-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MFTeKkuHpIgjUgJPaEuhRVosxdeN+nMGrCKntLe82djeUxeWv3Eov4ax1cw99+LH vpLMLOv8Koa7XiJ6sc2bXw== 0001144204-04-016838.txt : 20041025 0001144204-04-016838.hdr.sgml : 20041025 20041025172847 ACCESSION NUMBER: 0001144204-04-016838 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041025 DATE AS OF CHANGE: 20041025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GELSTAT CORP CENTRAL INDEX KEY: 0000890725 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411713474 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21394 FILM NUMBER: 041094828 BUSINESS ADDRESS: STREET 1: SOUTHPOINT OFFICE CENTER STREET 2: 1650 WEST 82ND STREET, SUITE 1040 CITY: BLOOMINGTON STATE: MN ZIP: 55431 BUSINESS PHONE: 952-881-4105 MAIL ADDRESS: STREET 1: SOUTHPOINT OFFICE CENTER STREET 2: 1650 WEST 82ND STREET, SUITE 1040 CITY: BLOOMINGTON STATE: MN ZIP: 55431 FORMER COMPANY: FORMER CONFORMED NAME: DEVELOPED TECHNOLOGY RESOURCE INC DATE OF NAME CHANGE: 19930309 10QSB 1 v07769_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-QSB |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission File Number: 0-21394 GELSTAT CORPORATION (Exact name of small business issuer as specified in its charter) MINNESOTA 41-1713474 --------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1650 WEST 82ND STREET SUITE 1200 BLOOMINGTON, MINNESOTA 55431 ---------------------------- (Address of principal executive offices) (zip code) (952) 881-4105 -------------- (Issuer's telephone number) 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 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 As of October 25, 2004, 12,295,814 shares of the Issuer's Common Stock were outstanding. GELSTAT CORPORATION (A DEVELOPMENT STAGE COMPANY) INDEX FOR THE QUARTER ENDED SEPTEMBER 30, 2004 PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed balance sheets 3 Condensed statements of operations 4 Condensed statements of cash flows 5 Notes to condensed financial statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ITEM 3. CONTROLS AND PROCEDURES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES GELSTAT CORPORATION (A Development Stage Company) Condensed Balance Sheets
September 30, December 31, 2004 2003 (Unaudited) (Audited) ----------------- -------------- ASSETS - ------ Current Assets - -------------- Cash and cash equivalents $ 1,564,089 $ 417,839 Accounts receivable 133,379 - Inventories 1,052,917 - Prepaid consulting 68,172 433,513 Prepaid expenses 202,955 71,012 Other current assets - 10,248 ----------------- -------------- Total Current Assets 3,021,512 932,612 ----------------- -------------- Property and Equipment, net 72,638 206,950 ----------------- -------------- Other Assets - ------------ Patents 91,516 59,118 Note receivable - 25,000 Lease deposits 7,692 5,692 ----------------- -------------- Total Other Assets 99,208 89,810 ----------------- -------------- TOTAL ASSETS $ 3,193,358 $1,229,372 ================= ============== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities - ------------------- Accounts payable $ 1,243,549 $ 132,778 Accrued expenses 253,435 118,572 Deferred revenue 53,233 - ----------------- -------------- Total Current Liabilities 1,550,217 251,350 Long-Term Liabilities Deferred gain - 25,000 Accrued marketing fees - 20,222 ----------------- -------------- Total Liabilities 1,550,217 296,572 ----------------- -------------- Stockholders' Equity Undesignated 10,000,000 shares Common stock, $.01 par value per share 50,000,000 shares authorized 12,295,814 and 9,200,805 shares issued and outstanding 122,958 92,008 Additional paid-in capital 7,607,981 2,470,483 Subscriptions receivable - (3,375) Deficit accumulated during the development stage (6,087,798) (1,626,316) ----------------- -------------- Total Stockholders' Equity 1,643,141 932,800 ----------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,193,358 $1,229,372 ================= ==============
See accompanying notes to financial statements GELSTAT CORPORATION (A Development Stage Company) Condensed Statements of Operations (Unaudited)
Three Three Nine Nine June 25, 2002 Months Ended Months Ended Months Ended Months Ended (inception) to September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003 September 30, 2004 ------------------ ----------------- ----------------- ------------------ ------------------ Revenues, net $ 157,463 $ 0 $ 174,202 $ 0 $ 174,202 Cost of Goods Sold 65,557 - 284,121 284,121 ------------------ ----------------- ----------------- ------------------ ------------------ Gross Profit (Loss) 91,906 0 (109,919) 0 (109,919) ------------------ ----------------- ----------------- ------------------ ------------------ Operating Expenses Selling, general and administrative 2,462,168 362,125 3,958,069 833,491 5,410,727 Impairment on property and equipment 167,000 - 166,983 - 168,788 Research and development 23,518 27,351 227,068 87,134 403,172 ------------------ ----------------- ----------------- ------------------ ------------------ Total Operating Expenses 2,652,686 389,476 4,352,120 920,625 5,982,687 ------------------ ----------------- ----------------- ------------------ ------------------ Loss from Operations (2,560,780) (389,476) (4,462,039) (920,625) (6,092,606) ------------------ ----------------- ----------------- ------------------ ------------------ Other Income and (Expense) Interest expense - - - - (72) Interest income - 752 557 4,158 4,880 ------------------ ----------------- ----------------- ------------------ ------------------ Net Other Income - 752 557 4,158 4,808 ------------------ ----------------- ----------------- ------------------ ------------------ Net Loss $ (2,560,780) $ (388,724) $ (4,461,482) $ (916,467) $ (6,087,798) ================== ================= ================= ================== ================== Net Loss per common share: Basic and Diluted $ (0.22) $ (0.05) $ (0.42) $ (0.15) $ (0.81) ================== ================= ================= ================== ================== Weighted Average Shares Outstanding: 11,608,716 7,726,351 10,646,002 6,263,506 7,520,350 ================== ================= ================= ================== ==================
See accompanying notes to financial statements GELSTAT CORPORATION (A Development Stage Company) Condensed Statements of Cash Flows (Unaudited)
Nine Nine June 25, 2002 Months Ended Months Ended (inception) to September 30, September 30, September 30, 2004 2003 2004 ---------------- ---------------- ---------------- CASH FLOW FROM OPERATING ACTIVITIES Net Loss $ (4,461,482) $ (916,467) $ (6,087,798) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation 12,869 399 14,719 Common stock issued for services 708,929 - 1,254,039 Warrants issued for services 13,920 - 13,920 Stock options issued below fair market value 27,000 - 27,000 Expense from stock based transaction - - 20,222 Impairment on property and equipment 166,983 191 168,788 Changes in operating assets and liabilities: Accounts receivables (133,379) - (133,379) Inventories (1,052,917) (12,262) (1,052,917) Prepaid consulting 365,341 - (68,172) Prepaid expenses (131,943) 12,442 (125,565) Other current assets 10,248 37,493 37,674 Accounts payable 1,110,771 165,253 1,243,549 Accrued expenses 134,863 (1,033) 219,416 Deferred revenue 53,233 - 53,233 ---------------- ---------------- ---------------- Net Cash Flows from Operating Activities (3,175,564) (713,984) (4,415,271) ---------------- ---------------- ---------------- CASH FLOW FROM INVESTING ACTIVITIES Cash received from merger with Developed Technology Resource, Inc. - 400,478 393,478 Proceeds from note receivable acquired in merger - 467,219 467,219 Purchases of property and equipment (45,540) (170,123) (255,381) Patent acquisition costs (32,398) (31,962) (91,516) Lease deposits (2,000) (5,192) (7,692) ---------------- ---------------- ---------------- Net Cash Flows from Investing Activities (79,938) 660,420 506,108 ---------------- ---------------- ---------------- CASH FLOW FROM FINANCING ACTIVITIES Proceeds from note payable - 200,000 500,000 Issuance of common stock, net of expenses 4,383,802 - 4,909,802 Exercise of stock options 13,750 21,500 42,250 Exercise of warrants 825 7,000 7,825 Purchase of warrants - 10,000 10,000 Payments received on stock subscriptions receivable 3,375 - 3,375 ---------------- ---------------- ---------------- Net Cash Flows from Financing Activities 4,401,752 238,500 5,473,252 ---------------- ---------------- ---------------- Net Change in Cash and Cash Equivalents 1,146,250 184,936 1,564,089 CASH AND CASH EQUIVALENTS, Beginning of Period 417,839 133,014 - ---------------- ---------------- ---------------- CASH AND CASH EQUIVALENTS, End of Period $ 1,564,089 $ 317,950 $ 1,564,089 ================ ================ ================
See accompanying notes to financial statements NOTE 1 - Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- Nature of Operations GelStat Corporation (the "Company") is a development stage company that develops and markets over the-counter (OTC, non-prescription) consumer health care products. Development efforts are focused on very large markets where GelStat products can offer improved efficacy, safety, and/or convenience over existing OTCs. The Company's first product, "GelStat(TM) Migraine", is intended to provide acute relief from the pain and associated symptoms of migraine and migraine-like headaches. "GelStat(TM) Migraine" first began to be distributed to leading national and regional retailers in the second quarter of 2004. The Company plans to introduce several new OTC consumer health care products in 2005. Unaudited Financial Statements The accompanying unaudited condensed financial statements of GelStat Corporation have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of operating results. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited condensed financial statements should be read in conjunction with the financial statements and notes included in the Company's Form 10-KSB for the year ended December 31, 2003. Principles of Consolidation On May 9, 2003, Developed Technology Resource, Inc. (DTR) filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting the merger of GelStat Corp. with NP Acquisition Corp. (NP Acquisition), then a wholly owned subsidiary of DTR. As described in the current report, for accounting purposes, the merger was accounted for as a reverse acquisition, with GelStat Corp. as the acquirer. The historical financial statements of GelStat Corp. become the historical financial statements of DTR, and the assets and liabilities of DTR are accounted for as required under the purchase method of accounting. Results of operations of DTR are included in the financial statements from April 30, 2003, the effective date of the merger. On October 6, 2003, the Company's Board of Directors approved a stock dividend in the amount of one share for each share held of record. All share data is presented to give effect to the retroactive application of the stock dividend as if it occurred on June 25, 2002 (date of inception of GelStat Corp.) All share data has been restated to give effect of the merger under which each GelStat Corp. share was converted into 1.3080249 shares of DTR as adjusted for the stock dividend declared on July 19, 2004.(Note 3). Effective July 14, 2003, DTR changed its name to GelStat Corporation. Effective March 17, 2004, GelStat Corp. was merged into its parent, GelStat Corporation. Inventories At September 30, 2004, inventories were valued at $1,052,917 and consisted of raw materials of $303,581, work-in-process of $13,632 and finished goods of $735,704. Inventories are valued at the lower of cost using the first-in, first-out (FIFO) method or market. At December 31, 2003, the Company had no inventory. Intangible Assets Patent costs will be amortized over their estimated useful life using the straight-line method upon the patent issuance date. As of September 30, 2004, the Company has applied for several patents and none have been issued. Research and Development Costs The Company expenses research and development costs as incurred. Prepaid Consulting Prepaid consulting includes cash and/or common stock issued to consultants for services to be rendered related to public relations, distribution consulting, investor relations and general operations conducted in the normal course of business. These costs are being expensed over the terms of the contracts, which expire through January 2005, using the straight-line method. Impairment Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the three and nine months ended September 30, 2004 and 2003 and the period from June 25, 2002 (inception) to September 30, 2004, the Company recorded an impairment of tooling (property and equipment) of $167,000, $0, $166,983, $0 and $168,788, respectively. An impairment was recorded on production equipment due to the Company's redesign and location of their production process, therefore, the entire carrying amount of the equipment was recorded as an impairment loss. Stock-Based Compensation In accordance with Accounting Principles Board (APB) Opinion No. 25 and related interpretations, the Company uses the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of the Company's common stock at the grant date over the amount the employee must pay for the stock. The Company's general policy is to grant stock options at fair value at the date of grant. Options and warrants issued to non-employees are recorded at fair value, as required by Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation," (SFAS No. 123), using the Black Scholes pricing model. The Company has adopted the disclosure only provision of SFAS No. 148, "Accounting for Stock-Based Compensation." Pursuant to APB No. 25 and related interpretations, $0, $0, $27,000, $0, and $27,000 of compensation costs have been recognized in the accompanying statements of operations for the three months ended September 30, 2004 and 2003, for the nine months ended September 30, 2004 and 2003, and for the period from June 25, 2002 (inception) to September 30, 2004, respectively. Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, the Company's net loss and basic and diluted loss per common share would have increased to the following pro forma amounts: Stock Based Compensation Table
Three Three Nine Nine 25-Jun-02 Months Ended Months Ended Months Ended Months Ended (inception) to September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003 September 30, 2004 ------------------ ------------------ ------------------ ------------------ ------------------ Net loss $ (2,560,780) $ (388,724) $ (4,461,482) $ (916,467) $ (6,087,798) Pro forma net loss $ (2,934,248) $ (422,674) $ (4,903,885) $ (950,417) $ (6,607,701) Basic and diluted net loss per share: As reported $ (0.22) $ (0.05) $ (0.42) $ (0.15) $ (0.81) Pro forma net loss $ (0.25) $ (0.05) $ (0.46) $ (0.15) $ (0.88) Stock-based compensation: As reported $ -- $ -- $ 27,000 $ -- $ 27,000 Pro forma $ 373,468 $ 33,950 $ 442,403 $ 33,950 $ 519,903 Weighted Average Shares Outstanding: 11,608,716 7,726,351 10,646,002 6,263,506 7,520,350
In determining the compensation cost of the options granted during the three and nine months ended September 30, 2004 and 2003, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black Scholes pricing model and the weighted average assumptions of used in these calculations are summarized as follows:
For the three months For the nine months ended September 30, ended September 30, 2004 2003 2004 2003 Risk-free Interest Rate 3.66% 2.74% 3.51% 2.74% Expected Life of Options Granted 5 years 5 years 5 years 5 years Expected Volatility 208.3% 90.0% 182.9% 90.0% Expected Dividend Yield 0.0% 0.0% 0.0% 0.0%
Income Taxes The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement and income tax reporting bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance to the extent that realization is not assured. Net Loss per Common Share Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding for the reporting period. Diluted net loss per common share is computed by dividing net loss by the sum of the weighted average number of common shares outstanding plus all additional common stock that would have been outstanding if potentially dilutive common shares related to stock options and warrants had been issued. All options and warrants outstanding during the three and nine months ended September 30, 2004 and 2003, and the period from June 25, 2002 (inception) to September 30, 2004 were anti-dilutive. Management's Estimates The preparation of financial statements in conformity 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The Company sells its product to a number of leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers, both directly and through the services of external sales brokers. In accordance with the Securities Exchange Commission's Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements", the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists, shipment has occurred, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, except with respect to customers that buy products on Pay on Scan terms, we recognize revenue at the time of shipment of the merchandise. The Company generated gross revenues of $178,731 and $374,394 excluding required revenue recognition adjustments of $21,268 and $200,192 for the three and nine months ending September 30, 2004, respectively. The Company recognizes Pay-on-Scan sales as revenues when 1) we are notified of the customer's sales through periodic sales reports, 2) receive payments from the customer or 3) when the customer reorders a specified quantity of the relevant product. Pay-on-Scan revenue recognition treatment typically ends 90 to 180 days after the date of first shipment under Pay-on-Scan or earlier when persuasive evidence exists that a customer or distributor has agreed to terminate the Pay-on-Scan arrangement in favor of a traditional sales arrangement. The Company estimates and accrues liabilities for product returns as a percentage of unpaid and outstanding product sales. For the three and nine months ending September 30, 2004, the Company had reserved $5,125 and $10,995, respectively, which is equivalent to 3.0% of sales for damaged products and product returns. Trade promotions provided to our customer and distributors in the form of free merchandise are recorded as a reduction in revenues. We remove the items from inventory when shipped. For the three and nine months ending September 30, 2004, the Company had reserved $2,166 and $50,442, respectively, for trade promotion as a reduction from gross revenues. Temporary Price Reduction (TPR) programs, merchandising fees, co-op advertising and slotting expenses are treated as a reduction in revenues by the Company. We record the liability when persuasive evidence exists that we and the customer or distributor have reached agreement and that an advertising action will result in an expense to the Company in the near future. The liability is maintained until the customer takes the deduction against payments due. For the three and nine months ending September 30, 2004, the Company had reserved $26,256 and $75,156, respectively, for TPR programs, merchandising fees, co-op advertising and slotting expenses as a reduction from gross revenues. The Company accrues liabilities for broker sales expenses as sales and marketing expenses. The broker sales expense is typically a fixed percentage of the net sales revenues for a customer and the broker sales expenses liability is maintained until the customer pays the outstanding account receivable. The Company has fully paid all broker expenses due as of September 30, 2004. NOTE 2 - DEVELOPMENT STAGE COMPANY The Company is a development stage company that has generated net revenues of $174,202 and has incurred net losses since inception totaling approximately $6,087,798. To fund its operations to date during the development stage, the Company has issued common stock for cash. The accompanying condensed financial statements have been prepared assuming the Company will continue as a going concern, i.e., the financial statements contemplate the realization of assets and satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is dependent on it continuing to generate revenues through sales of its products, achieving profitability and/or raising additional capital. Management intends to obtain additional debt or equity capital to meet all of its existing cash obligations and to fund expenses to bring its products to market; however, there can be no assurance that capital will be available or available on terms favorable to the Company. In August 2004, the Company issued 1,030,257 shares of common stock with gross proceeds of $2,575,643 (Note 4). NOTE 3 - MERGER Effective April 30, 2003, DTR completed its merger pursuant to an Agreement and Plan of Merger dated April 18, 2003 by and among DTR, GelStat Corp. and NP Acquisition, a wholly owned subsidiary of DTR. In the Merger, NP Acquisition merged with GelStat Corp., with GelStat Corp. being the surviving company and becoming a wholly-owned subsidiary of DTR. In the merger, the former stockholders of GelStat Corp. received shares of DTR common stock. In addition, in the merger, warrants and options to purchase shares of GelStat Corp. common stock were converted into warrants and options to purchase shares of DTR common stock. Each share of GelStat Corp. common stock was converted into 1.3080249 shares of DTR common stock. Each warrant and option to purchase one share of GelStat Corp. common stock was converted into a warrant or option to purchase 1.3080249 shares of DTR common stock. Immediately after the merger, the former GelStat Corp. stockholders, option holders and warrant holders together owned a total of approximately 60% of DTR common stock on a fully-diluted basis, (assuming the exercise of all options and warrants to purchase DTR common stock), and the pre-merger DTR stockholders owned a total of approximately 40% of DTR common stock on a fully-diluted basis. The merger involved the issuance of 3,238,065 shares of DTR common stock valued at $1,442,506. No cash consideration or other consideration was issued or used in the merger. In addition to the ownership of the common stock, GelStat Corp. board members controlled the board of directors post merger and the management of GelStat Corp. became the controlling management team of the Company. The merger was accounted for as a reverse acquisition by GelStat Corp, and, accordingly, was deemed to be equivalent, for accounting purposes, to the issuance of GelStat Corp. capital stock in exchange for the fair market value of the assets and liabilities of DTR. Since DTR had only monetary assets, the assets and liabilities of DTR were recorded at historical cost, which approximated fair value, and no goodwill was recorded. GelStat Corp. changed its name to GS Corp. on June 4, 2003 and DTR changed its name to GelStat Corporation on July 14, 2003. Effective March 17, 2004, GS Corp. merged with and into GelStat Corporation. The fair value of the assets acquired, liabilities assumed, and purchase price were as follows: Cash $ 393,478 Other current assets 115,064 Notes receivable 967,219 Property and equipment 764 Other assets 25,000 ----------- Total assets acquired 1,501,525 =========== Current liabilities $ 34,019 Deferred gain 25,000 ----------- Total liabilities assumed 59,019 =========== NOTE 4 - STOCKHOLDERS' EQUITY In January 2004, the Company issued 150,000 shares of common stock with gross proceeds of $125,000 and expenses of $12,500 in connection with a private placement offering. The Company issued 22,500 five-year warrants at an exercise price of $0.83 as commission for financing. In February 2004, the Company issued 636,000 shares of common stock with gross proceeds of $1,060,000 and expenses of $51,000 in connection with a private placement offering. The Company issued 45,900 five-year warrants at an exercise price of $1.67 as commission for financing. In May 2004, the Company issued 776,250 shares of common stock with gross proceeds of $1,105,000 and expenses of $98,150 in connection with a private placement offering. The Company issued 56,625 five-year warrants at an exercise price of $1.33 and 7,500 shares of common stock as commission for financing On July 19, 2004, the Company's Board of Directors approved a three for two stock split, payable on or about August 31, 2004 to shareholders of record on August 17, 2004 (the "record date"). All share data is presented to give effect to the retroactive application of the stock dividend as if it occurred on June 25, 2002 (date of inception of GelStat Corp). In August 2004, the Company issued 1,030,257 shares of common stock with gross proceeds of $2,575,643 and expenses of $320,190 in connection with a private placement offering. The Company issued 103,288 five-year warrants at an exercise price of $2.50 as commission for financing. During the three months ended September 30, 2004, the Company issued 138,750 shares of common stock at prices ranging from $1.67 to $5.03 per share for services rendered or to be rendered valued at $570,700. During the nine months ended September 30, 2004, the Company issued 241,500 shares of common stock at prices ranging from $1.16 to $5.03 per share for services rendered or to be rendered valued at $729,150. During the three and nine months ended September 30, 2004, 15,000 vested stock options were exercised by an employee with an exercise price of $0.92 resulting in the issuance of 15,000 shares of common stock. During the three months ended September 30, 2004, the Company did not issue any warrants for services. During the nine months ended September 30, 2004, the Company issued 18,000 three-year warrants with an exercise price of $1.20 for services to be rendered. These warrants were valued at $13,920 using the Black Scholes pricing model and are being expensed over the term of the contract. During the three months ended September 30, 2004, 37,500 five year warrants having an exercise price of $1.67 were exercised on a "cashless" or "net exercise" basis (based on the market price of the Company's common stock the day before exercise) resulting in the issuance of 21,622 shares. During the nine months ended September 30, 2004, 49,500 warrants were exercised with a weighted average exercise price of $1.58 on a "cashless" or "net exercise" basis (based on the market price of the Company's common stock the day before exercise) resulting in the issuance of 28,891 shares of common stock. NOTE 5 - RELATED PARTY TRANSACTIONS The Company entered into an agreement with Mitchell Health Technologies (MHT) in September 2002 in which MHT was to provide consulting services, in exchange for a performance bonus not exceeding $75,000, based on certain milestones to be achieved by MHT prior to December 31, 2003. On May 9, 2003, the Company's Board of Directors amended the agreement to allow for performance bonus payments of up to $125,000. During the three and nine months ended September 30, 2004 and 2003, and the period from June 25, 2002 (inception) to September 30, 2004, the Company paid $0, $40,000, $25,000, $60,000, and $125,000, respectively, to MHT in accordance with this agreement. The final payment in accordance with the agreement was made on March 9, 2004 and the agreement was terminated. Russ Mitchell, President of Gelstat Corporation, was the founder and principal shareholder of MHT. During the year ended December 31, 2003, the Company was involved in a legal proceeding with a third party, which was subsequently released by all parties involved. In connection with that release and as a condition of its execution, certain officers of the Company were personally required to give up previously awarded cash settlements and all pending and future claims against the third party. These officers were granted $40,000 as compensation to secure this release for the benefit of the Company. This amount is included in accrued expenses at December 31, 2003 and was paid on March 9, 2004. NOTE 6 - Supplemental Cash Flow Information
------------------------------------------------------------ Nine months Nine months ended ended June 25, 2002 September 30, September 30 (inception) to 2004 2003 September 20, 2004 ------------------------------------------------------------ Supplemental cash flow disclosures: Cash paid for interest $ 0 $ 0 $ 72 Cash paid for income taxes 0 2,587 2,587 Noncash investing and financing activities: Issuance of common stock in exchange for assets and liabilities in connection with merger Other current assets 0 115,064 115,064 Notes receivable 0 967,219 967,219 Property and equipment 0 764 764 Other assets 0 25,000 25,000 Current liabilities 0 34,019 34,019 Deferred gain 0 25,000 25,000 Conversion of accrued marketing fees into common stock 20,222 -- 20,222 Write off note receivable and deferred gain $ 25,000 $ -- $ 25,000
NOTE 7 - CONCENTRATIONS During the three months ended September 30, 2004, the Company has gross revenues from three customers of 34%, 20%, and 11%, respectively. During the nine months ended September 30, 2004 and during the period from June 25, 2002 (inception) to September 30, 2004, the Company had three major customers of 17%, 21%, and 20%, respectively. At September 30, 2004, the Company had accounts receivable from these three customers of 38%, 1%, and 30%, respectively. During the three and nine months ended September 30, 2003, the Company had no revenues. NOTE 8 - LEGAL PROCEEDINGS On July 30, 2004, a complaint was filed against the Company by Peter Hauser, a former director of the Company, demanding compensation for prior services in the form of cash and stock options. The Company believes the complaint is without merit and plans to defend itself against all claims made therein. On September 13, 2004, a complaint was filed against the Company by Michael Borman, a former employee of the Company, demanding severance pay in the form of cash and stock options. The Company believes the complaint is without merit and plans to defend itself against all claims made therein. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION STATEMENTS OTHER THAN CURRENT OR HISTORICAL INFORMATION INCLUDED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS AND ELSEWHERE IN THIS FORM 10 QSB, IN FUTURE FILINGS BY GELSTAT CORPORATION (THE "COMPANY" OR "GELSTAT") WITH THE SECURITIES AND EXCHANGE COMMISSION AND IN GELSTAT'S PRESS RELEASES AND ORAL STATEMENTS MADE WITH THE APPROVAL OF AUTHORIZED EXECUTIVE OFFICERS, SHOULD BE CONSIDERED "FORWARD-LOOKING STATEMENTS" MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. GELSTAT WISHES TO CAUTION THE READER NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS. OVERVIEW GelStat Corporation ("the Company" or "GelStat") is a consumer health care company dedicated to the cost-effective development and marketing of over-the-counter (OTC) and other non-prescription consumer health care products. Development efforts are focused on products that address large markets with the goal of offering new products that offer improved efficacy, safety, and/or convenience over existing OTCs. GelStat is committed to building a portfolio of products with significant commercial potential. The Company's first product is "GelStat(TM) Migraine", a patent pending OTC homeopathic drug intended for use as a first-line, acute treatment for migraine and migraine-like headaches. GelStat Migraine is intended to provide acute (at the time of an attack) relief from headache pain as well as other symptoms frequently associated with migraine. These associated symptoms often include nausea, photophobia (excessive sensitivity to light) and phonophobia (excessive sensitivity to sound). Over 90 percent of those with migraine employ OTC medications as part of their treatment arsenal and nearly 60 percent rely exclusively on OTC medications. In general, older OTC headache medications are based on aspirin or other non-steroidal anti-inflammatory drugs (NSAIDs) with these agents reported to exhibit an effect in only about 25 percent of those with moderate to severe migraine. A recent clinical trial showed GelStat Migraine to be an effective treatment for 83 percent of those with moderate to severe migraine. Migraine pain was completely eliminated in 48 percent of patients and was arrested at the mild pain phase in 35 percent. Though all of the patients enrolled in this study were those whose migraine consistently progressed to moderate or severe headache pain, after treatment with GelStat Migraine at the mild pain phase, only 17 percent went on to develop moderate pain and 0 percent (none) developed severe pain. In addition, GelStat Migraine effectively relieved the associated symptoms of migraine such as nausea, photophobia and phonophobia. Further details regarding this clinical trial are available on the Company's website (www.gelstat.com). Current sales and marketing efforts are focused exclusively on GelStat Migraine. Approximately 30 million Americans are known to suffer with migraine headaches and a total of 50 million Americans are reported to have severe, recurrent headaches. Americans spend an estimated $2.6 billion each year on the purchase of over 600 million units of OTC headache medication. The Company believes that the migraine market is potentially very receptive to GelStat Migraine, as less than 30 percent of those with migraine report being very satisfied with their current treatment, two-thirds of those with a prescription for migraine delay or altogether avoid such treatment due to concerns over side effects, and 79 percent of migraine sufferers have reported their willingness to try a new migraine remedy. The Company believes that the market for GelStat Migraine is global, since international incidence of migraine approximates that of the United States (around 12 percent of the population.) The Company anticipates the first international sales of GelStat Migraine in 2005. The Company believes that GelStat Migraine may offer consumers certain significant advantages over older, NSAID-based headache treatments, including speed of action, efficacy, convenience and a more advantageous (less significant) side effect profile. Unlike NSAID-based headache treatments, GelStat Migraine has not to date been associated with rebound headaches or any other significant side effects. GelStat intends to market and distribute its OTC products primarily through mainstream chain drug store, food store, and mass merchandise retailers. GelStat Migraine was first introduced at the National Association of Chain Drug Stores (NACDS) "Marketplace 2003" convention in June 2003. That exposure created initial interest among a number of retailers and led to the scheduling of follow-on meetings, many with national retailers. In December 2003, the Company initiated its first shipments of GelStat Migraine to certain select retailers in three test markets. Test markets selected were the Washington/Baltimore area, the Minneapolis/St. Paul area and the Raleigh/Durham area. No revenue was recognized in relation to these initial product shipments due to their use for promotional and test marketing venues. By July 2004 the Company had achieved placement of GelStat Migraine in approximately 7,000 retail locations. At September 30, 2004, the Company had shipped product to a number of leading wholesalers across the United States and had also shipped approximately 100,000 consumer packages of GelStat Migraine to over 10,000 retail locations. GelStat Migraine is presently available at approximately 15,000 food, drug and discount stores, including Walgreens, Eckerd, CVS, Brooks Pharmacy, Longs Drugs, Publix, H.E.B., Giant Carlisle, Raley's, Basha's, Meijer, ShopKo, Fred Meyer, Drugstore.com and many others. GelStat Migraine is also available through most leading drug wholesalers, including Amerisource Bergen, Cardinal Health, F. Dohman, D&K Healthcare and many others. The Company has received reorders from retailers and distributors following their initial stocking orders and believes it will continue to receive a significant number of initial orders followed by reorders for GelStat Migraine over the coming months. The Company expects that it will continue to experience rapid growth in the total number of retail locations stocking GelStat Migraine and has received indications of interest or verbal commitments from a number of specific retailers. The Company maintains a list of retailers and wholesalers stocking GelStat Migraine on its website (www.gelstat.com). The Company continues to meet its customers' immediate volume and delivery requirements. In addition, the Company has built a substantial inventory of GelStat Migraine in anticipation of the increased demand expected to result from national advertising that began in October 2004. In the three months ended September 30, 2004, the Company produced approximately 440,000 consumer packages of GelStat Migraine and at September 30, 2004, held approximately $1.1 million of GelStat Migraine (at cost) in inventory. The Company has continued to build inventory and increase manufacturing capacity in anticipation of increased sales. Given the nature of the retailing industry, the need for an effective advertising and media campaign to generate consumer awareness, and the introductory terms required for initially placing GelStat Migraine with retailers, the Company does not anticipate recognizing substantial revenues prior to the fourth quarter of 2004. The Company began the major portion of its national advertising and media campaign in October 2004. This campaign includes full page advertisements in several national magazines, radio advertisements in key cities and the national distribution, via newspapers, of coupon bearing inserts. The Company plans to distribute more than 55 million coupons in the fourth quarter of 2004, each for $1.00 off GelStat Migraine. The Company expects its marketing campaign to create well over 100 million advertising impressions in calendar 2004 and believes that it will continue investing heavily in advertising and other promotional efforts through 2005 and beyond. Public relations and other promotional activities are expected to play a significant role in driving consumer awareness and trial. The Company released its first video news release (VNR) on October 12, 2004. That news release, timed to coincide with other marketing activities, is intended to generate additional awareness and added credibility for the Company and GelStat Migraine. The VNR highlights the results from the first clinical trial of GelStat Migraine and includes commentary by Dr. Roger Cady, the lead investigator in that trial and a leading migraine authority who is well known for his pioneering medical research. The VNR has received substantial coverage thus far, having been aired 55 times on 27 television stations during the first five days after its release. Many of these airings took place in key markets such as New York, Los Angeles, Philadelphia, Dallas, Houston, Seattle, Tampa, Miami, Orlando, San Diego and many others. The VNR is expected to continue running in various markets through the end of 2004, with less frequent airings expected after around the end of October 2004. The Company believes that there is a high degree of public interest in health news generally and plans to conduct additional promotional activities throughout the foreseeable future, both for GelStat Migraine and for other GelStat products now awaiting launch. Consistent with clinical data obtained thus far, GelStat Migraine is intended to be used as a first-line treatment, early in the course of a migraine headache, for acute relief from migraine headache pain and associated symptoms. Several additional clinical trials of GelStat Migraine are presently underway and several more are planned. The results of these future and ongoing trials are uncertain, but should provide additional data on the efficacy of GelStat Migraine and could result in a substantially expanded market for the product or support the planned development of new versions meant to address various other aspects of migraine treatment. Additional applications or versions could include those specifically for the treatment of pediatric migraine, for migraine prophylaxis (prevention of migraine onset via daily use of product), or for "mini-prophylaxis" (prevention of migraine through daily use at and around the time of an expected menstrual period in women whose migraine is frequently associated with menses). In conjunction with its first product, the Company has developed a sublingual (under the tongue) delivery system: the OraDoseTM System. The OraDose System is designed to enhance the efficacy of the active ingredients in GelStat Migraine, including their speed of action. The result is a proprietary product that utilizes a unique delivery system in combination with a unique formulation and that is expected to provide fast relief from migraine headaches for most users more effectively than other OTC products and at a fraction of the cost of prescription medications. Sublingual administration can be a very advantageous drug delivery method, particularly because of the speed with which active ingredients can reach the bloodstream relative to the orally ingested capsules or tablets generally employed in OTC products. The Company believes that sublingual administration is underutilized, especially in the OTC marketplace, and that other OTC products can be developed economically as a result of its accumulated experience with transmucosal drug delivery and by employing the OraDose System. GelStat is committed to building a portfolio of products addressing consumer health care conditions and believes that each of its present or planned products offers significant commercial potential. The Company plans to introduce several new products in 2005. Planned product introductions include "GelStatTM Sinus", an OTC homeopathic drug for the treatment of nasal and sinus symptoms, including congestion, pressure and headache. The National Institute of Allergy and Infectious Disease estimates that 37 million Americans are affected by sinusitis every year. Health care workers report 33 million cases of chronic sinusitis to the U.S. Centers for Disease Control and Prevention annually. The intended introduction of GelStat Sinus is March of 2005 and consumer samples are expected to be available shortly. The Company also plans to introduce "GelStatTM Arthritis" sometime in 2005 and "GelStatTM Sleep" sometime thereafter. GelStat Arthritis is expected to be an OTC homeopathic drug for the treatment of symptoms associated with arthritis. More than 40 million Americans have some form of arthritis according to the National Institutes of Health. GelStat Sleep is expected to be sold as a nutritional supplement for the promotion of healthy sleep. Approximately 70 million Americans are reported to be "problem sleepers". GelStat plans to conduct clinical trials on every product it develops. While the Company believes it has good anecdotal data suggesting the efficacy of GelStat Sinus, GelStat Arthritis and GelStat Sleep, formal clinical trials are required to confirm performance expectations presently based on anecdotal data alone. The Company believes that the successful completion of clinical trials demonstrating efficacy is essential in gaining broad acceptance by the medical community, retail establishments and the consumer. The Company is in the process of forming a wholly owned subsidiary, "GS Pharma" to pursue various pharmaceutical (prescription drug) opportunities that might exist relative to the Company's intellectual property and its pending and now ongoing research and development work. The Company believes that these opportunities may be substantial, but that their development and commercialization is beyond the scope of activity reasonably possible for GelStat Corporation in the foreseeable future. Management therefore seeks to maximize shareholder value by creating the subsidiary as a means to fund or otherwise further develop these opportunities without incurring dilution of GelStat stock or otherwise negatively impacting its capital structure or financial resources, while still retaining substantial ownership interest for GelStat shareholders. GelStat Corporation will continue focusing its resources on the development and commercialization of OTC health care products. PLAN OF OPERATION The Company had no revenues from operations for fiscal 2003 or 2002. Year to year comparisons are of only limited value since the Company is a new, development stage company, had no substantial revenue in either of its two most recent fiscal years, and commenced shipping product in June 2004. However, the following is an overview of income and expenses during the three and nine months ended September 30, 2004 compared to September 30, 2003. Cost of goods sold for the three and nine months ended September 30, 2004 and 2003, and the period from June 25, 2002 (inception) to September 30, 2004, respectively, were $65,557, $284,121, $0, $0, and $284,121 respectively. The increase in the third quarter of 2004 is attributable to the fact that the Company began to ship products to leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers in June 2004. Selling, general and administrative expenses for the three and nine months ended September 30, 2004 and 2003, and the period from June 25, 2002 (inception) to September 30, 2004, respectively, were $2,462,168, $3,958,069, $362,125, $833,491, and $5,410,727, respectively. The increase in the third quarter of 2004 compared to the third quarter of 2003 is attributable to the fact that GelStat had only very limited operations from September 25, 2002 (inception) to June 30, 2004. The Company began to ship products to leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers in June 2004. The Company incurred $23,518, $227,068, $27,531, $87,134, and $403,172 in research and development expense for the three and nine months ended September 30, 2004 and 2003, and the period from June 25, 2002 (inception) to September 30, 2004, respectively. The Company plans to substantially increase expenditures on research and development in 2004, primarily in the performance of additional clinical trials, and the development and commercialization of new products. The Company recorded net interest income of $0, $557, $752, $4,158 and $4,880 for the three and nine months ended September 30, 2004 and 2003, and the period from June 25, 2002 (inception) to September 30, 2004, respectively. Interest and investment income is not expected to make a material contribution to revenue in the foreseeable future. The Company has 11 employees and expects to further expand during the next 12 months. GelStat will actively seek, among others, additional marketing, operations, research & development, and accounting personnel and administrative staff. The Company does expect to expend substantial capital on research and development (consisting primarily of additional clinical trials for GelStat Migraine), additional product development, equipment capital to expand Migraine production, marketing and merchandising. During the three months ended September 30, 2004, the Company did record an impairment loss of $167,000 related to long-lived assets (production equipment) due to the Company's redesign and location of the production process, therefore, the entire carrying amount of the equipment was recorded as an impairment loss. LIQUIDITY AND CAPITAL RESOURCES Cash was $1,564,089 at September 30, 2004, representing an increase of $1,146,250 from the cash position of the Company as of December 31, 2003, which was $417,839. The increase is attributable to proceeds from the sale of common stock. The Company has paid for current commitments to spend $1,283,000 in the fourth quarter of fiscal 2004 on product advertising and promotion, excluding $209,353 which is due and payable in the fourth quarter of 2004. The Company's principal commitments consist of a long-term lease for its corporate offices and research and development facilities. As of October 25, 2004, the Company had cash of $419,917. While planning to raise additional capital, the Company believes that, in the event additional capital is unavailable, cash on hand plus results of operations could fund operations for the next 12 months, though such operations would be substantially reduced in scope from those presently envisioned. There can be no assurance that additional capital will be available on terms acceptable to the Company or on any terms whatsoever. In addition, the Company may evaluate potential acquisitions and alliances, which may require equity or cash resources. The Company's ability to continue the present operations and successfully implement its development plans is contingent upon its ability to increase revenues and ultimately attain and sustain profitable operations and/or raise additional capital. In August 2004, the Company issued 1,030,257 shares of common stock with gross proceeds of $2,575,643 and expenses of $320,190 in connection with a private placement offering. The Company issued 103,288 five-year warrants at an exercise price of $2.50 as commission for financing. CRITICAL ACCOUNTING POLICIES IMPAIRMENT OF LONG-LIVED ASSETS The Company's long-lived assets include property, equipment and leasehold improvements. At September 30, 2004, the Company had net property and equipment of $72,638, which represents approximately 2.3% of the Company's total assets. The estimated fair value of these assets is dependent on the Company's future performance. In assessing for potential impairment for these assets, the Company considers future performance. If these forecasts are not met, the Company may have to record an impairment charge not previously recognized, which may be material. During the period from June 25, 2002 (inception) to September 30, 2004, the Company did record an impairment loss of $168,788 related to long-lived assets. INVENTORIES At September 30, 2004, the Company had inventory of $1,052,917. We value our inventory at the lower of the actual cost or the current estimated market value of the inventory. We plan to regularly review inventory quantities on hand and record a provision for excess and obsolete inventory if considered necessary. Changes in product formulation, packaging, the introduction of new products, competition, or market dynamics could result in an increase in the amount of obsolete inventory quantities. REVENUE RECOGNITION The Company sells its product to a number of leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers, both directly and through the services of external sales brokers. In accordance with the Securities Exchange Commission's Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements", the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists, shipment has occurred, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, except with respect to customers that buy products on Pay on Scan terms, we recognize revenue at the time of shipment of the merchandise. The Company generated gross revenues of $178,731 and $374,394 excluding required revenue recognition adjustments of $21,268 and $200,192 for the three and nine months ending September 30, 2004, respectively. The Company recognizes Pay-on-Scan sales as revenues when 1) we are notified of the customer's sales through periodic sales reports, 2) receive payments from the customer or 3) when the customer reorders a specified quantity of the relevant product. Pay-on-Scan revenue recognition treatment typically ends 90 to 180 days after the date of first shipment under Pay-on-Scan or earlier when persuasive evidence exists that a customer or distributor has agreed to terminate the Pay-on-Scan arrangement in favor of a traditional sales arrangement. The Company estimates and accrues liabilities for product returns as a percentage of unpaid and outstanding product sales. For the three and nine months ending September 30, 2004, the Company had reserved $5,125 and $10,995, respectively, which is equivalent to 3.0% of sales for damaged products and product returns. Trade promotions provided to our customer and distributors in the form of free merchandise are recorded as a reduction in revenues. We remove the items from inventory when shipped. For the three and nine months ending September 30, 2004, the Company had reserved $2,166 and $50,442, respectively, for trade promotion as a reduction from gross revenues. Temporary Price Reduction (TPR) programs, merchandising fees, co-op advertising and slotting expenses are treated as a reduction in revenues by the Company. We record the liability when persuasive evidence exists that we and the customer or distributor have reached agreement and that an advertising action will result in an expense to the Company in the near future. The liability is maintained until the customer takes the deduction against payments due. For the three and nine months ending September 30, 2004, the Company had reserved $26,256 and $75,156, respectively, for TPR programs, merchandising fees, co-op advertising and slotting expenses as a reduction from gross revenues. The Company accrues liabilities for broker sales expenses as sales and marketing expenses. The broker sales expense is typically a fixed percentage of the net sales revenues for a customer and the broker sales expenses liability is maintained until the customer pays the outstanding account receivable. The Company has fully paid all broker expenses due as of September 30, 2004. ITEM 3. CONTROLS AND PROCEDURES The Company's chief executive officer ("CEO") and the chief financial officer ("CFO") evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report to insure that the Company records, processes, summarizes and reports in a timely and effective manner the information required to be disclosed in reports filed with or submitted to the Securities and Exchange Commission. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in timely bringing to their attention material information related to the Company required to be included in the Company's periodic Securities and Exchange Commission filings. During the fiscal quarter covered by this report, the Company hired a Chief Financial Officer who has undertaken steps to improve and strengthen internal controls and financial reporting. With the addition of the CFO, there is an effective process of financial checks and balances regarding capital and operating expense transactions. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 30, 2004, the Company was served with a Summons and Complaint entitled "Peter Hauser vs. Gelstat Corporation and Stephen C. Roberts." The action is to be heard in Minnesota State Court (District Court, 4th Judicial District, Hennepin County). Mr. Hauser, a former director of the Company, alleges that he is owed options to purchase Company stock and cash fees in connection with his service as a director. Mr. Hauser asserts a claim for damages in the amount of $725,000 based on the price of the Company stock plus the amount of unpaid cash fees. Both Mr. Roberts and the Company dispute Mr. Hauser's claims and intend to defend against the action. On September 13, 2004, the Company was served with a Summons and Complaint entitled "Michael C. Borman vs. Gelstat Corporation." The action is to be heard in Minnesota State Court (District Court, 4th Judicial District, Hennepin County). Mr. Borman, a former employee of the Company, alleges that he is owed wages, severance and options to purchase Company stock and cash fees in connection with his service as an employee. Mr. Borman asserts a claim for damages in the amount of $226,667 based on the price of the Company stock plus the amount of unpaid wages and severance. The Company disputes Mr. Borman's claims and intends to defend against the action. ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES (c) The Company sold the following securities that were not registered under the Securities Act of 1933, as amended (the "Act"), during the quarter ended September 30, 2004. In August, 2004, the Company issued 1,030,257 shares of common stock with gross proceeds of $2,575,643 and expenses of $320,190 in connection with a private placement offering. The Company issued 103,288 five-year warrants at an exercise price of $2.50 as commission for financing. During the three months ended September 30, 2004, 15,000 vested incentive stock options were exercised by an employee with an exercise price of $0.92 resulting in the issuance of 15,000 shares of common stock. During the three months ended September 30, 2004, 37,500 five year warrants having an exercise price of $1.67 were exercised on a "cashless" or "net exercise" basis (based on the market price of the Company's common stock the day before exercise) resulting in the issuance of 21,622 shares. All securities listed above were offered to a limited number of accredited investors, as defined in Rule 501(a) under the Act, and are restricted securities that are not transferable. These shares were issued without registration under the Act pursuant to the exemptions afforded by the provisions of Section 4(2) and 4(6) thereof, each recipient of securities having delivered appropriate investment representations to the Company with respect thereto. No underwriters were used in connection with share issuances. The gross proceeds from sale of the shares were added to the Company's working capital and are being used to pursue the Company's business strategy, including marketing, advertising, and expenses associated with the sale of the Company's products. ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on Thursday, August 12, 2004. As of the record date on July 8, 2004, there were 7,330,216 shares of common stock issued and outstanding. There were present and voting at the meeting, in person or by proxy, 5,740,090 shares of common stock (approximately 78.31% of the total issued and outstanding). Matters voted upon and the results thereof are as follows: 1. For Withheld Election of Directors: --------- --------- Stephen C. Roberts MD 3,832,944 1,907,146 Donald Miller 3,840,416 1,899,674 2. The authority to vote, in his discretion, all other business that may properly come before the meeting. For: 3,814,996 Against: 1,904,294 Abstain: 20,800 Broker Non-Vote: 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following new Exhibits are filed as part of this Form 10-QSB: (a) List of Exhibits 31.1 Certification of the Company's Chief Executive Officer & Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 32.1 Certification of the Company's Chief Executive Officer & Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (b) Reports on Form 8-K o July 22, 2004; Other Events GelStat Corporation announced a three-for-two stock dividend, payable to shareholders of record on August 17, 2004. o September 28, 2004; Change in Directors or Principal Officers GelStat Corporation appoints K. James Ehlen, M.D. to its Board of Directors 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. GELSTAT CORPORATION Date: October 25, 2004 By /s/ Stephen C. Roberts -------------------------------- Name: Stephen C. Roberts Title: Chairman and Chief Executive Officer By /s/ Nicholas C. Bluhm -------------------------------- Name: Nicholas C. Bluhm Title: Chief Financial Officer EX-31.1 2 v07769_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS We, Stephen C. Roberts, Chief Executive Officer and Nicholas C. Bluhm, Chief Financial Officer, of GelStat Corporation, certify that: 1. We have reviewed this Quarterly Report on Form 10-QSB of GelStat Corporation; 2. Based on our knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on our knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and we are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and we have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. s/ Stephen C. Roberts Stephen C. Roberts Chief Executive Officer /s/ Nicholas C. Bluhm Nicholas C. Bluhm Chief Financial Officer October 25, 2004 EX-32.1 3 v07769_ex32-1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of GelStat Corporation (the "Company") on Form 10-QSB for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen C. Roberts, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stephen C. Roberts Stephen C. Roberts Chief Executive Officer /s/ Nicholas C. Bluhm Nicholas C. Bluhm Chief Financial Officer October 25, 2004 -----END PRIVACY-ENHANCED MESSAGE-----