $ 137,899 $ 9,815
Cost of revenues 130,791 -- 98,047 --
------------- ------------- ------------- -------------
Net revenues 56,617 41,059 39,852 9,815
Operating expenses:
General and administrative 1,151,168 613,283 646,975 250,148
Marketing and sales 374,072 1,009,564 195,834 668,614
------------- ------------- ------------- -------------
Total operating expenses 1,525,240 1,622,847 842,809 918,762
------------- ------------- ------------- -------------
Loss from operations before
interest and taxes (1,468,623) (1,581,788) (802,957) (908,947)
Interest expense 9,641 -- 9,641 --
Provision for taxes - State -- 2,560 -- 2,560
------------- ------------- ------------- -------------
Net loss $ (1,478,264) $ (1,584,348) $ (812,598) $ (911,507)
============= ============= ============= =============
Loss per share $ (0.06) $ (0.07) $ (0.03) $ (0.04)
============= ============= ============= =============
Weighted average number of common
shares outstanding 24,031,395 21,239,656 24,618,082 21,395,965
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
JOYSTAR, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------------
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 705,294 366,891 -- -- -- 366,891
Stock issued for cash 2,582,070 1,140,270 -- (590,000) -- 550,270
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
Deferred compensation earned -- -- 136,500 -- -- 136,500
Net loss -- -- -- -- (1,478,264) (1,478,264)
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 2005 27,857,383 $ 6,155,299 $ (484,750) $ 204,800 $(6,308,174) $ (432,825)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
JOYSTAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------------------------------------------------------------------------------------
For the six For the six
months ended months ended
June 30, 2005 June 30, 2004
------------- -------------
Cash flows from operating activities:
Net loss $(1,478,264) $(1,584,348)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 6,739 3,638
Stock issued for services 531,353 893,272
Stock issued for interest 9,641
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses 4,609 190
Decrease (increase) in other receivables (25,072) 1,000
Increase (decrease) in accounts payable 45,985 (17,191)
Increase in accrued salaries 2,061 79,637
Increase in payroll taxes 164,786 --
Increase in accrued rent 7,952 466
------------ ------------
Net cash used by operations (730,210) (623,336)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (16,081) (15,594)
------------ ------------
Net cash used by investing activities (16,081) (15,594)
------------ ------------
Cash flows from financing activities:
Increase (decrease) in loans from shareholders 470 (500)
Issuance of common stock 550,270 275,480
Reduction of shareholder loan, subscribed
60,000 shares of common stock -- (83,295)
Stock subscribed not issued -- 443,000
------------ ------------
Net cash provided by financing activities 550,740 634,685
------------ ------------
Decrease in cash (195,551) (4,245)
Cash at the beginning of the period 283,869 136,319
------------ ------------
Cash at the end of the period $ 88,318 $ 132,074
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of stock for services $ 531,353 $ 893,272
Income taxes paid $ -- $ --
Shares issued for shareholder loan $ 259,834 $ 83,295
Shares issued for interest $ 9,641 $ --
Subscribed shares issued $ 590,000 $ --
Shares issued for accrued prior year compensation $ 172,038 $ --
The accompanying notes are an integral part of these financial statements.
6
JOYSTAR, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
Joystar, Inc. a California corporation (" the Company") was incorporated on
February 5, 1998. The Company specializes in selling complex travel products
including cruises, vacation packages and group travel through its national sales
force of independent travel agents.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation.
Results of operations for the six months ended June 30, 2005 and 2004 are not
necessarily indicative of the results that may be expected for any future
period. The balance sheet at December 31, 2004 was derived from audited
financial statements.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, have been omitted. These financial statements
should be read in conjunction with the audited financial statements and notes
for the year ended December 31, 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE RECOGNITION
--------------------
The Company recognizes revenue when the travel is completed and Joystar
has been paid the corresponding commission from the supplier. The
Company records revenues from travel related sales transactions where
the Company both purchases from the supplier and sells to the customer
the requested travel service. This is reflected in the Statement of
Operations at the net amount, which reflects the gross amount charged
to the customer less the cost paid to the supplier. The Company also
receives commissions from travel suppliers for processing reservations.
7
Revenues derived in the future from annual memberships or other
activities where a time factor is involved will be deferred over the
appropriate period and recognized as earned.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets,
which is seven years for furniture and equipment and three years for
computer equipment.
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INCOME TAXES
------------
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
NET LOSS PER SHARE
------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 "Earnings Per Share" which requires the Company to
present basic and diluted earnings per share, for all periods
presented. The computation of loss per common share (basic and diluted)
is based on the weighted average number of shares actually outstanding
during the period. The Company has no common stock equivalents, which
would dilute earnings per share.
8
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. However, the Company had been in the development stage
since its inception, 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 its
development stage operations. However, there is no assurance that the
necessary funds will be realized by securing debt or through stock
offerings.
4. LEGAL PROCEEDINGS
-----------------
In March, 2004 a former employee of the Company who was terminated
prior to the acquisition of Joystar, filed a lawsuit in Orange County
Superior Court for breach of contract and specific performance relating
to the exercise of options, among other causes of action. A proposed
settlement has been submitted to the Company in which the Company will
issue an additional 300,000 shares and a cash payment of $12,700 for
cost. As of the date of this report, this agreement has not yet been
finalized. The Company's financial statements do not reflect any
adjustment to record the possible settlement.
An independent third party stockbroker has filed a lawsuit against the
Company for refusal to register certain shares to them. A proposed
settlement has been submitted by the Company in which the Company will
register an additional 138,600 shares. As of the date of this report,
this agreement has not yet been finalized. The Company's financial
statements do not reflect any adjustment to record the possible
settlement.
9
5. SUBSEQUENT EVENTS
-----------------
As of July 18, 2005, the Company 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 number of warrants outstanding at June 30, 2005 and subsequent to
the shares issued in July were 821,443 and 1,862,514, respectively. The
Company issued 20,000 shares of common stock for services in the amount
of $10,300.
Subsequent to June 30, 2005 the Company acquired the assets of Vacation
and Cruise Resources, Inc. DBA Miami Cruise Center for $25,000 cash and
137,500 of restricted common shares valued at the closing price on the
date of issue $70,125.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. PROSPECTIVE SHAREHOLDERS SHOULD
UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER ANY FORWARD - LOOKING STATEMENT
CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY ONE OF THOSE FACTORS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED HEREIN. THESE
FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO THE PRODUCTS AND
THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY. ASSUMPTIONS RELATING TO THE
FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG OTHER THINGS, FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE BUSINESS DECISIONS, AND THE
TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE DEVELOPMENT PROJECTS, ALL OF
WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN ARE
REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE,
THERE CAN BE NO ASSURANCE THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD -
LOOKING STATEMENTS CONTAINED HEREIN WILL BE REALIZED. BASED ON ACTUAL EXPERIENCE
AND BUSINESS DEVELOPMENT, THE COMPANY MAY ALTER ITS MARKETING, CAPITAL
EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD - LOOKING STATEMENTS INCLUDED THEREIN, THE INCLUSION OF ANY SUCH
STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER
PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED.
General
Joystar, Inc., a California corporation, (the "Company") was incorporated in the
State of California on February 5, 1998.
Joystar is one of the nation's largest and fastest growing travel agency
networks. The Company specializes in selling complex travel products including
cruises, vacation packages and group travel through its national sales force of
2,200 professional travel agents. Joystar's comprehensive business combines
innovative technology, marketing opportunities and expert support services to
the Company's independent and home-based travel agents. The Company makes it
possible for professional travel agents to concentrate on promoting travel and
creating customer loyalty without the administrative and financial burden of
owning/operating a traditional storefront travel agency.
These financial statements should be read in conjunction with the financial
statements and notes for the year ended December 31, 2004.
10
RESULTS OF OPERATIONS
---------------------
Joystar experienced positive results in the following areas:
1. Increase revenues from travel completed
2. Increase bookings corresponding to revenue received
3. Dramatic growth in agent memberships
4. Increase in new travel bookings not yet completed
5. Substantial reduction of debt (subsequent event)
6. Attained positive net worth (subsequent event)
--------------------------------------------------------------------------------
The Company recognizes revenue when the travel is completed and Joystar has been
paid the corresponding commission from the supplier.
Revenues recognized from travel completed for the quarter ended June 30, 2005,
increased 252% to $126,222 compared to $50,031 for the previous quarter ended
March 31, 2005.
Revenues recognized from travel completed for the six months ended June 30,
2005, increased 100% to $176,253 compared to $0 for the six months ended June
30, 2004.
Completed travel bookings for which Joystar was paid a commission for the
quarter ended June 30, 2005 increased 255% to $1,367,477 compared to $535,788
for the previous quarter ended March 31, 2005.
Completed travel bookings for which Joystar was paid a commission for the six
months ended June 30, 2005 increased 100% to $1,903,265 compared to $0 for the
six months ended June 30, 2004.
During the same period, membership increased by 820 travel agents to 2,022.
Additionally, Joystar received new travel bookings (not completed) totaling over
$4,300,000 during the 3 months ended June 30, 2005.
Marketing and sales expenses for the six months ended June 30, 2005 decreased
$636,000 to $374,000 compared to $1,010,000 for the six months ended June 30,
2004. This was due to Company's successful results of marketing over the past
year and the Company's ability to attract professional agents to its Network
more cost effectively.
General and administrative expenses for the six months ended June 30, 2005 were
$1,151,000 as compared to $613,000 for the six months ended June 30, 2004, an
increase of $538,000 due primarily to the increases in employees and salaries of
$356,000, insurance of $35,000, legal fees $31,000 and a general increase in
other expenses due to increased activity.
LIQUIDITY AND SOURCES OF CAPITAL
--------------------------------
In July, the Company closed a $1,640,000 private placement which included
$1,057,000 in cash and the conversion of $575,000 from debt to equity under the
same terms. The Company issued 2,082,143 shares of common stock for $728,750 as
part of the $1,627,000 financing. The Company intends to raise an additional 5
million dollars in 2005. The Company expects to finance the capital needed with
additional issuances of its securities. In order to fund the Company's growth,
the Company has engaged an NASD member firm to provide investment banking
services. There is no assurance that the Company will be able to secure such
financing.
At June 30, 2005 the Company had a cash balance of $88,318 as compared to a cash
balance of $283,869 at December 31, 2004.
The Company had negative working capital at June 30, 2005. In July, the Company
raised an additional $728,750 resulting in positive working capital. To date the
Company has financed operations by issuance of shares of common stock in private
placements of $3,011,000 and issuance of shares for services in the amount of
$3,144,000 including new money.
11
Item 3. 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 June 30, 2005, 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 quarter ended June 30, 2005, 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.
12
PART II. OTHER INFORMATION
Item 1. Legal proceedings
In March, 2004 a former employee of the Company who was terminated prior to the
acquisition of Joystar, filed a lawsuit in Orange County Superior Court for
breach of contract and specific performance relating to the exercise of options,
among other causes of action. A proposed settlement has been submitted to the
Company in which the Company will issue an additional 300,000 shares and a cash
payment of $12,700 for cost. As of the date of this report, this agreement has
not yet been finalized. The Company's financial statements do not reflect any
adjustment to record the possible settlement.
An independent third party stockbroker has filed a lawsuit against the Company
for refusal to register certain shares to them. A proposed settlement has been
submitted by the Company in which the Company will register an additional
138,600 shares. As of the date of this report, this agreement has not yet been
finalized. The Company's financial statements do not reflect any adjustment to
record the possible settlement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds NONE
Item 3. Defaults on Senior Securities NONE
Item 4. Submission of Items to a Vote NONE
Item 5. Other Information NONE
Item 6.
(a) Exhibits
--------
The following Exhibits are incorporated herein by reference or are
filed with this report as indicated below.
Exhibit No. Description
----------- -----------
Exhibit 10.1 Subscription Agreement
Exhibit 10.2 Warrant Agreement
Exhibit 10.3 Escrow Agreement
Exhibit 10.4 Standstill Agreement
Exhibit 31 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
b) Reports on 8K during the quarter: NONE
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
JOYSTAR, INC.
Date: August 15, 2005
By: /s/ William Alverson
---------------------------------
Chief Executive Officer and Chief
Financial Officer
14