GSAC GelStat Corporation (PK)

ITEM 1A. RISK FACTORS

Risks Related to Our Business

Our ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financings.

Our continued existence is dependent upon us obtaining adequate working capital to fund all of our operations. Working capital limitations continue to impinge on our day-to-day operations, thus contributing to continued operating losses. Currently, the Company is entirely dependent on outside investments to support its operations. Thus, if we are unable to raise funds to fund the development, manufacturing and marketing of our products, we may not be able to continue as a going concern and you will lose your investment.

We have a limited recent operating history on which to evaluate our potential for future success and to determine if we will be able to execute our business plan. Therefore, it is difficult to evaluate our future prospects and the risk of success or failure of our business.

Since we encountered severe financial problems in 2005, we have had very limited operations. Revenue has been limited to some website orders since we have lacked the capital for marketing. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company. These risks include:

We may not be able to address these risks and difficulties, which could materially and adversely affect our revenue, operating results and our ability to continue to operate our business.

The success of our products is subject to ongoing and additional clinical trials which may not be successful.

The U.S. Food and Drug Administration (the “FDA”) does not require homeopathic drugs to be submitted to pre-market approval and are not required to be tested for safety and effectiveness. Our GelStat Migraine product has undergone two clinical trials and additional trials may be required. In order to test the efficacy of the GelStat Migraine product, we have put it through a clinical trial and, if we have the necessary funding, anticipate putting the product through additional testing. Although this product has already undergone two clinical trials with favorable results, we cannot assure you that the results will be favorable in the future trials. Additionally, some consumers and retailers may defer purchasing the product until such time, if any, that such additional trials are successfully completed. The results of future clinical trials are expected to strongly affect the economic viability and perceived value of our products. There can be no assurance as to the outcome of future clinical trials on our current or future products. If the clinical trial results for any of the Company’s initial products suggest that any of them are not efficacious, or reveal unexpected problems such as serious side effects, the Company may be unable to successfully market the products even if we desired to do so. In such event, the Company’s results of operations will be adversely affected and you may lose your investment.

Because successful development of our products is uncertain, our results of operations may be materially harmed.

Our development of current and future products is subject to the risks of failure and delay inherent in the development of non-prescription consumer health care products, including but not limited to the following:

Because of these risks, our development efforts may not result in any commercially viable products. If a significant portion of these development efforts are not successfully completed, required regulatory approvals are not obtained, or any approved products are not commercialized successfully, our business, financial condition, and results of operations may be materially harmed.

Any unanticipated problems with product development and commercialization develop or our products are found to be ineffective or unsafe, our business may fail.

Our successful development of existing and new products is subject to the risks of failure and delay inherent in the development and commercialization of products. We may experience unanticipated or otherwise negative research and development results. Existing or proposed products may be found to be ineffective or unsafe, or may otherwise fail to receive required regulatory clearance or approval. We may find that existing or proposed products, while effective, are uneconomical to commercialize or market. Existing or proposed products may not achieve broad market acceptance.

Because we will need to rely on third parties for the development, manufacture, sales and marketing of our current or future products, our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.

We do not have the capability and resources to manufacture, market or sell our current products or any future product. We intend to outsource all of our product manufacturing and packaging operations for the foreseeable future. Accordingly, we will seek to enter, at the appropriate time, into agreements with other companies that can assist us and provide certain capabilities that we do not possess. Even if we do succeed in securing these alliances, we may not be able to maintain them if, for example, development results are disappointing or approval of a product (if required) is delayed or sales of a product are below expectations. Furthermore, any delay in entering into agreements could delay the development and commercialization of our products and reduce their competitiveness even if they reach the market. Any such delay related to our agreements could adversely affect our business. Further, f ailure by such parties to provide the agreed services at an acceptable level could adversely affect our business.

If our products gain widespread commercial acceptance, we could face potential difficulties in locating sufficient manufacturing sources.

We have used third parties to manufacture our products on a limited basis. If we are unable to produce our products in sufficient quantities at an acceptable cost, we may lose customers and our business could be harmed. Our ability to expand production could also be hindered by the availability of materials used to manufacture our products or the availability of qualified personnel. These difficulties could result in reduced quality of our products or reduced sales, which could damage our industry reputation and hurt our ability to generate revenues.

Because the consumer healthcare product market is subject to substantial regulation by regulatory agencies, if we do not obtain the requisite regulatory approvals we need to market our products, we will not be able to commercialize our products.

We believe that all of our current and planned products will be marketed either as homeopathic products or as dietary supplements, and that each will therefore be exempt from the new drug approval process required in the United States for prescription pharmaceuticals. The Company’s products, product development activities and manufacturing processes are nonetheless subject to regulation by the Food and Drug Administration (“FDA”) and by comparable agencies in foreign countries. In the U.S., the FDA regulates manufacturing, labeling and record keeping procedures even for non-prescription products. We use qualified third-party manufacturers to perform these services; however, if these third-parties do not comply with the regulations, we may not be able to sell our products. Nonetheless, the failure of such third parties to adhere to regulations could have a material adverse affect on our business.

In addition, product claims, labels, advertising and other communications with the public are closely monitored by the Federal Trade Commission (“FTC”) and states under their “Little FTC Acts”. Failure to comply with any of the numerous regulations which govern our industry could result in regulatory or enforcement actions which would have a material adverse affect on our business. In addition, we are subject to those risks associated with any highly regulated industry wherein regulations are subject to change that is both substantial and rapid. Regulatory change may force the Company to expend substantial time and money becoming compliant, may make the Company’s business more expensive to operate and the products less profitable, or not profitable at all, and might even prevent the Company from marketing one or more of its products. We are marketing our first product, GelStat Migraine, as an effective solution in alleviating migraine headaches. Under FDA and FTC rules, we are required to obtain scientific and/or clinical data to support any health claims we make concerning our products. Although we have neither provided nor been requested to provide any such data to the regulators in support of this claim, we have in fact obtained supporting scientific and clinical data. We cannot be certain, however, that the scientific and clinical data we have obtained or will obtain in the future in support of our claims will be deemed acceptable or sufficient by any regulator. If the FDA or the FTC requests any supporting information, and we are unable to provide support that is acceptable to the FDA or the FTC, either agency could force us to stop making the claims in question, which would most likely have a negative impact on sales. Regulatory actions may materially adversely affect the Company’s business, financial condition and results of operations.

If any of our products are alleged to have unacceptable adverse effects, we could be subject to liability which would adversely affect our results of operations.

The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in adverse effects. Any such claims would likely have an adverse effect on the Company. The Company currently has product liability insurance for claims against it up to one million dollars,on a per-occurrence basis. However, there can be no assurance that such coverage would protect the Company in every instance, or that a claim might not substantially exceed the limit of coverage beyond the Company’s ability to pay. Additionally, there can be no assurance that such insurance will continue to be available to the Company in the future on commercially reasonable terms, or at all. If the Company is unable to continue its product liability insurance coverage for any reason, it may have a material impact on the retailer’s willingness to stock the Company’s products.

If we lose our Chief Executive Officer, our business may materially suffer.

We are highly dependent on Mr. Gerald Kieft, Chief Executive Officer, who is our sole officer and provides “as needed” services. We do not carry “key-man” life insurance on Mr. Kieft. Furthermore, our future success will also depend in part on our ability to identify, hire, and retain qualified personnel at senior and other management levels. We will experience intense competition for qualified personnel and may be unable to attract and retain the personnel necessary for the development of our business. Because of this competition, our compensation costs may increase significantly and our business may suffer.

If we fail to establish a method to sell, market or distribute our products, our results of operations would be adversely affected.

Because we have limited experience in the sale, marketing and distribution of consumer products, we intend on selling our products through the Internet, direct-to-consumer advertising and certain traditional retail outlets. To achieve this, may work with a number of brokers and distributors currently serving these markets. There can be no assurance that any broker or distributor will be able to place our product with the aforementioned channels, or that once such initial placement is achieved any retailer or other outlet will continue to carry our product, or that any broker or distributor will continue working with the Company and our products.

If we do not obtain protection for our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing drugs.

Our success will depend, in part, on our ability to maintain the confidentiality of our trade secrets and know how, operate without infringing on the proprietary rights of others and prevent others from infringing our proprietary rights. We have received a United States patent on our GelStat Migraine product however we cannot assure you that this patent will afford adequate protection to us. The Company has hired I.P. counsel to assist us with obtaining I.P. protection on our products in international markets. However, we cannot assure you that we will obtain any such I.P. protection on our products internationally.

Competitors may successfully challenge our intellectual property rights, produce similar drugs or products that do not infringe our patents, or produce drugs in countries where we have not applied for patent protection or that do not respect our patents.

If any of these events occurs, or we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced. Patent protection and other intellectual property protection are important to the success of our business and prospects, and there is a substantial risk that such protections will prove inadequate.

If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses, pay substantial damages and prevent us from selling our products.

In the drug development business, third parties accumulate large portfolios of patents. Third parties may claim that our patent and/or products infringe or violate their intellectual property rights. Intellectual property litigation is characterized by unusually large legal fees, consulting and expert fees and other costs. Any claims that we are violating the intellectual property rights of another party could cause us to incur significant expenses which may likely exceed our capacity to pay the fees and costs. If successfully asserted against us, an adverse intellectual property claim is likely to require that we pay substantial damages in excess of our ability to pay and prevent us from using licensed technology that may be fundamental to our business. Even if we were to prevail, any litigation regarding intellectual property could be costly and time-consuming and divert our attention from our business operations. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from selling our products unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on terms acceptable to us, and as a result, we may be precluded from offering some or all of our products.

If we cannot manage our growth effectively, we may not become profitable.

Businesses, which grow rapidly often, have difficulty managing their growth. If we grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

Among other things, implementation of our growth strategy would be adversely affected if we were not able to attract sufficient customers to the products we offer in light of the price and other terms required in order for us to attain the necessary profitability.

Because of our limited experience in commercializing our products, the market acceptance of the Company’s products is uncertain.

Our success depends upon the acceptance by retail consumers of our products. Although we believe that our products are efficacious, and that they will meet with consumer acceptance, we have no assurance of that. There is only limited data by which to gauge consumer acceptance of the Company’s products. Most of the products that compete with the Company’s products have substantial brand recognition, and have already achieved a certain amount of consumer acceptance. Those consumers who presently use a competitor’s product to treat a condition designed to be treated by our products will have to be convinced to switch products, which is often difficult. We believe that the successful completion of clinical trials demonstrating the efficacy of our products or, in the case of GelStat Migraine, additional clinical trials, may be essential for the successful marketing of these products, especially in light of entrenched competition. There can be no assurance that any clinical trials will be completed beyond the initial trials of GelStat Migraine that have already been completed, or that such additional clinical trials will demonstrate the same degree of efficacy as these initial trials, or any efficacy at all. Insufficient market acceptance of our products would have a material adverse effect on our business, financial condition and results of operations.

Although we plan to diversify our product offering, we may not be successful.

The Company proposes as an important part of its business plan to complete development of additional products related to arthritis, sinusitis and problem sleep. Offering new products is subject to a number of risks including:

No assurance can be given that the Company will ever be able to successfully design, develop, and market any such additional new products.

If economic conditions in the United States and elsewhere do not materially improve, we may be hampered by our ability to sell our products.

The sharp economic downturn in the United States and elsewhere beginning in 2008 and the resulting unemployment has a tendency to cause consumers to reduce spending except on necessities. While consumer healthcare products may be relatively resistant to this trend, to the extent that consumers lack disposable money we believe that we will be adversely affected. Unless and until the economy materially improves, we may be affected by these factors.

Risks Related to Our Common Stock

Because the market for our Common Stock is limited, persons who purchase our Common Stock may not be able to resell their shares at or above the purchase price paid by them.

Our Common Stock trades on the OTC Markets, which is not a liquid market.  There is currently only a limited public market for our Common Stock.  We cannot assure you that an active public market for our Common Stock will develop or be sustained in the future.  If an active market for our Common Stock does not develop or is not sustained, the price may continue to decline.

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our Common Stock which adversely affects its liquidity and market price.

The Securities and Exchange Commission ("SEC") has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions.  The market price of our Common Stock on the OTC Markets has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules.  This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.  These rules limit the ability of broker-dealers to solicit purchases of our Common Stock and therefore reduce the liquidity of the public market for our shares.

Due to factors beyond our control, our stock price may be volatile.

Any of the following factors could affect the market price of our Common Stock:

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted.  A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

We may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price.

Our Board may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share.  This could permit our Board to issue preferred stock to investors who support GelStat and our management and give effective control of our business to GelStat and our management.  Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our Common Stock.  This could make it more difficult for shareholders to sell their Common Stock.  This could also cause the market price of our Common Stock shares to drop significantly, even if our business is performing well.

An investment in GelStat may be diluted in the future as a result of the issuance of additional securities, the exercise of options or warrants or the conversion of outstanding preferred stock.

In order to raise additional capital to meet its working capital needs, GelStat expects to issue additional shares of Common Stock or securities convertible, exchangeable or exercisable into Common Stock from time to time, which could result in substantial dilution to investors.  Investors should anticipate being substantially diluted based upon the current condition of the capital and credit markets.

Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our Common Stock.

It is not likely that securities analysts of major brokerage firms will provide research coverage for our Common Stock since the firm itself cannot recommend the purchase of our Common Stock under the penny stock rules referenced in an earlier risk factor.  The absence of such coverage limits the likelihood that an active market will develop for our Common Stock. It may also make it more difficult for us to attract new investors at times when we acquire additional capital.

Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.