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Share Name | Share Symbol | Market | Type |
---|---|---|---|
GelStat Corporation (PK) | USOTC:GSAC | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.0004 | 0.0003 | 0.0005 | 0.00 | 11:56:11 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2007 | ||
OR | ||
£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ________________ to ________________ |
Commission file number 000-21394
Gelstat Corporation |
(Exact name of registrant as specified in its charter) |
Delaware | 90-0075732 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
3557 SW Corporate Parkway Palm City, Florida |
34990 |
|
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (772) 283-0020
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes £ No S
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes £ No S
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer £ | Accelerated filer £ |
Non-accelerated filer £ (Do not check if a smaller reporting company) | Smaller reporting company S |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
Class | Date of Filing this Report | |
Common Stock, $0.01 par value per share | 127,447,078 shares |
( 1 ) |
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (unaudited) | 3 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |
Item 3. | Qualitative and Quantitative Disclosures about Market Risk | 14 | |
Item 4. | Controls and Procedures | 14 | |
PART II – OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 15 | |
Item 1A. | Risk Factors | 15 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 | |
Item 3. | Defaults Upon Senior Securities | 15 | |
Item 4. | Mine Safety Disclosure | 15 | |
Item 5. | Other Information | 15 | |
Item 6. | Exhibits | 15 | |
SIGNATURES | 16 | ||
( 2 ) |
PART I — FINANCIAL INFORMATION
Explanatory Note. This report on Form 10-Q has been compiled from information which is believed to be true and correct in all material respects. This Report has been prepared in 2012 in order to correct filing delinquencies.
Item 1. Financial Statements.
GELSTAT CORPORATION | ||||||||
BALANCE SHEETS | ||||||||
AS OF JUNE 30, 2007 AND DECEMBER 31, 2006 | ||||||||
ASSETS | 6/30/2007 | 12/31/2006 | ||||||
(UNAUDITED) | (AUDITED) | |||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 6,421 | $ | 9,287 | ||||
Accounts receivable | 119,466 | 116,467 | ||||||
Other current assets | 20,000 | 20,000 | ||||||
Total Current Assets | 145,887 | 145,755 | ||||||
Other Assets | ||||||||
Patents | 25,458 | 24,280 | ||||||
Total Other Assets | 25,458 | 24,280 | ||||||
TOTAL ASSETS | $ | 171,345 | $ | 170,035 | ||||
LIABILITIES AND STOCKHOLDERS' (DEFICIT) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 831,673 | $ | 790,248 | ||||
Accrued expenses | 469,597 | 448,197 | ||||||
Notes payable | 472,000 | 472,000 | ||||||
Notes payable - related parties | 63,000 | 63,000 | ||||||
Total Current Liabilities | 1,836,270 | 1,773,445 | ||||||
Stockholder's (Deficit) | ||||||||
Common stock ($0.01 par value; 50,000,000 shares authorized; 25,253,020 and 23,953,020 issued and outstanding at June 30, 2007 and December 31, 2006, respectively. | 252,529 | 239,529 | ||||||
Additional paid in capital | 13,957,441 | 13,853,775 | ||||||
Additional paid in capital-warrants | 196,582 | 155,749 | ||||||
Deferred compensation | (135,070 | ) | (393,334 | ) | ||||
Retained deficit | (15,936,407 | ) | (15,459,129 | ) | ||||
Total Stockholders' (Deficit) | (1,664,925 | ) | (1,603,409 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) | $ | 171,345 | $ | 170,035 |
The accompanying notes are an integral part of these consolidated financial statements
( 3 ) |
GELSTAT CORPORATION | ||||||||||||||||
STATEMENTS OF OPERATIONS (UNAUDITED) | ||||||||||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 | ||||||||||||||||
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenues | $ | 2,665 | $ | 72,068 | $ | 13,231 | $ | 163,459 | ||||||||
Cost of Goods Sold | 2,458 | 19,598 | 2,515 | 40,355 | ||||||||||||
Gross Profit (Loss) | 207 | 52,471 | 10,715 | 123,105 | ||||||||||||
Operating Expenses | ||||||||||||||||
Selling, general and administrative expenses | 41,637 | 182,472 | 18,830 | 237,019 | ||||||||||||
Common stock issued for services | 20,000 | 38,400 | 20,000 | 280,100 | ||||||||||||
Consulting expense | 148,264 | 143,838 | 325,764 | 287,675 | ||||||||||||
Management fees | 74,500 | — | 102,000 | — | ||||||||||||
Payroll expense | — | 32,282 | — | 208,226 | ||||||||||||
Research and development | — | 15,367 | — | 18,953 | ||||||||||||
Total expenses | 284,401 | 412,359 | 466,594 | 1,031,974 | ||||||||||||
Loss from operations | (284,194 | ) | (359,888 | ) | (455,878 | ) | (908,869 | ) | ||||||||
Other Income and (Expense) | ||||||||||||||||
Interest expense | (10,700 | ) | (8,900 | ) | (21,400 | ) | (18,380 | ) | ||||||||
Net Other Income (Expense) | (10,700 | ) | (8,900 | ) | (21,400 | ) | (18,380 | ) | ||||||||
Loss before income taxes | (294,894 | ) | (368,788 | ) | (477,278 | ) | (927,249 | ) | ||||||||
Provision for income taxes | — | — | — | — | ||||||||||||
Net loss | $ | (294,894 | ) | $ | (368,788 | ) | $ | (477,278 | ) | $ | (927,249 | ) | ||||
Loss per common share: | ||||||||||||||||
Basic and fully diluted | ($ | 0.01 | ) | ($ | 0.02 | ) | ($ | 0.02 | ) | ($ | 0.06 | ) | ||||
Weighted average common shares outstanding | 24,661,811 | 16,233,121 | 24,316,003 | 16,055,187 |
The accompanying notes are an integral part of these consolidated financial statements
( 4 ) |
GELSTAT CORPORATION | ||||||||
STATEMENTS OF CASH FLOWS (UNAUDITED) | ||||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 | ||||||||
For the six months ended | ||||||||
6/30/2007 | 6/30/2006 | |||||||
Cash Flows from Operating Activities | ||||||||
Net (loss) | (477,278 | ) | $ | (927,249 | ) | |||
Adjustments to reconcile net (loss) to net cash flows (used in) operating activities: | ||||||||
Amortization of patent | 322 | — | ||||||
Common stock issued for services | 20,000 | 280,100 | ||||||
Amortization of deferred compensation | 325,764 | 287,675 | ||||||
Changes in operating assets and liabilitites: | ||||||||
Accounts receivable | (2,999 | ) | (11,166 | ) | ||||
Other current assets | — | 40,000 | ||||||
Accounts payable | 41,425 | 46,110 | ||||||
Accrued expenses | 21,400 | 6,604 | ||||||
NET CASH (USED IN) OPERATING ACTIVITIES | (71,365 | ) | (277,926 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Patent acquisition costs | (1,501 | ) | (7,364 | ) | ||||
NET CASH (USED IN) INVESTING ACTIVITIES | (1,501 | ) | (7,364 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Issuance of common stock, net of expenses | 70,000 | 30,000 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 70,000 | 30,000 | ||||||
NET (DECREASE) IN CASH AND CASH EQUIVALENTS | (2,866 | ) | (255,290 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR | 9,287 | 225,548 | ||||||
CASH AND CASH EQUIVALENTS, END OF THE PERIOD | $ | 6,421 | $ | (29,741 | ) | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the years for: | ||||||||
Interest | $ | — | $ | — | ||||
Taxes | $ | — | $ | — | ||||
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING INFORMATION: | ||||||||
Common stock issued for services rendered | $ | 20,000 | $ | 280,100 |
The accompanying notes are an integral part of these consolidated financial statements
( 5 ) |
GELSTAT CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The unaudited financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited financial statements for the preceding fiscal year. Accordingly, these unaudited financial statements should be read in conjunction with the audited financial statements and the related notes for the years ended December 31, 2006 and 2005 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2006.
NOTE 2 - Organization and Business Background
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. While development efforts ceased in 2005 due to lack of capital, its efforts were focused on proprietary, innovative products that addressed multi-billion dollar global markets.
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. The stock exchange transaction has been accounted for as a reverse acquisition and recapitalization of NP Acquisition, whereby Gelstat is deemed to be the accounting acquirer (legal acquiree) and NP Acquisition to be the accounting acquiree (legal acquirer). The accompanying consolidated financial statements are in substance those of Gelstat, with the assets and liabilities, and revenues and expenses, of NP Acquisition being included effective from the date of stock exchange transaction. NP Acquisition is deemed to be a continuation of the business of Gelstat. Accordingly, the accompanying consolidated financial statements include the following:
(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost;
(2) The financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.
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 .4360083 shares of DTR as adjusted for the stock dividend declared on July 19, 2004.
Effective July 14, 2003, DTR changed its name to GelStat Corporation. Effective March 17, 2004, GS Corp. was merged into its parent, GelStat Corporation.
In 2004, the Company formed a wholly-owned subsidiary, GS Pharma, Inc. (GS Pharma), to pursue various pharmaceutical (prescription drug) opportunities that might exist relative to the Company's intellectual property. During the remainder of 2004, this subsidiary evaluated potential business opportunities, but had no financial activity or licensing agreements in place.
Effective January 1, 2005, GS Pharma entered into a license agreement with DTLL, Inc. ("DTLL"), a Minnesota corporation, in exchange for 12,500,000 shares of DTLL common stock. Effective March 25, 2005, GS Pharma changed its name to GSC Subsidiary, Inc. On November 14, 2005, the Company sold 12.4 million of its shares in DTLL for gross cash proceeds of $500,000. As a result of the transaction, the Company will no longer be consolidating DTLL results in the Company’s future financial statements.
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NOTE 3 - Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Management's Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivables, inventories, income taxes and the estimation on useful lives of property, plant and equipment. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with a maturity of three months or less when purchased to be cash and equivalents for purposes of the statement of cash flows.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. As of June 30, 2007, the Company did not record an allowance for uncollectible accounts
Inventories
Inventories are valued at the lower of cost (using the first-in, first out (FIFO) method) or market. Inventory items replaced by an alternative and rendered unusable or diminished in value are considered to be obsolete. Obsolete inventory items are written down to zero.
Intangible Assets
Patent cost, including legal fees and other costs associated with obtaining this patent, will be amortized over the life of the patent using the straight-line method after the patent is approved by the authorities.
Revenue Recognition
The Company sells its products 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. 104 (SAB 104) "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, the Company recognizes revenue at the time of shipment of the merchandise. The Company recognizes Pay-on-Scan sales as revenues at the earliest of the following events: 1) the Company is notified of the customer's sales through periodic sales reports; 2) the Company receives payments from the customer; or 3) the customer reorders a specified quantity of the relevant product. Pay-on-Scan revenue recognition treatment typically ends 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.
Cost of Revenue
Cost of revenues consists primarily of product costs and shipping and handling, which are directly attributable to the sale of products.
Advertising
Advertising costs are charged to operations when incurred.
Research and Development Costs
The company expenses research and development costs as incurred.
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NOTE 3 - Summary of Significant Accounting Policies, Cont’d.
Depreciation
Property and equipment are recorded at cost. Depreciation is provided for using the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are expensed when incurred.
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.
Income Taxes
The Company accounts for income tax using FASB ASC 740 “Accounting for Income Taxes” , which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statement of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for stock-based compensation using the fair value method following the guidance set forth in section 718-10 of the FASB Accounting Standards Codification for disclosure about Stock-Based Compensation. This section requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award – the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which the employees do not render the requisite service.
The Company recognizes expenses for the fair value of its outstanding stock warrants and options as they vest, whether held by employees or others. The fair value of each stock warrant and option at the grant date is evaluated by using the Black-Scholes option pricing model based upon certain assumptions, including the expected stock price volatility.
Net Loss per Common Share
The Company calculates net loss per share in accordance with FASB ASC 260, “Earnings per Share” . Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding. No diluted loss per share is required to be represented.
Recent Accounting Standards
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 4 – Patents
On June 6, 2003, the Company filed a patent application with the United States Patent and Trademark Office (USPTO) for “Compositions and methods of treatment to alleviate or prevent migrainous headaches and their associated symptoms”. The patent #7,192,614 was issued on March 7, 2007. Legal fees and other costs associated with obtaining this patent were $25,780 and are being amortized over the 20 year useful life of the patent, using the straight-line method. As of the date of this report, the carrying value of the patent is $25,458.
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NOTE 5 - Short Term Convertible Notes Payable
The Company has outstanding balances on its short-term notes payable of the following amounts at the respective dates:
6/30/2007 | 12/31/2006 | |||||||
Related Party, interest rate 6%, original due date, February 2, 2005; extended to June 2, 2005. | $ | 63,000 | $ | 63,000 | ||||
Non-affiliate third party, interest rate 6%, original due date, February 2, 2005; extended to June 2, 2005. | 72,000 | 72,000 | ||||||
Non-affiliate third party, interest rate 6%, original due date, February 2, 2005; extended to June 2, 2005. | 60,000 | 60,000 | ||||||
Non-affiliate third party, interest rate 6%, original due date, February 2, 2005; extended to June 2, 2005. | 60,000 | 60,000 | ||||||
Non-affiliate third party, interest rate 6%, original due date, February 2, 2005; extended to June 2, 2005. | 60,000 | 60,000 | ||||||
Non-affiliate third party, interest rate 6%, original due date, February 2, 2005; extended to June 2, 2005. | 120,000 | 120,000 | ||||||
Non-affiliate third party, interest rate 6%, original due date, October 5, 2005. | 100,000 | 100,000 | ||||||
Original issue discount | — | — | ||||||
Total | $ | 535,000 | $ | 535,000 |
On December 2, 2004, the Company issued unsecured convertible promissory notes related to a private placement of short term debt. The notes were issued to six individuals in principal amounts ranging from $60,000 to $120,000 for a total of $474,000. The Company agreed to repay the principal amount in its entirety within three business days after the Company closed on net proceeds of at least $2,000,000 obtained through any offering of its securities, including any debt, common stock or preferred stock, or if earlier, on February 2, 2005. If the Company closed on $2,000,000 or more in net proceeds through an offering of its securities, the promissory note holders had the option to convert the principal amount into securities of the Company according to the same terms and provisions. The conversion of the short-term notes payable was contingent upon the closing of a $2,000,000 stock offering and the incremental intrinsic value would have been recognized when the triggering event occurred. In lieu of interest, the Company issued to the note holders five-year warrants to purchase 79,000 shares of common stock at an exercise price of $3.00. The warrants were valued using the Black-Scholes pricing model using the following factors: dividend yield of 0%, expected volatility of 158%, risk-free interest rate of 3.5% and expected lives of five years. The resulting original issue discount and the fair value of the warrants were amortized over the life of the notes using the straight-line method, which approximates the interest method.
The Company paid $24,000 of the principal balance of the notes during the three months ended March 31, 2005. During the first quarter the note holders agreed to extend the payment of the remaining balance of $450,000 to June 2, 2005. In lieu of interest during the period up to the extended due date, the Company issued to the note holders five-year warrants to purchase 75,000 shares of common stock at an exercise price of $1.00. The warrants were valued using the Black-Scholes pricing model using the following factors: dividend yield of 0%, expected volatility of 163%, risk-free interest rate of 3.5% and expected lives of five years. The resulting original issue discount and the fair value of the warrants of $276,000 were amortized over the extended life of the notes using the straight-line method, which approximates the interest method. April 2005, the Company paid $15,000 of the principal balance. An additional $100,000 was borrowed by the Company during the three months ended September 30, 2005 bringing the outstanding balance to $535,000. No further principal payments were made on the notes. A settlement agreement was reached on the $100,000 note payable November 2009. Settlement agreements were reached on the remaining notes payable July 2011.
NOTE 6 - Related Party Transactions
On December 2, 2004, the Company borrowed $102,000 from a director of the Company for a term ending on February 2, 2005, or, if earlier, upon a $2,000,000 financing, as discussed in Note 5, above. In lieu of interest, the Company issued to the director a five-year warrant to purchase 17,000 shares of common stock at an exercise price of $3.00. The repayment date for $78,000 of the note was extended to June 2, 2005, and in lieu of interest for the extension period, the Company issued to the director a five-year warrant to purchase 13,000 shares of common stock at an exercise price of $1.00. The Company paid $24,000 of the principal during the three months ended March 31, 2005. The Company paid an additional $15,000 of the principal note balance during the three months ended June 30, 2005. During the six months ended December 31, 2005, the Company did not make any principal payments, and accrued 6% interest on the outstanding balance. The Company negotiated a settlement of the remaining note balance of $63,000 outstanding in July 2011.
( 9 ) |
NOTE 7 – Deferred Compensation
The Company’s deferred compensation includes common stock or warrants issued to consultants for services to be rendered related to public relations, sales distribution consulting, investor relations and general operations conducted in the normal course of business. The following table sets forth the details of deferred compensation:
6/30/2007 | 12/31/2006 | |||||||
728,000 shares of common stock at prices ranging from $0.54 - $0.98 per share were issued during the year ended December 31, 2005 for consulting services rendered from 05/01/2005 to 10/03/2006. | $ | (468,140 | ) | $ | (468,140 | ) | ||
Five-year warrants to purchase 285,000 shares of common stock were granted during the year ended December 31, 2005 with exercise prices ranging from $.50-$3.00 per share for services rendered from 5/1/2005 to 10/03/2006. The Company determined the fair value of the warrants based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 201.89%, and risk-free interest rates ranging from 3.63% - 4.1% | (195,650 | ) | (195,650 | ) | ||||
1,700,000 shares of common stock at a share price of $0.10 were issued during the period ending 09/30/2006 for consulting services rendered from 08/28/2006 to 08/27/2007. | (170,000 | ) | (170,000 | ) | ||||
Five-year warrants to purchase 3,000,000 shares of common stock were granted during the period ended 09/30/2006 with exercise prices ranging from $0.25 - $0.50 per share for services rendered from 08/28/2006 to 08/27/2007. The Company determined the fair value of the warrants based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 216.54%, and risk-free interest rate of 4.77%. | (300,000 | ) | (300,000 | ) | ||||
1,500,000 shares of common stock at a share price of $0.08 were issued during the period ending 12/31/2006 for consulting services rendered from 11/01/2006 to 10/31/2007. | (120,000 | ) | (120,000 | ) | ||||
400,000 shares of common stock at a share price of $0.10 were issued during the period ending 03/31/2007 for consulting services rendered from 03/28/2007 to 03/28/2008. | (40,000 | ) | ||||||
Five-year warrants to purchase 250,000 shares of common stock were granted during the period ended 06/30/2007 with an exercise price of $0 .10 per share for services rendered from 05/01/2007 to 04/30/2010. The Company determined the fair value of the warrants based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 468.93%, and risk-free interest rate of 4.54%. | (27,500 | ) | ||||||
Amortization of deferred compensation | 1,186,220 | 860,456 | ||||||
Total | $ | (135,070 | ) | $ | (393,334 | ) |
NOTE 8 - Stockholders' Equity
During the three months ended June 30, 2007 the Company issued 250,000 warrants at an exercise price of $.10 per share for services rendered or to be rendered valued at $27,500. The Company determined the fair value of the warrants based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 468.93%, risk-free interest rate of 4.54% and an expected life of five years.
During the three months ended June 30, 2007, the Company issued 200,000 shares of common stock at $.10 per share for services rendered or to be rendered valued at $20,000.
During the three months ended June 30, 2007 the Company issued 700,000 shares of common stock and 700,000 warrants with an exercise price of $.25 for gross proceeds of $70,000 which was allocated between common stock and warrants on a pro rata basis based on the known fair values of both securities. The fair value of the common stock was $70,000 determined using the market price of $.10 per share at issuance date; the fair value of the warrants was $98,000 determined based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 468.93%, risk-free interest rate of 4.60% and an expected life of five years.
During the three months ended June 30, 2006, the Company issued 320,000 shares of common stock at $.12 per share for services rendered or to be rendered valued at $38,400.
During the three months ended June 30, 2006, the Company issued 500,000 warrants at an exercise price of $.09 per share for severance valued at $60,000. The Company determined the fair value of the warrants based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 216.54%, risk-free interest rate of 5.08% and an expected life of five years.
During the three months ended March 31, 2006 the Company issued 60,000 shares of common stock and 30,000 warrants with an exercise price of $.70 for gross proceeds of $30,000 which was allocated between common stock and warrants on a pro rata basis based on the known fair values of both securities. The fair value of the common stock was $30,000 determined using the market price of $.50 per share at issuance date; the fair value of the warrants was $22,200 determined based on the Black Scholes pricing model using the following assumptions: dividend yield of 0%, expected volatility of 216.54%, risk-free interest rate of 4.32% and an expected life of five years.
During the three months ended March 31, 2006, the Company issued 535,000 shares of common stock at prices ranging from $.74 to $.22 per share for services rendered or to be rendered valued at $241,700.
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NOTE 9 - Legal Proceedings
O n January 19 th , 2006, the Company was served with a Summons and Complaint entitled “Milgaard RE Partnership vs. Gelstat Corporation.” Milgarrd RE Partnership, a promissory note holder, alleged Gelstat owed $76,734 regarding the note, interest and fees. On July 1, 2011, a settlement agreement was reached among parties wherein Milgarrd RE Partnership was issued 114,000, $0.03, 5 year warrants and $3,600 cash.
On September 7, 2006, the Company was served with a Summons and Complaint entitled “Dr. Steven Klos vs. Gelstat Corporation.” Dr. Steven Klos, a promissory note holder, alleged Gelstat owed $100,000 regarding the note, interest and fees. On November 3, 2009, a settlement agreement was reached among parties wherein Dr. Steven Klos was paid $25,000 cash.
NOTE 10 – Going Concern
As shown in the accompanying unaudited financial statements, the Company has suffered recurring losses from operations to date. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management’s plan includes obtaining additional funds by equity financing and/or related party advances; however, there is no assurance of additional funding being available. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might arise as a result of this uncertainty.
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PART II— OTHER INFORMATION
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operation
Please refer to the financial statements and related notes thereto which is a part of this report for further information regarding the results of operations of the Company.
Company 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. The Company's first product is "Gelstat® Migraine", a patented 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. Gelstat(TM) Sleep is presently under final development and is intended to be marketed as a sleep aid. It was introduced to consumers in 2010 on a test basis to obtain data to determine product viability. Gelstat Sleep is expected to be classified as a dietary supplement.
Current sales and marketing efforts are focused primarily on Gelstat Migraine.
Critical Accounting Policies
Inventories
We value our inventory at the lower of the actual cost or the current estimated market value of the inventory. Management reviews sales, shipped goods and available inventory quantities on a weekly basis and record a provision for excess and obsolete inventory if considered necessary. Changes in the marketplace or introduction of new products could result in an increase in the amount of obsolete inventory quantities.
Revenue Recognition
In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104 (SAB 104) "Revenue Recognition", the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, 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.
Stock-Based Compensation
The Company follows the provisions of ASC 718-10 Compensation – Stock Compensation which establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under ASC 718-10, we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.
We estimate the fair value of each stock option at the grant date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Notes to the Consolidated Financial Statements contained in this Report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options.
Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments
We estimate the fair value of each warrant and embedded conversion option at the issuance date and at each subsequent reporting date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Notes to the Consolidated Financial Statements contained in this Report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such warrants.
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New Accounting Pronouncements
There are no recent accounting pronouncements that have a material impact on our financial statements.
Results of Operations
For the three months ended June 30, 2007
The Company had revenues of $2,665 and $72,068 during the three months ended June 30, 2007 and 2006, respectively. The decrease in revenue in 2007 is attributable to the Company marketing on a limited basis only.
Cost of goods sold were $2,458 and $19,598 during the three month ended June 30, 2007 and 2006, respectively. The decrease in cost of goods sold expense in 2007 is attributable to the corresponding decrease in products sold.
Selling, general and administrative expenses were $41,637 and $182,472, during the three month ended June 30, 2007 and 2006 respectively. The decrease in 2007 is due to the reduction in professional fees and advertising expense.
The Company incurred $0 and $15,367 in research and development expense during the three month ended June 30, 2007 and 2006 respectively. The Company discontinued clinical trials in 2007 due to capital constraints.
The Company recorded $10,700 and $8,900 of interest expense during the three month ended June 30, 2007and 2006, respectively. T he interest expense relates to a 7% accrual on the outstanding notes payable balance.
For the six months ended June 30 , 2007
The Company had revenues of $13,231and $163,459, during the six months ended June 30, 2007 and 2006, respectively. The decrease in revenue in 2007 is attributable to the Company marketing on a limited basis only.
Costs of goods sold were $2,515 and $40,355 during the six month ended June 30, 2007 and 2006, respectively. The decrease in cost of goods sold expense in 2007 is attributable to the corresponding decrease in products sold.
Selling, general and administrative expenses were $18,830 and $237,019, during the six month ended June 30, 2007 and 2006 respectively. The decrease in 2007 is due to the reduction in professional fees and advertising expense.
The Company incurred $0 and $18,953 in research and development expense during the six month ended June 30, 2007 and 2006 respectively. The Company discontinued clinical trials in 2007 due to capital constraints.
The Company recorded $21,400 and $18,380 of interest expense during the six month ended June 30, 2007 and 2006, respectively. T he interest expense relates to a 7% accrual on the outstanding notes payable balance.
Liquidity and Capital Resources
Cash flows used in operating activities were $71,365 and $277,926 for the six months ended June 30, 2007 and 2006, respectively. Negative cash flows from operations for the six months ended June 30, 2007 were due primarily to the net loss of $477,278, partially offset by amortization of deferred compensation. Negative cash flows from operations for the six months ended June 30, 2006 were due primarily to the net loss of $927,249, partially offset by common stock issued for services and the amortization of deferred compensation.
Cash flows used in investing activities were $1,501and $7,364 during the six months ended June 30, 2007 and 2006, respectively. Cash flows used in investing activities were primarily due to patent acquisition costs.
Cash flows provided by financing activities were $70,000 and $30,000 during the six months ended June 30, 2007 and 2006, respectively. Positive cash flows from financing activities during the six months ended June 30, 2007and 2006 were due solely from proceeds from issuance of common stock.
As of the date of filing this Report, the Company had approximately $5,000 cash. The Company needs to raise additional capital to continue operations. There can be no assurance that additional capital will be available on terms acceptable to the Company or on any terms what so ever. 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.
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Cautionary Note Regarding Forward Looking Statements
This report contains forward-looking statements including those relating to our liquidity. Forward looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the condition of the credit and financial markets, the effects of the global recession, the market for smaller public companies in general including their ability to raise capital and our inability to develop a robust marketing plan.
Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for smaller reporting companies.
ITEM 4. Controls and Procedures.
During the course of their audit of our consolidated financial statements for 2006, our independent registered public accounting firm, Bongiovanni, advised management and the Audit Committee of our Board of Directors that they had identified deficiencies in internal control. The deficiencies are considered to be a "material weakness" as defined under standards established by the American Institute of Certified Public Accountants. The material weakness relates to the lack of segregation of duties and financial oversight controls, which in aggregate created an ineffective control environment. Because the Company has no employees and only one officer, it is not practical to remediate this material weakness.
Evaluation of Disclosure Controls and Procedures
We have discussed our corrective actions and future plans with our Audit Committee and Bongiovanni. Further, our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this report. Based on such evaluation and due to the Company’s limited operations, our Chief Executive Officer and Chief Financial Officer has concluded that the material weakness noted above will not, however, impact the quality of the financial information provided on a quarterly or annual basis. In addition, because of this material weakness, the Company’s disclosure controls are considered to be ineffective.
In addition, there can be no assurances that our disclosure controls and procedures will detect or uncover all failure of persons with the Company to report material information otherwise required to be set forth in the reports that we file with the Securities and Exchange Commission.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. | Legal Proceedings. |
From time to time, we are involved in litigation in the ordinary course of business. We are not party to any material litigation.
On January 19, 2006, the Company was served with a Summons and Complaint entitled “Milgaard RE Partnership vs. Gelstat Corporation.” Milgaard RE Partnership, a promissory note holder, alleged Gelstat owed $76,734 under the note, including interest and fees. On July 1, 2011, a settlement agreement was reached among parties wherein Milgaard RE Partnership was issued 114,000, $0.03, five year warrants and $3,600 cash.
In September 2006, the Company was served with a Summons and Complaint entitled “Dr. Steven Klos vs. Gelstat Corporation.” Dr. Klos, a promissory note holder, alleged Gelstat owed $100,000 regarding the note. November 3, 2009 a settlement agreement was reached among parties whereby Gelstat paid Dr. Klos $25,000.
ITEM 1A. | Risk Factors. |
Not applicable to smaller reporting companies.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
During the three months ended June 30, 2007 the Company issued 250,000 warrants at an exercise price of $.10 per share for services rendered or to be rendered valued at $27,500.
During the three months ended June 30, 2007, the Company issued 200,000 shares of common stock at $.10 per share for services rendered or to be rendered valued at $20,000.
During the three months ended June 30, 2007 the Company sold 700,000 shares of common stock and 700,000 warrants with an exercise price of $.25 for gross proceeds of $70,000.
All of the sales of the securities above were exempt from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder on the grounds that the securities were only sold to accredited investors who purchased for investment and legends were placed on the securities.
ITEM 3. | Defaults Upon Senior Securities. |
None.
ITEM 4. | Mine Safety Disclosures. |
Not Applicable.
ITEM 5. | Other Information. |
None.
ITEM 6. | Exhibits. |
Exhibit | Incorporated by Reference |
Filed or
Furnished |
||||||||
No. | Exhibit Description | Form | Date | Number | Herewith | |||||
3.1 | Certificate of Incorporation | Filed | ||||||||
3.2 | Bylaws | Filed | ||||||||
31.1 | Certification of Principal Executive Officer (302) | Furnished | ||||||||
31.2 | Certification of Principal Financial Officer (302) | Furnished | ||||||||
32.1 | Certification of Principal Executive and Principal Financial Officer (906) | Furnished |
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to GelStat Corporation, 3557 SW Corporate Parkway Palm City, Florida, 34990 Attention: Mr. Gerald Kieft.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GELSTAT CORPORATION | ||
October 17, 2012 | /s/ Gerald Kieft | |
Gerald Kieft | ||
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
||
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