-----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, FYm6h3/lA1xJ2uNWSin0/bL6hvgNzYp0CjyLC3NyILeY1J6xtuqJVvHHZfDIEaoA Lr/qyO8MmYPq8oW0AlkssQ== 0001144204-04-012177.txt : 20040816 0001144204-04-012177.hdr.sgml : 20040816 20040816164022 ACCESSION NUMBER: 0001144204-04-012177 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04979247 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 v05776.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 JUNE 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 August 11, 2004, 7,638,888 shares of the Issuer's Common Stock were outstanding. 1 GELSTAT CORPORATION (A DEVELOPMENT STAGE COMPANY) INDEX FOR THE QUARTER ENDED JUNE 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 13 ITEM 3. CONTROLS AND PROCEDURES 18 PART II. OTHER INFORMATION 18 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURES 21 GELSTAT CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED BALANCE SHEETS JUNE 30, DECEMBER 31, 2004 2003 (UNAUDITED) (AUDITED) ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 920,041 $ 417,839 Accounts Receivable 195,663 -- Inventories 138,915 -- Prepaid consulting 179,676 433,513 Prepaid expenses 182,673 71,012 Other current assets -- 10,248 ----------- ----------- Total Current Assets 1,616,968 932,612 ----------- ----------- Property and Equipment, net 235,636 206,950 ----------- ----------- OTHER ASSETS Patents 74,481 59,118 Note receivable -- 25,000 Lease deposits 5,692 5,692 ----------- ----------- Total Other Assets 80,173 89,810 ----------- ----------- TOTAL ASSETS $ 1,932,777 $ 1,229,372 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 363,664 $ 132,778 Accrued expenses 244,183 118,572 Deferred revenue 60,912 -- ----------- ----------- Total Current Liabilities 668,759 251,350 ----------- ----------- LONG-TERM LIABILITIES Deferred gain -- 25,000 Accrued marketing fees -- 20,222 ----------- ----------- Total Liabilities 668,759 296,572 ----------- ----------- STOCKHOLDERS' EQUITY Undesignated 10,000,000 shares Common stock, $.01 par value per share 50,000,000 shares authorized 11,004,324 and 9,200,805 shares issued and outstanding $ 110,043 92,008 Additional paid-in capital $ 4,780,993 2,470,483 Subscriptions receivable $ (100,000) (3,375) Deficit accumulated during the development stage $(3,527,018) (1,626,316) ----------- ----------- Total Stockholders' Equity $ 1,264,018 932,800 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,932,777 $ 1,229,372 =========== =========== 3
GELSTAT CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF OPERATIONS (UNAUDTIED) Three Three Six Six June 25, 2002 Months Ended Months Ended Months Ended Months Ended (inception) to June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 June 30, 2004 ------------ ------------ ------------ ------------ ------------ REVENUES, NET $ 16,739 $ 0 $ 16,739 $ 0 $ 16,739 ------------ ------------ ------------ ------------ ------------ COST OF GOODS SOLD 218,564 0 218,564 0 218,564 ------------ ------------ ------------ ------------ ------------ GROSS LOSS (201,825) 0 (201,825) 0 (201,825) ------------ ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general and administrative 838,496 304,650 1,495,884 445,773 2,950,347 Research and development 48,100 33,173 203,550 59,783 379,654 ------------ ------------ ------------ ------------ ------------ Total Operating Expenses 886,596 337,823 1,699,434 505,556 3,330,001 ------------ ------------ ------------ ------------ ------------ Loss from Operations (1,088,421) (337,823) (1,901,259) (505,556) (3,531,826) ------------ ------------ ------------ ------------ ------------ OTHER INCOME AND (EXPENSE) Interest expense 0 0 0 0 (72) Interest income 205 3,406 557 3,406 4,880 ------------ ------------ ------------ ------------ ------------ Net Other Income 205 3,406 557 3,406 4,808 ------------ ------------ ------------ ------------ ------------ NET LOSS $ (1,088,216) $ (334,417) $ (1,900,702) $ (502,150) $ (3,527,018) ============ ============ ============ ============ ============ Net Loss per common share: Basic and Diluted $ (0.10) $ (0.05) $ (0.19) $ (0.09) $ (0.50) ============ ============ ============ ============ ============ Weighted Average Shares Outstanding: 10,541,600 6,613,183 10,162,120 5,513,887 7,008,396 ============ ============ ============ ============ ============
4
GELSTAT CORPORATION (A DEVELOPMENT STAGE COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDTIED) Six Six June 25, 2002 Months Ended Months Ended (inception) to June 30, 2004 June 30, 2003 June 30, 2004 ----------- ----------- ----------- Net Loss $ (1,900,702) $ (502,150) $ (3,527,018) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation 7,671 177 9,521 Common stock issued for services 138,228 - 683,338 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 Loss on disposal of property and equipment - 1,791 1,805 Changes in operating assets and liabilities: Accounts receivables (195,663) - (195,663) Inventories (138,915) (5,091) (138,915) Prepaid consulting 253,837 - (179,676) Prepaid expenses (111,661) 9,678 (105,283) Other current assets 10,248 33,184 37,674 Accounts payable 230,886 129,130 363,664 Accrued expenses 125,611 (2,279) 210,164 Deferred revenue 60,912 - 60,912 ----------- ----------- ----------- Net Cash Flows from Operating Activities (1,478,628) (335,560) (2,718,335) ----------- ----------- ----------- Cash received from merger with Developed Technology Resource, Inc. - 393,478 393,478 Proceeds from note receivable acquired in merger - 467,219 467,219 Purchases of property and equipment (36,664) (168,600) (246,505) Proceeds from sale of property and equipment 307 - 307 Patent acquisition costs (15,363) (25,641) (74,481) Lease deposits - - (5,692) ----------- ----------- ----------- Net Cash Flows from Investing Activities (51,720) 666,456 534,326 ----------- ----------- ----------- Proceeds from note payable - 200,000 500,000 Issuance of common stock, net of expenses 2,028,350 - 2,554,350 Exercise of stock options - 7,000 28,500 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 2,032,550 224,000 3,104,050 ----------- ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 502,202 554,896 920,041 417,839 133,014 0 ----------- ----------- ----------- $ 920,041 $ 687,910 $ 920,041 =========== =========== ===========
5 GELSTAT CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONDENSED FINANCIAL STATEMENTS JUNE 30, 2004 AND 2003 (UNAUDITED) 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-prescriptive) consumer healthcare products. The Company's first product, GelStat Migraine, is intended to provide acute relief from the pain and associated symptoms of migraine and migraine-like headaches. GelStat Migraine first began to be distributed to leading national and regional retailers in the second quarter of 2004. 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 six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited condensed consolidated 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. 6 Inventories At June 30, 2004, inventories were valued at $138,915 and consisted of raw materials of $94,063, work-in-process of $13,151 and finished goods of $31,701. 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 June 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. 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, $24,750, $0, $27,000, $0 and $27,000 of compensation costs have been recognized in the accompanying consolidated statements of operations for the three months ended June 30, 2004 and 2003, for the six months ended June 30, 2004 and 2003, and for the period from June 25, 2002 (inception) to June 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: 7
Stock Based Compensation Table Three Three Six Six June 25, 2002 Months Ended Months Ended Months Ended Months Ended (inception) to June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 June 30, 2004 ----------- ----------- ------------ ----------- ----------- Net loss $(1,088,216) $ (334,417) $(1,900,702) $ (502,150) $(3,527,018) Pro forma net loss $(1,123,201) $ (334,417) $(1,969,637) $ (502,150) $(3,673,454) Basic and diluted net loss per share: As reported $ (0.10) $ (0.05) $ (0.19) $ (0.09) $ (0.50) Pro forma net loss $ (0.11) $ (0.05) $ (0.19) $ (0.09) $ (0.52) Stock-based compensation: As reported $ 24,750 $ -- $ 27,000 $ -- $ 27,000 Pro forma $ 34,985 $ -- $ 68,935 $ -- $ 146,436
The estimated fair value of each option grant is estimated on the date of grant using the Black Scholes pricing model with the following weighted-average assumptions used for options granted during the three and six months ended June 30, 2004: dividend yield of 0%, expected volatility of 129.1% and 116.1%, risk-free interest rate of 3.2% and 2.96% and expected lives of five years. There were no options issued during the three and six months ended June 30, 2003. 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 six months ended June 30, 2004 and 2003, and the period from June 25, 2002 (inception) to June 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. 8 Revenue Recognition The Company sells its product to a number of leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers 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 will recognize 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. During the quarter ending June 30, 2004, the Company generated Gross Revenues of $195,663 prior to required revenue recognition adjustments. The Company recognizes Pay on Scan sales as revenues when we are notified of the customer's sales through periodic sales reports, receive payments from the customer or when the customer reorders a specified quantity of the relevant product. Pay on Scan revenue recognition treatment typically ends 90 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 for a traditional sales arrangement. The Company estimates and accrues liabilities for product returns as a percentage of unpaid and outstanding product sales. At June 30, 2004, the Company had reserved approximately $5,900, equivalent to 3.0% of sales for product returns. During the quarter ended June 30, 2004, the Company had no products returned by customers or distributors. 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. During the quarter ended June 30, 2004, the Company had recorded approximately $48,300 in trade promotion expense. 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. During the quarter ended June 30, 2004, the Company had recorded approximately $48,900 for TPR programs, merchandising fees, co-op advertising and slotting expenses and recorded in accrued expenses at June 30, 2004. 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. At June 30, 2004, the Company had accrued approximately $5,000 for broker sales expense. NOTE 2 - DEVELOPMENT STAGE COMPANY The Company is a development stage company that has generated net revenues of $16,739 and has incurred net losses since inception totaling approximately $3,527,000. 9 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 May 2004, the Company issued 776,250 shares of common stock with gross proceeds of $1,105,000. (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. 10 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 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 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. During the three months ended June 30, 2004, the Company issued 18,750 shares of common stock at prices ranging from $1.67 to $3.46 per share for services rendered or to be rendered valued at $46,950. During the three months ended June 30, 2004, 12,000 warrants were exercised with an exercise price of $1.33 on a cashless basis resulting in the issuance of 7,269 shares of common stock. At June 30, 2004, the Company had a subscription receivable of $100,000 due to the Company from the issuance of common stock. Payment was received in full by the Company in early July 2004. 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 six months ended June 30, 2004 and 2003, and the period from June 25, 2002 (inception) to June 30, 2004, the Company paid $0, $40,000, $25,000, $35,000, 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. 11 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 Six Six months months ended ended June 25, 2002 June 30, June 30, (inception) to 2004 2003 June 30, 2004 --------- -------- -------- Supplemental cash flow disclosures: Cash paid for interest $ 0 $ 0 $ 72 Cash paid for income taxes 0 0 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 0 115,064 Notes receivable 0 0 967,219 Property and equipment 0 0 764 Other assets 0 0 25,000 Current liabilities 0 0 34,019 Deferred gain 0 0 25,000 Conversion of accrued marketing fees into common stock 20,222 0 20,222 Stock subscription receivable received for stock $100,000 $ 0 $100,000 Write off note receivable and deferred gain $ 25,000 $ 0 $ 25,000 12 NOTE 7 - SUBSEQUENT EVENTS 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. From July 1 through August 9, 2004, the Company sold 445,008 shares of common stock with gross proceeds of $1,112,520 and cash expenses of $141,253 in connection with a private placement offering. The Company issued 6,750 five-year warrants at an exercise price of $2.50 as commission for financing. 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 healthcare company dedicated to the cost-effective development and marketing of OTC and other non-prescription consumer healthcare products. Current development efforts are focused exclusively on products for migraine therapy which is estimated to represent a multi-billion dollar global market. GelStat is committed to building a portfolio of products addressing consumer healthcare conditions and believes that each of its present or planned products offers significant commercial potential. The Company believes that its current and planned products could potentially offer improved efficacy, safety and/or convenience relative to existing OTC products. The Company's first product is GelStatTM Migraine, a patent pending solution designed to provide acute relief from migraine headaches. In conjunction with this first product, the Company has developed a sublingual (under the tongue) delivery system designed to enhance the efficacy of the active ingredients in GelStat Migraine, including their speed of action. The result is a product that is expected to provide fast relief from migraine headaches for most users at a fraction of the cost of prescription medications. 13 GelStat intends to market and distribute its OTC products primarily through mainstream chain drug store, food store, and mass merchandise retailers, and first introduced its initial product, GelStat Migraine, at the National Association of Chain drug Stores (NACDS) "Marketplace 2003" convention in late 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 area and the Raleigh/Durham area. No revenue was recognized in relation to these initial product placements due to their use as promotional and test marketing venues. In June, 2004, the Company shipped GelStat Migraine to retailers operating approximately 6,500 retail locations and wholesalers across the United States. The Company maintains on its website (www.gelstat.com) a current list of retailers where consumers can purchase GelStat Migraine. GelStat Migraine is currently being positioned as a first-line treatment for use as an early intervention in the treatment of migraine headaches, consistent with clinical data obtained thus far. Several additional clinical trials of GelStat Migraine are presently underway and several more planned. The results of these future and ongoing trials are uncertain, but such results are expected to provide additional data on the efficacy of GelStat Migraine. Future clinical trial results might result in additional marketing and promotional opportunities and could support the planned development of new versions of the product meant to address various other aspects of migraine treatment. Additional products 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.) While there is no data presently available to support such use, these additional trials could provide such support and thus open substantially larger markets for GelStat Migraine or some modified version thereof. GelStat plans to conduct clinical trials on every product it develops, prior to offering that product for sale. It is believed essential to demonstrate efficacy in a manner recognized and accepted by the medical community as well as the consumer. The Company received its first purchase order from a national chain subsequent to the presentation of its initial clinical trial results. Presentation of those trial results appears to have significantly accelerated retailer acceptance, and the Company has received initial purchase orders from and shipped product to a number of retailers and wholesalers, including several representing national chains as well as a number of regional chains. On April 26, 2004, the Company announced a temporary delay in the large scale manufacturing of GelStat Migraine. On June 18, 2004, the Company announced that it had commenced shipments of "GelStat(TM) Migraine," to a number of leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers. The Company continues to produce and distribute GelStat Migraine, meeting the volume and delivery dates specified by customers; the Company continues to increase product inventory. 14 The Company maintains on its website (www.gelstat.com) a current list of retailers where consumers can purchase GelStat Migraine. The Company has received subsequent reorders from retailers and distributors following their initial orders. The Company believes that it will continue to receive a significant number of initial orders followed by reorders for GelStat Migraine over the coming months. Given the nature of the retailing industry, the anticipation of a national media campaign commencing in the fourth quarter, 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 is a development stage company. Due to continuing losses, the Company has been and continues to be dependent on outside capital in addition to product sales for its ability to continue as a going concern. However, the Company believes that its selling and marketing activities in 2004 will be sufficient to result in its emerging from the development stage. 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 six months ended June 30, 2004 compared to June 30, 2003. Cost of goods sold for the three and six months ended June 30, 2004 and 2003, and the period from June 25, 2002 (inception) to June 30, 2004, respectively, were $218,564, $218,564, $0, $0, and $218,564, respectively. The increase in the second 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 six months ended June 30, 2004 and 2003, and the period from June 25, 2002 (inception) to June 30, 2004, respectively, were $838,496, $1,495,884, $304,650, $445,773 and $2,950,347, respectively. The increase in the second quarter of 2004 is attributable to the fact that GelStat had only very limited operations from June 25, 2002 (inception) to March 31, 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 $48,100, $203,550, $33,173, $59,783 and $379,654 in research and development expense for the three and six months ended June 30, 2004 and 2003, and the period from June 25, 2002 (inception) to June 30, 2004, respectively. The Company plans to substantially increase expenditures on research and development in 2004, primarily in the performance of additional clinical trials. The Company recorded net interest income of $205, $557, $3,406, $3,406 and $4,880 for the three and six months ended June 30, 2004 and 2003, and the period from June 25, 2002 (inception) to June 30, 2004, respectively. Interest and investment income is not expected to make a material contribution to revenue in the foreseeable future. 15 The Company currently employs 8 people and expects to expand significantly in 2004. GelStat will actively seek, among others, additional 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) and additional product development. The Company has current commitments to spend $1,760,000 in the second half of fiscal 2004 on product marketing (including national and regional advertising based on then current distribution of GelStat Migraine), including approximately $360,000 in payments made in July 2004. LIQUIDITY AND CAPITAL RESOURCES Cash was $920,041 at June 30, 2004, representing an increase of $502,202 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's principal commitments consist of a long-term lease for its corporate offices and research and development facilities. As of August 11, 2004, the Company had cash of $1,078,539. 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 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. CRITICAL ACCOUNTING POLICIES IMPAIRMENT OF LONG-LIVED ASSETS The Company's long-lived assets include property, equipment and leasehold improvements. At June 30, 2004, the Company had net property and equipment of $235,636, which represents approximately 12% 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 June 30, 2004, the Company did not record any impairment losses related to long-lived assets. INVENTORIES At June 30, 2004, the Company had inventory of $138,915. We will 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 the medical field and introduction of new products could result in an increase in the amount of obsolete inventory quantities. 16 REVENUE RECOGNITION The Company sells its product to a number of leading regional and national retailers, wholesalers, specialty distributors and catalog merchandisers 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 will recognize 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. During the quarter ending June 30, 2004, the Company generated Gross Revenues of $195,663 prior to required revenue recognition adjustments. The Company recognizes Pay on Scan sales as revenues when we are notified of the customer's sales through periodic sales reports, receive payments from the customer or when the customer reorders a specified quantity of the relevant product. Pay on Scan revenue recognition treatment typically ends 90 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 for a traditional sales arrangement. The Company estimates and accrues liabilities for product returns as a percentage of unpaid and outstanding product sales. At June 30, 2004, the Company had reserved approximately $5,900, equivalent to 3.0% of sales for product returns. During the quarter ended June 30, 2004, the Company had no products returned by customers or distributors. 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. During the quarter ended June 30, 2004, the Company had recorded approximately $48,300 in trade promotion expense. 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. During the quarter ended June 30, 2004, the Company had recorded approximately $48,900 for TPR programs, merchandising fees, co-op advertising and slotting expenses and recorded in accrued expenses at June 30, 2004. 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. At June 30, 2004, the Company had accrued approximately $5,000 for broker sales expense. 17 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, there were no significant changes in the Company's internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation, and currently does not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company's operations. 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. 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 June 30, 2004. 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. 18 Between June 4, 2004 and June 15, 2005, the Company sold an aggregate of 7,269 shares of common stock to certain warrant holders upon conversion of two outstanding warrants with an exercise price of $1.33 per share, which consideration was paid by the forfeiture of 4,731 shares of common stock in accordance with the terms of their warrants. 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. 19 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 & Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 32.1 Certification of the Company's Chief Executive & Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (b) Reports on Form 8-K 20 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: August 13, 2004 By /s/ Stephen C. Roberts -------------------------------- Name: Stephen C. Roberts Title: Director, Chief Executive Officer and Chief Financial Officer (Principal Executive, Financial, and Accounting Officer) 21 EX-31 2 v05776_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Stephen C. Roberts, Chief Executive Officer and Chief Financial Officer of GelStat Corporation, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of GelStat Corporation; 2. Based on my 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 my 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 I 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 I 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. Date: August 13, 2004 /s/ Stephen C. Roberts -------------------------------- Stephen C. Roberts Chief Executive Officer and Chief Financial Officer 22 EX-32 3 v05776_ex32-1.txt EXHIBIT 32.1 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 June 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. August 13, 2004 /s/ Stephen C. Roberts -------------------------------- Stephen C. Roberts Chief Executive Officer and Chief Financial Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----