SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010 | |
| OR | |
| o | 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 0-52993
| GelTech Solutions, Inc. | ||
| (Exact name of registrant as specified in its charter) |
| Delaware | 56-2600575 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 1460 Park Lane South, Suite 1, Jupiter, Florida | 33458 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (561) 427-6144
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 þ No o
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 o No o
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 o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
| Class | Outstanding at May 14, 2010 | |
| Common Stock, $0.001 par value per share | 16,382,674 shares |
Table of Contents
| PART I – FINANCIAL INFORMATION | |||||
| Item 1. | Consolidated Financial Statements. | 1 | |||
| Condensed Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009 | 1 | ||||
| Condensed Consolidated Statements of Operations for the Three and Nine Months ended March 31, 2010 and 2009 (Unaudited) | 2 | ||||
| Condensed Consolidated Statements of Cash Flows for the Three and Nine Months ended March 31, 2010 and 2009 (Unaudited) | 3 | ||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 4 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 15 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 20 | |||
| Item 4. | Controls and Procedures | 20 | |||
| Item 4T. | Controls and Procedures | 20 | |||
| PART II – OTHER INFORMATION | |||||
| Item 1. | Legal Proceedings. | 22 | |||
| Item 1A. | Risk Factors. | 22 | |||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 22 | |||
| Item 3. | Defaults Upon Senior Securities. | 22 | |||
| Item 4. | (Removed and Reserved). | 22 | |||
| Item 5. | Other Information. | 22 | |||
| Item 6. | Exhibits. | 22 | |||
| SIGNATURES | 23 | ||||
PART I – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | ||||||||
| March 31, | June 30, | |||||||
| 2010 | 2009 | |||||||
| ASSETS | (Unaudited) | |||||||
| Cash and cash equivalents | $ | 1,396,206 | $ | 245,381 | ||||
| Accounts receivable trade, net | 3,367 | 16,167 | ||||||
| Inventories | 198,831 | 249,409 | ||||||
| Prepaid expenses and other current assets | 29,822 | 11,103 | ||||||
| Total current assets | 1,628,226 | 522,060 | ||||||
| Furniture, fixtures and equipment, net | 21,424 | 23,207 | ||||||
| Prepaid consulting | 319,405 | - | ||||||
| Debt issue costs, net | 57,500 | 316,250 | ||||||
| Deposits | 41,980 | 30,630 | ||||||
| Total assets | $ | 2,068,535 | $ | 892,147 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Accounts payable | $ | 42,574 | $ | 51,778 | ||||
| Accrued expenses | 15,892 | 27,753 | ||||||
| Customer deposit | - | 25,000 | ||||||
| Line of credit | 2,450,000 | 1,550,000 | ||||||
| Due to related party | - | 60,000 | ||||||
| Insurance premium finance contract | 16,147 | 7,060 | ||||||
| Total current liabilities | 2,524,613 | 1,721,591 | ||||||
| Total liabilities | 2,524,613 | 1,721,591 | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholder's equity (deficit) | ||||||||
| Preferred stock: $0.001 par value; 5,000,000 shares authorized; | ||||||||
| no shares issued and outstanding | - | - | ||||||
| Common stock: $0.001 par value; 50,000,000 shares authorized; | ||||||||
| 16,333,378 and 13,858,986 shares issued and outstanding as of March 31, 2010 and June 30, 2009, respectively. | 16,333 | 13,859 | ||||||
| Additional paid in capital | 8,215,698 | 5,262,999 | ||||||
| Accumulated deficit | (8,688,109 | ) | (6,106,302 | ) | ||||
| Total stockholders' equity (deficit) | (456,078 | ) | (829,444 | ) | ||||
| Total liabilities and stockholders' equity (deficit) | $ | 2,068,535 | $ | 892,147 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended March 31, | For the Nine Months Ended March 31, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Sales | $ | 34,297 | $ | 288,248 | $ | 559,718 | $ | 317,310 | ||||||||
| Cost of goods sold | 9,025 | 98,375 | 169,155 | 106,327 | ||||||||||||
| Gross profit | 25,272 | 189,873 | 390,563 | 210,983 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative expenses | 931,229 | 715,594 | 2,617,999 | 2,080,766 | ||||||||||||
| Research and development | 6,239 | 6,409 | 13,076 | 119,206 | ||||||||||||
| Total operating expenses | 937,468 | 722,003 | 2,631,075 | 2,199,972 | ||||||||||||
| Loss from operations | (912,196 | ) | (532,130 | ) | (2,240,512 | ) | (1,988,989 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Loss on conversion | - | (841 | ) | - | (841 | ) | ||||||||||
| Other income (expense) | - | (33,000 | ) | - | (33,000 | ) | ||||||||||
| Interest income | 4,463 | - | 4,524 | 14,513 | ||||||||||||
| Interest expense | (117,679 | ) | (24,686 | ) | (345,819 | ) | (32,176 | ) | ||||||||
| Total other income (expense) | (113,216 | ) | (58,527 | ) | (341,295 | ) | (51,504 | ) | ||||||||
| Net loss | $ | (1,025,412 | ) | $ | (590,657 | ) | $ | (2,581,807 | ) | $ | (2,040,493 | ) | ||||
| Net loss per common share - basic and diluted | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.18 | ) | $ | (0.15 | ) | ||||
| Weighted average shares outstanding - basic and diluted | 15,759,271 | 13,619,523 | 14,542,433 | 13,517,205 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| Cash flows from operating activities | ||||||||
| Reconciliation of net loss to net cash used in operating activities: | ||||||||
| Net loss | $ | (2,581,807 | ) | $ | (2,040,493 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Depreciation | 7,667 | 14,255 | ||||||
| Bad debt expense | 7,463 | - | ||||||
| Amortization of debt issuance costs | 258,750 | - | ||||||
| Amortization of prepaid stock compensation | - | 55,730 | ||||||
| Amortization of prepaid consulting | 106,468 | - | ||||||
| Credit issued | - | 65,570 | ||||||
| Stock option compensation expense | 419,301 | 238,470 | ||||||
| Loss on settlement | - | 841 | ||||||
| Stock issued for settlement | - | 41,967 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (19,663 | ) | (206,883 | ) | ||||
| Inventories | 50,578 | (70,182 | ) | |||||
| Prepaid expenses and other current assets | 14,384 | (6,416 | ) | |||||
| Deposits and other assets | (11,351 | ) | 1,000 | |||||
| Accounts payable | (9,204 | ) | 30,154 | |||||
| Related party payable | (60,000 | ) | - | |||||
| Customer deposits | - | 50,000 | ||||||
| Accrued expenses | (11,861 | ) | (38,655 | ) | ||||
| Net cash used in operating activities | (1,829,275 | ) | (1,864,642 | ) | ||||
| Cash flows from Investing Activities | ||||||||
| Sales of short term marketable debt securities | - | 750,000 | ||||||
| Purchases of equipment | (5,884 | ) | (4,857 | ) | ||||
| Net cash provided by (used in) investing activities | (5,884 | ) | 745,143 | |||||
| Cash flows from Financing Activities | ||||||||
| Payments on Insurance Finance Contract | (24,016 | ) | (19,649 | ) | ||||
| Proceeds from sale of stock and warrants, net | 2,085,000 | 100,000 | ||||||
| Proceeds from related party debt | - | 10,000 | ||||||
| Proceeds from exercise of stock options | 25,000 | - | ||||||
| Proceeds from revolving line of credit, net | 900,000 | 808,000 | ||||||
| Net cash provided by financing activities | 2,985,984 | 898,351 | ||||||
| Net increase in cash and cash equivalents | 1,150,825 | (221,148 | ) | |||||
| Cash and cash equivalents - beginning | 245,381 | 230,058 | ||||||
| Cash and cash equivalents - ending | $ | 1,396,206 | $ | 8,910 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | 90,177 | $ | 10,031 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Supplementary Disclosure of Non-cash Investing and Financing Activities: | ||||||||
| Financing of prepaid insurance contracts | $ | 55,560 | $ | 23,097 | ||||
| Prepaid stock-based consulting | $ | 425,872 | $ | 38,500 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
1. Organization and Basis of Presentation
Organization
GelTech Solutions, Inc. (“GelTech” or the “Company”) is a Delaware corporation. GelTech is primarily engaged in business activities that include finalizing the development of products in three distinct markets and beginning the marketing and delivery of products in two of those markets: (i) FireIce®, a patented fire suppression product, which is non-toxic and when combined with water becomes a water-based gel product used to suppress fires involving structures, personal property and forest wildfires; (ii) Soil2O™(formerly RootGel), a moisture preservation solution that has many applications useful in the agricultural industry including water and nutrient retention in golf course maintenance, landscaping and forestry and (iii) IceWear™, a line of garments that help cool the core body temperature fo r individuals who work in extreme conditions (e.g., firefighters, police officers, construction workers, race car drivers). Additionally, GelTech owns a United States patent for a method to modify weather.
Beginning July 2008, the Company was no longer in the development stage as defined by Accounting Standards Codification (ASC) 915-10. “Accounting and Reporting for Development Stage Enterprises." The Company will no longer continue to report as a development stage company, since significant revenues have been generated and the company operations have moved beyond the activities of identifying and developing products to the activities of marketing, selling and distributing products. The corporate office is located in Jupiter, Florida.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its two wholly owned subsidiaries: Weather Tech Innovations, Inc. and FireIce Gel, Inc. (formerly GelTech Innovations, Inc.). Prior to July 1, 2008, there had been no activity in either subsidiary. Beginning on July 1, 2008, the Company began operating the marketing, sales and distribution of FireIce® through FireIce Gel, Inc. These unaudited, condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (”SEC”) for interim financial information. Accordingly, they do not include all o f the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009 filed on September 28, 2009.
Inventories
Inventories as of March 31, 2010 consisted of raw materials and finished goods in the amounts of $97,668 and $101,163, respectively.
Revenues
The Company recognizes sales of its products when they are shipped FOB shipping point in accordance with ASC 605-15 and reduces revenues for any credits issued to customers. During the nine months ended March 31, 2009, the Company issued credits to customers in the amount of $8,880 for products returned by a distributor. As a result, sales for the nine months ended March 31, 2009 were reduced by the amount of the returns.
4
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
Accounting Standard Codification
In June 2009, FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC, have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. Other than changes to authoritative references, there have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended March 31. 2010.
As a result of the Company’s implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, the Company will provide reference to the both the old and new guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification. New references will use the term Accounting Standards Codification (ASC) followed by the relevant ASC section.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Significant estimates in the fiscal 2010 period include the allowance for doubtful accounts, valuation of inventories, valuation of options and warrants granted for services, valuation of common stock granted for services and the deferred tax assets.
Earnings (Loss) per Share
The Company computes earnings (loss) per share in accordance with ASC 260-10, “Earnings per Share.” ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. At March 31, 2010, there were options to purchase 2,659,007 shares of the Company’s common stock and warrants to purchase 3,277,361 shares of the Company’s common stock which may di lute future earnings per share.
Stock-Based Compensation
On July 19, 2006 (inception), the Company adopted ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
Stock-based compensation expense recognized under ASC 718-10 for the period July 1, 2009 to March 31, 2010 was $419,301 which consisted of compensation related to employee, director and advisor stock options, and is included in selling, general and administrative expenses on the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At March 31, 2010, the total compensation cost for stock options not yet recognized was approximately $313,323. This cost will be amortized on a straight-line basis over the remaining vesting term of the options.
On July 1, 2009, the Company granted options to purchase 100,000 shares of the Company’s common stock to directors of the Company. The options have an exercise price of $1.84 per share, vest over one year and have a ten year term. The options were valued using the Black-Scholes model using a volatility of 166.28% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 3.03%. The value of the options will be recognized over the vesting term, one year.
5
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
During the three months ended March 31, 2010, the Company’s CEO sold 50,000 options to purchase shares of the Company’s common stock which were exercisable at $0.667 per share. These options are included in options sold to third party in the following schedule and are included in options purchased from officer in the Non-Employee, Non-Director schedule. In addition, the Company’s Chief Technology Officer was issued 14,993 shares of common stock in exchange for a payment of $10,000 to exercise options with an exercise price of $0.667 per share.
A summary of stock option transactions for all stock options for the nine months ended March 31, 2010 and 2009 is as follows:
Employee Options
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Balance at June 30, 2008 | 1,175,000 | $ | 0.82 | 7.53 | ||||||||||||
| Granted | 1,540,000 | $ | 1.00 | 10.0 | ||||||||||||
| Exercised | –– | $ | –– | –– | ||||||||||||
| Forfeited | –– | $ | –– | –– | ||||||||||||
| Expired | –– | $ | –– | –– | ||||||||||||
| Outstanding at March 31, 2009 | 2,715,000 | $ | 0.92 | 8.71 | $ | 154,050 | ||||||||||
| Exercisable at March 31, 2009 | 583,253 | $ | 0.87 | 5.72 | $ | 52,900 | ||||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2009 | $ | 0.42 | ||||||||||||||
| Balance at June 30, 2009 | 2,714,000 | $ | 0.92 | 8.20 | ||||||||||||
| Granted | –– | $ | –– | –– | ||||||||||||
| Exercised | (14,993 | ) | $ | 0.667 | 7.97 | |||||||||||
| Options sold to third party | (50,000 | ) | $ | 0.667 | 7.97 | |||||||||||
| Forfeited | (500,000 | ) | $ | 1.00 | 9.75 | |||||||||||
| Expired | –– | $ | –– | |||||||||||||
| Outstanding at March 31, 2010 | 2,149,007 | $ | 0.91 | 7.13 | $ | 1,810,664 | ||||||||||
| Exercisable at March 31, 2010 | 922,590 | $ | 0.86 | 5.51 | $ | 781,575 | ||||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2010 | N/A | |||||||||||||||
6
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
A summary of options issued to non-employees under the 2007 Plan and changes during the nine month periods from June 30, 2008 to March 31, 2009 and from June 30, 2009 to March 31, 2010 is as follows:
Options Issued to Directors
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Balance at June 30, 2008 | 110,000 | $ | 0.85 | 5.89 | ||||||||||||
| Granted | 95,000 | $ | 0.88 | 10.00 | ||||||||||||
| Exercised | –– | $ | –– | –– | ||||||||||||
| Forfeited | –– | $ | –– | –– | ||||||||||||
| Expired | –– | $ | –– | –– | ||||||||||||
| Outstanding at March 31, 2009 | 205,000 | $ | 0.86 | 7.40 | $ | 13,550 | ||||||||||
| Exercisable at March 31, 2009 | 113,333 | $ | 0.89 | 7.08 | $ | 5,372 | ||||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2009 | $ | 0.43 | ||||||||||||||
| Balance at June 30, 2009 | 205,000 | $ | 0.86 | 5.89 | ||||||||||||
| Granted | 100,000 | $ | 1.84 | 10.00 | ||||||||||||
| Exercised | –– | $ | –– | –– | ||||||||||||
| Forfeited | –– | $ | –– | –– | ||||||||||||
| Expired | –– | $ | –– | –– | ||||||||||||
| Outstanding at March 31, 2010 | 305,000 | $ | 1.18 | 7.17 | $ | 181,800 | ||||||||||
| Exercisable at March 31, 2010 | 269,168 | $ | 1.10 | 6.92 | $ | 180,899 | ||||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2010 | $ | 1.78 | ||||||||||||||
7
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
| Non-Employee, Non-Director Options | ||||||||||||||||
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Balance at June 30, 2008 | 170,000 | $ | 1.00 | 4.53 | ||||||||||||
| Granted | –– | $ | –– | –– | ||||||||||||
| Exercised | –– | $ | –– | –– | ||||||||||||
| Forfeited | –– | $ | –– | –– | ||||||||||||
| Expired | –– | $ | –– | –– | ||||||||||||
| Outstanding at March 31, 2009 | 170,000 | $ | 1.00 | 3.78 | $ | 34,000 | ||||||||||
| Exercisable at March 31, 2009 | 103,665 | $ | 1.00 | 3.78 | $ | 20,733 | ||||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2009 | N/A | |||||||||||||||
| Balance at June 30, 2009 | 170,000 | $ | 1.00 | 3.53 | ||||||||||||
| Granted | –– | $ | –– | –– | ||||||||||||
| Options purchased from officer | 50,000 | $ | 0.667 | 7.97 | ||||||||||||
| Exercised | (15,000 | ) | $ | 1.00 | 3.25 | |||||||||||
| Forfeited | –– | $ | –– | –– | ||||||||||||
| Expired | –– | $ | –– | –– | ||||||||||||
| Outstanding at March 31, 2010 | 205,000 | $ | 0.92 | 4.04 | $ | 170,400 | ||||||||||
| Exercisable at March 31, 2010 | 205,000 | $ | 0.92 | 4.04 | $ | 170,400 | ||||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2010 | N/A | |||||||||||||||
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term using the simplified method. The risk free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
The fair value of stock option grants for the period from July 1, 2009 to March 31, 2010 was estimated to have a weighted average fair value of $1.78, using the following assumptions:
| Risk free interest rate | 3.03 | % | ||
| Expected term (in years) | 6.5 | |||
| Dividend yield | –– | |||
| Volatility of common stock | 166.28 | % | ||
| Estimated annual forfeitures | –– |
8
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
2. Going Concern
These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize it assets and discharge its liabilities in the normal course of business. As of March 31, 2010, the Company had a working capital deficit of $896,387 and had an accumulated deficit and stockholders’ deficit of $8,688,109 and $456,078, respectively, and incurred net losses of $2,581,807 for the nine months ended March 31, 2010 and used cash from operations of $1,829,275 during the nine months ended March 31, 2010. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. In May 2009, the Company entered into a $2,500,000 revolving line of credit agreement with its largest shareholder. As of March 31, 2010 the Compa ny had drawn $2,450,000 against this line of credit. In May 2010, the shareholder/lender extended the due date of the line of credit to May 2011. This shareholder/lender has assured the Company that he will provide any additional support the Company may require. During the nine months ended March 31, 2010 the Company issued 2,175,000 shares of common stock and 2,175,000 warrants to purchase common stock in exchange for $2,085,000, net of expenses. All of these transactions have been through private placements. If the Company is unable to generate substantial cash flows from additional sales of its products, or through financings, including but not limited to the line of credit, the Company may not be able to remain operational.
The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. Line of Credit Agreement
On May 29, 2009, the Company entered into a Credit Enhancement and Financing Security Agreement with the Company’s largest shareholder. In connection with this agreement the Company executed a Revolving Promissory Note which permits the Company to borrow up to $2,500,000. Interest, at an annual rate of 5%, is due monthly on the 20th day of each month which commenced on July 20, 2009 and the principal and all accrued interest is due on May 29, 2010. Additionally, the Company may be compelled to pay the outstanding principal balance earlier during which it will not be permitted to borrow any sums for a period of 30 consecutive days. As of March 31, 2010, the Company has received advances against the note of $2,450,000 of which $1,058,943 was used to repay amounts owed under previous lines of credit. 60;Interest expense on the note for the nine months ended March 31, 2010 was $90,177. The Company has been advised that the shareholder/lender has agreed to renew the loan for an additional one-year term on the same terms and conditions. In connection with the renewal, the Company will issue the shareholder/lender 150,000 shares of common stock, 150,000 two year warrants to purchase shares of common stock for $1.50 per share and a cash payment of $60,000. The transaction is anticipated to close shortly after the shareholder/lender renews a loan from a commercial bank.
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GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
4. Stockholders’ Equity
The issuances of common stock during the nine months ended March 31, 2010 were as follows:
In October 2009, the Company issued 15,000 shares of common stock in exchange for $15,000 in cash upon the exercise of options by a member of the Company’s advisory board.
In November 2009, the Company issued 200,000 shares to an investment banking firm as compensation for a two year consulting agreement with an effective date of October 15, 2009. The Company recorded the fair value of the shares, $340,000, based upon the quoted trade price of the shares on the date of the agreement, as prepaid consulting fees and will amortize the amount over the term of the agreement, two years. The Company amortized $42,500 of this amount during the three months ended March 31, 2010.
In November 2009, the Company issued 30,000 shares of common stock and two year warrants to purchase 30,000 shares of common stock at an exercise price of $2.00 per share in exchange for $45,000 in cash, or $1.50 per unit, in private placements with accredited investors. In March 2010, the Company issued these investors an additional 15,000 shares of common stock and issued them additional warrants to purchase 15,000 shares of common stock at an exercise price of $1.60 per share for three years and modified the initial 30,000 warrants to extend the term to three years at an exercise price of $1.60 per share, to make their investments equal to the subsequent private placement investors.
In total, from November 2009 through March 31, 2010 the Company issued 2,175,000 shares of common stock and three year warrants to purchase 2,175,000 shares of common stock at an exercise price of $1.60 per share in exchange for $2,175,000 in cash or $1.00 per unit, in private placements with accredited investors including the shares and warrants in the preceding paragraph. The Company paid $90,000 in commissions related to these private placements.
In January 2010, the Company issued 45,282 and 23,929 shares of the Company’s common stock to the Company’s Chairman and a Director, respectively. These shares were issued to compensate the Chairman and Director for the amount of their personal shares that were used to exchange shares of the Company to former Dyn-O-Mat shareholders in a prior year. The fair value of the shares, $69,211 was recorded as stock compensation expense.
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GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
Common Stock Warrants
A summary of outstanding warrants as of March 31, 2010 and 2009 and changes during the nine month periods ended March 31, 2010 and 2009 is as follows:
| Warrants Issued as Settlements | ||||||||||||
Number of Options | Weighted Average Exercise Price | Remaining Contractual Life | ||||||||||
| Balance at June 30, 2008 | 504,058 | $ | 1.05 | 1.92 | ||||||||
| Granted | –– | $ | –– | –– | ||||||||
| Exercised | (30,000 | ) | $ | 1.00 | –– | |||||||
| Forfeited | –– | $ | –– | –– | ||||||||
| Expired | –– | $ | –– | –– | ||||||||
| Outstanding at March 31, 2009 | 474,058 | $ | 1.05 | 1.41 | ||||||||
| Exercisable at March 31, 2009 | 474,058 | $ | 1.05 | 1.41 | ||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2009 | N/A | |||||||||||
| Balance at June 30, 2009 | 474,058 | $ | 1.05 | 0.91 | ||||||||
| Granted | –– | $ | –– | –– | ||||||||
| Exercised | –– | $ | –– | –– | ||||||||
| Forfeited | –– | $ | –– | –– | ||||||||
| Expired | –– | $ | –– | –– | ||||||||
| Outstanding at March 31, 2010 | 474,058 | $ | 1.05 | 2.17 | ||||||||
| Exercisable at March 31, 2010 | 474,058 | $ | 1.05 | 2.17 | ||||||||
| Weighted average fair value of warrants extended during the nine months ended March 31, 2010 | $ | 0.55 | ||||||||||
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GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
A summary of warrants issued for cash and changes during the periods June 30, 2008 to March 31, 2009 and from June 30, 2009 to March 31, 2010 is as follows:
| Warrants issued for cash | ||||||||||||
Number of Options | Weighted Average Exercise Price | Remaining Contractual Life | ||||||||||
| Balance at June 30, 2008 | 528,303 | $ | 1.14 | 2.29 | ||||||||
| Granted | –– | $ | –– | –– | ||||||||
| Exercised | –– | $ | –– | –– | ||||||||
| Forfeited | –– | $ | –– | –– | ||||||||
| Expired | –– | $ | –– | –– | ||||||||
| Outstanding at March 31, 2009 | 528,303 | $ | 1.14 | 1.79 | ||||||||
| Exercisable at March 31, 2009 | 528,303 | $ | 1.14 | 1.79 | ||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2009 | N/A | |||||||||||
| Balance at June 30, 2009 | 528,303 | $ | 1.14 | 1.29 | ||||||||
| Granted | 2,275,000 | $ | 1.60 | 3.09 | ||||||||
| Exercised | –– | $ | –– | –– | ||||||||
| Forfeited | –– | $ | –– | –– | ||||||||
| Expired | –– | $ | –– | –– | ||||||||
| Outstanding at March 31, 2010 | 2,803,303 | $ | 1.51 | 2.55 | ||||||||
| Exercisable at March 31, 2010 | 2,803,303 | $ | 1.51 | 2.55 | ||||||||
| Weighted average fair value of options granted during the nine months ended March 31, 2010 | $ | 0.85 | ||||||||||
In connection with private placement transactions from November 2009 through March 31, 2010 , the Company issued three year warrants to purchase 2,175,000 shares of the Company’s common stock at an exercise price of $1.60 per share. In January 2010, the Company issued 100,000 five year options, exercisable at $1.60 per share to a consultant.
5. Fair Value Measurements
In July 2009, the Company implemented FASB Accounting Standards Codification 850 “Fair Value Measurements and Disclosures” (formerly SFAS 157, “Fair Value Measurements”), relative to its financial assets and liabilities that are recognized or disclosed at fair value in the financial statements at least annually.
Our cash and cash equivalents are recorded at fair value as determined through market, observable and corroborated sources
As of March 31, 2010 the Company’s cash and cash equivalents that are carried at fair value on a recurring basis include the following:
| Fair Value Measurements Using | ||||||||||||||||
| Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Cash | $ | 1,396,206 | $ | 1,396,206 | $ | –– | $ | –– | ||||||||
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GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
6. Commitments and Contingencies
On September 15, 2006, the Company entered into employment agreements with two of its officers and on December 18, 2006 the Company entered into an employment agreement with a third officer. Each agreement is for a term of three years and requires the payment of $91,000 in annual compensation to each officer. In addition, two of the employment contracts include the issuance of incentive stock options to purchase 175,000 shares of the Company’s common stock to each of the officers. Effective March 17, 2008, the Board authorized an amendment to the employment agreements with the officers. The officers agreed to eliminate their automobile allowances of $875 per month. In exchange, their annual compensation has been increased from $91,000 to $125,000, and each officer was granted 200,000 stock options exercisable at $0.667 pe r share over a 10-year period, subject to semi-annual vesting if still employed by the Company on each applicable vesting date. The Board also granted an additional 175,000 stock options to the officer that did not receive an initial grant, exercisable at $1.00 per share over a 10-year period, subject to the same vesting described in the prior sentence. The Board also agreed to amend a provision of the officers’ employment agreements which permits them to resign for “Good Reason” and receive severance equal to three years base salary and have all unvested options vest. Under this provision, each officer has 180 days to resign in the event a shareholder acquires beneficial ownership of at least 30% of the Company’s common stock. On January 30, 2008, an investor passed this 30% threshold as described on a Form 8-K filed by the Company on the same day. The amendment gave each officer until March 31, 2008 to make this election. None made such an election. See Note 1 for add itional information on the options granted the officers.
As discussed above, in December 2008, the Compensation Committee approved new employment terms for each of the Company’s three executive officers. Each received an annual salary of $125,000 for the balance of fiscal 2009 with increases to $150,000 and $175,000 for fiscal 2010 and 2011, subject to the discretion of the Compensation Committee. Target bonuses, subject to the discretion of the Compensation Committee, are $112,500 and $131,250 for fiscal 2010 and 2011, respectively based upon meeting job performance, revenue growth, positive cash flow and pre-tax income. No bonus was awarded for fiscal 2009. Additionally, each executive received a grant of 500,000 10-year options exercisable at $0.667 per share. The options vest annually subject to continued employment with the Company and subject to meeting budgeted revenue target s. If the Company fails to meet any revenue targets, the Compensation Committee has discretion to vest or cancel the options. Based upon the failure to meet fiscal 2009 revenue targets, a total of 500,000 options were forfeited.
The Company was sued by a former employee on June 23, 2008, alleging breach of a consulting agreement and an employment agreement entered into in May and June 2007, respectively. In addition, the plaintiff seeks to recover certain of his personal property, which was used or stored in the Company’s offices, and alleges the Company invaded his privacy by looking at his personal computer in the Company’s offices. The defendants have filed motions to dismiss and continue to contend that the lawsuit is baseless.
In October 2008, the Company entered into a Master Distributing Agreement with a California company (the Distributor). Under the agreement, the Company agreed to pay the Distributor up to $450,000 in costs toward the marketing of the Company’s FireIce® Gel product. As of June 30, 2009, the Company had paid $50,000 to the Distributor. In addition, the Company issued a credit in lieu of payment, in the amount of $50,000, against the accounts receivable of the Distributor. As such, the remaining amounts due under the agreement called for the payment of an additional $210,000 in calendar 2009 and $140,000 in calendar 2010. In September 2009, the Company and the Distributor entered into a settlement agreement whereby each party was relieved of any further obligations related to the Master Distributing Agreement.
7. Related Party Transactions
In addition to the Chief Executive Officer (CEO) and the Chief Technology Officer (CTO) the following related parties are employed at GelTech:
| · | the CEO’s wife is a bookkeeper at $1,000 per week, |
| · | thee CEO and CTO’s father is a researcher at $1,000 per week, and |
| · | the CEO and CTO’s mother as a receptionist at $600 per week. |
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GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 2010
(Unaudited)
The Company approved employment terms with its executive officers which are described under Note 6.
The Company has a Line of Credit with its largest shareholder which is in the process of being renewed on the terms as described in Note 3.
8. Concentrations
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2010. As of March 31, 2010, there were $1,167,257 of cash equivalent balances held in depository accounts that are not insured.
At March 31, 2010, three customers account for 56%, 21% and 13.5 % of accounts receivable.
For the nine months ended March 31, 2010 three customers accounted for approximately 74.3%, 6.4% and 6.1% of sales.
During the nine months ended March 31, 2010 all sales resulted from two products, FireIce® and Soil2O™ (formerly RootGel) which made up 84% and 16%, respectively, of total sales.
During the nine months ended March 31, 2010, the Company purchased approximately $85,000 of raw material from one vendor which amounted to 71.8% of the purchases for the period.
9. Subsequent Events
The Company has been advised that the shareholder/lender has agreed to renew the loan for an additional one-year term on the same terms and conditions. In connection with the renewal, the Company will issue the shareholder/lender 150,000 shares of common stock, 150,000 two year warrants to purchase shares of common stock for $1.50 per share and a cash payment of $60,000. The transaction is anticipated to close shortly after the shareholder/lender renews a loan from a commercial bank.
Management evaluated all activity of the Company through the issue date of the Company’s condensed unaudited consolidated financial statements) and concluded that no subsequent events have occurred that would require recognition in the unaudited condensed consolidated financial statements.
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTD OF OPERATIOS. |
Certain statements in “Management’s Discussion and Analysis and of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.
Overview
In 2007, we initiated marketing and sales of Soil2O™ (formerly RootGel), a product which reduces the use of water and is primarily marketed to golf courses and the agriculture market. The Company is in the process of rebranding this product under the name Soil2O™. In 2008, we initiated marketing FireIce®, a water soluble fire retardant which protects firefighters and is useful in containing fires including wildfires. In March 2009, the Company entered into a distribution agreement for SkinArmor™, an innovative new fire retardant skin ointment being developed that can be used to assist in protecting exposed skin from the effects of fire. In addition, in 2010 the Company expects to complete the development of IceWear™, a cooling vest which can be worn by firefighters, racecar drivers and others who work in extreme heat. Our financial statements have been prepared on a going concern basis, and we need to generate sufficient sales to support the ongoing business of the Company.
We were incorporated in July 2006 as a Florida corporation and reincorporated in Delaware in November 2006. Our Chief Technology Officer, Mr. Peter Cordani, invented FireIce®, IceWear™ and the current version of Soil2O™ on behalf of GelTech. WeatherTech, our hurricane suppression product was also developed by Mr. Cordani.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2009.
Sales
For the three months ended March 31, 2010, we had sales of $34,297 as compared to sales of $288,248 for the three months ended March 31, 2009, a decrease of $253,951. The decrease in sales resulted from one major sale of FireIce® amounting to $207,500 during the three months ended March 31, 2009. Sales of product during the quarter consisted of $12,273 for Soil2O™ (formerly RootGel) and $22,024 for FireIce®.
Cost of Goods Sold
Cost of goods sold was $9,025 for the three months ended March 31, 2010 as compared to a cost of goods sold of $98,375 for the three months ended March 31, 2009. The decrease was the direct result of the decrease in sales.
Selling, General and Administrative Expenses
S,G&A expenses were $931,229 for the three months ended March 31, 2010 as compared to $715,594 for the three months ended March 31, 2009. The increase in 2010 expenses resulted from increases in option expense of $84,000, salary and employee benefits of $18,000, investor relations costs of $125,000 and travel of $13,000 which were partially offset by a decrease in sales and marketing costs of $24,000.
Research and Development Expenses
R&D expenses were $6,239 for the three months ended March 31, 2010 as compared to $6,409 for the three months ended March 31, 2009. The slight decrease in fiscal 2010 expense reflects the normalization of continuing R&D costs for FireIce® and Soil2O™ (formerly RootGel).
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Loss from Operations
Loss from operations was $912,196 for the three months ended March 31, 2010 as compared to $532,130 for the three months ended March 31, 2009. The increase resulted from the higher operating expenses and lower sales as previously discussed.
Interest Income
Interest income was $4,463 for the three months ended March 31, 2010 as compared to $-0- for the three months ended March 31, 2009 primarily due to higher cash balances resulting from the private placement transactions in the current year.
Interest Expense
Interest expense was $117,679 for the three months ended March 31, 2010 as compared to $24,686 for the three months ended March 31, 2009. The increase resulted from the higher balances on our Lines of Credit during the three months ended March 31, 2010 and $86,250 of amortization of debt issue costs related to the line of credit agreement.
Net Loss
Net loss was $1,025,412 for the three months ended March 31, 2010 as compared to $590,657 for the three months ended March 31, 2009. The higher net loss resulted from the higher operating expenses, interest expense, and lower sales. Net loss per common share was $0.07 for the three months ended March 31, 2010 as compared to $0.04 for the three months ended March 31, 2009. The weighted average number of share outstanding for the three months ended March 31, 2010 and 2009 were 15,759,271 and 13,619,523, respectively.
FOR THE NINE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2009.
Sales
For the nine months ended March 31, 2010, we had sales of $559,718 as compared to sales of $317,310 for the nine months ended March 31, 2009, an increase of $242,408. The increase in sales resulted from two major sales of FireIce® amounting to $416,000 during the six months ended December 31, 2009. Sales of product during the nine months ended March 31, 2010 consisted of $89,709 for Soil2O™ (formerly RootGel) and $470,009 for FireIce®. The sales from 2009 were from sales of both Soil2O™ (formerly RootGel) and FireIce®.
Cost of Goods Sold
Cost of goods sold was $169,155 for the nine months ended March 31, 2010 as compared to $106,327 for the nine months ended March 31, 2009. The increase was the direct result of the increase in sales.
Selling, General and Administrative Expenses
S,G&A expenses were $2,617,999 for the nine months ended March 31, 2010 as compared to $2,080,766 for the nine months ended March 31, 2009. The increase in expenses for the nine months ended March 31, 2010 resulted from increases in sales commissions paid of $148,000, salary and employee benefits of $76,000, investor relations costs of $119,000 and option expense of $170,000, which were partially offset by lower expense related to legal and professional fees of $18,000 and a reduction in marketing expenses of $26,000.
Research and Development Expenses
R&D expenses were $13,076 for the nine months ended March 31, 2010 as compared to $119,206 for the nine months ended March 31, 2009. The decrease in fiscal 2010 expenses of $106,130 reflects the winding down of R&D costs for FireIce® and Soil2O™ (formerly RootGel).
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Loss from Operations
Loss from operations was $2,240,512 for the nine months ended March 31, 2010 as compared to $1,988,989 for the nine months ended March 31, 2009. The increase in the loss from operations resulted from an increase of $411,728 in operating expenses which was partially offset by the increase in gross profit of $179,580 due to the increase in sales.
Interest Income
Interest income was $4,524 for the nine months ended March 31, 2010 as compared to $14,513 for the nine months ended March 31, 2009.
Interest Expense
Interest expense was $345,819 for the nine months ended March 31, 2010 as compared to $32,176 for the nine months ended March 31, 2009. The increase resulted from the higher balances on our line of credit during the nine months ended March 31, 2010. In addition, interest expense for the nine months ended March 31, 2010 included $258,750 related to the amortization of debt issue costs.
Net Loss
Net loss was $2,581,807 for the nine months ended March 31, 2010 as compared to $2,040,493 for the nine months ended March 31, 2009. The higher net loss resulted from the increase in operating and interest expense during the nine months ended March 31, 2010. These factors were partially offset by the increase in gross profit. Net loss per common share was $0.18 for the nine months ended March 31, 2010 as compared to $0.15 for the nine months ended March 31, 2009. The weighted average number of share outstanding for the nine months ended as of March 31, 2010 and 2009 were 14,542,433 and 13,517,205, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used by operating activities for the nine month period ended March 31, 2010 were $1,829,275 in which our net loss of $2,581,807 was negatively impacted by an increase in accounts receivable of $19,663, a decrease in related party payables of $60,000, an increase in deposits and other assets and decreases in accounts payable of $9,204 and accrued expenses of $11,861, which were partially offset by non-cash stock option compensation expense of $419,301, amortization of debt issue costs and prepaid consulting fees of $258,750 and $106,468, respectively, and a decrease in inventories of $50,578. For the nine month period ended March 31, 2009, net cash used in operating activities was $1,864,642, comprised of the net loss for the period totaling $2,040,493 which was negatively impacted by an increas e in accounts receivable of $206,883, an increase in inventories of $70,182 and a decrease in accrued expenses of $38,655 which was offset by stock option expense of $238,470 and credits to customers of $65,570.
Cash flows used by investing activities for the nine months ended March 31, 2010 were $5,884 which related to purchase of equipment. For the nine month period ended March 31, 2009, net cash provided by investing was $745,143 which related to the sale of marketable debt securities of $750,000 which were partially offset by the acquisition of equipment costing $4,857.
Cash flows provided by financing activities for the nine months ended March 31, 2010 were $2,985,984, resulting from advances against the Company’s line of credit agreement of $900,000, proceeds from the sale of common stock and warrants of $2,085,000 and cash received from the exercise of options to purchase common stock of $25,000. These were partially offset by repayment of insurance premium finance contracts in the amount of $24,016. Cash flows provided by financing activities for the nine months ended March 31, 2009 were $898,351 which consisted proceeds from advances against the Company’s line of credit agreement of $808,000, proceeds from the sale of stock of $100,000, proceeds from related party debt of $10,000, which were partially offset by repayment of insurance premium finance contracts of $19,649.
As of March 31, 2010, we had a working capital deficit of approximately $900,000. As of the date of this report, we have $1.1 million in available cash and marketable debt securities. We do not anticipate the need to purchase any material capital assets in order to carry out our business.
17
In May 2009, we entered into a one-year $2,500,000 revolving line of credit agreement with our largest shareholder. This line of credit has been used to repay prior debt to the shareholder, pay for working capital and provide the Company in financing the purchase of inventory for substantiated transactions. As of the date of this report, GelTech has borrowed $2,450,000 under the line of credit. The revolving line of credit note requires the Company to pay the outstanding principal balance prior to its due date during which it will not be permitted to borrow any sums for a period of 30 consecutive days. The Company has been advised that the shareholder/lender has agreed to renew the loan for an additional on e-year term on the same terms and conditions. In connection with the renewal, the Company will issue the shareholder/lender 150,000 shares of common stock, 150,000 two year warrants to purchase shares of common stock for $1.50 per share and a cash payment of $60,000. The transaction is anticipated to close shortly after the shareholder/lender renews a loan from a commercial bank.
Since July 1, 2009, the Company has sold 217.5 units each consisting of 10,000 shares of common stock and three year warrants to purchase 10,000 shares of the Company’s common stock at an exercise price of $1.60 per share in exchange for $2,175,000 in cash, or $1.00 per unit. We currently have approximately six months of working capital remaining, and our line of credit is due in May 2011. If the Company is unable to generate substantial cash flows from sales of our products, or through financings, the Company may not be able to remain operational.
Related Person Transactions
For information on related party transactions and their financial impact, see Note 7 to the Condensed Consolidated Financial Statements (Unaudited).
Critical Accounting Estimates
In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company’s financial condition. The accounting estimates are discussed below. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company’s results of operations and financial condition.
Revenue Recognition
Under ASC 605-15-25 we recognize sales of our products when each of the following has occurred:
| - | The price of the product sold is fixed or determinable and evidence of an agreement is present |
| - | The title and risk of loss of the product has passed to the buyer and the sale is not contingent upon the buyer being able to resell the product. |
| - | We have a reasonable expectation that the buyer has the intent and the ability to pay for the product ordered. |
| - | We have no future obligation to the seller related to the product sold. |
Stock-Based Compensation
Under ASC 718-10 which was effective as of January 1, 2006, 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 and warrant at the grant date using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 1 to the unaudited condensed 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 may not necessarily provide a reliable single measure of the fair value of such stock options.
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RECENT ACCOUNTING PRONOUNCEMENTS
FASB Accounting Standards Codification
(Accounting Standards Update (“ASU”) 2009-01)
In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC, have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009 , and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the nine months ended March 31, 2009.
As a result of the Company’s implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, the Company will provide reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.
Subsequent Events
(Included in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165 “Subsequent Events”)
SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Company’s financial statements. The Company evaluated for subsequent events throug h the issuance date of the Company’s financial statements. No recognized or non-recognized subsequent events were noted.
Determination of the Useful Life of Intangible Assets
(Included in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS No. 142-3 “Determination of the Useful Lives of Intangible Assets”)
FSP SFAS No. 142-3 amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previously issued goodwill and intangible assets topics. This change was intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under topics related to business combinations and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP SFAS No. 142-3 became effective for financial statements issued fo r fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not impact the Company’s financial statements.
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Noncontrolling Interests
(Included in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51”)
SFAS No. 160 changed the accounting and reporting for minority interests such that they will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 became effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company implemented SFAS No. 160 at the start of fiscal 2010. The adoption of ASC 810 did not have a material impact on the unaudited condensed consolidated financial statements of the Company.
Consolidation of Variable Interest Entities — Amended
(To be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)
SFAS No. 167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities regarding certain guidance for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009, with earlier adoption prohibited. The Company will adopt SFAS No. 167 in fiscal 2010 and does not anticipate any material i mpact on the Company’s financial statements.
Forward Looking Statements
Certain statements in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including expectations regarding liquidity and working capital, expectations regarding completing the development of IceWear™, anticipated extension of our line of credit and anticipated need to purchase capital assets. 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 global and domestic economic conditions, budgetary pressures facing state and local governments, our failure to receive or the potential delay of anticipated orders for our products and failure to be listed by the U.S Forest Service.
Further information on our risk factors is contained in our filings with the SEC, including the Form 10-K for the fiscal year ended June 30, 2009. These forward-looking statements speak only as of the date on which this report is filed. 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 of these forward-looking statements, whether as a result of new information, future developments or otherwise.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK. |
Not applicable to smaller reporting companies
| ITEM 4. | CONTROLS AND PROCESURES. |
Not applicable to smaller reporting companies
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| ITEM 4T. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submi t under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control 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.
PART II – OTHER INFORMATION
| ITEM1. | LEGAL PROCEEDINGS. |
There were no material developments to any legal proceedings.
ITEM 1A. RISK FACTORS.
Not applicable to smaller reporting companies.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
In addition to those unregistered securities previously disclosed in reports filed with the SEC, we have sold securities without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2) and Rule 506 thereunder as described below.
| Name of Class | Date Sold | No. of Securities | Reason for Issuance |
| Shareholders | January 7, 2010 | 69,211 shares of common stock | Shares owed from Dyn-O-Mat Exchange Offer |
| Warrant holder | January 24, 2010 | 474,058 warrants exercisable at $1.50 per share | Extension of expiration date of previously issued warrant |
| Private placement investors | February 17, 2010 through March 15, 2010 | 470,000 shares of common stock and 470,000 warrant exercisable at $1.60 per share | In consideration for $470,000 |
| Option holder | March 25, 2010 | 14,993 shares of common stock | Exercise of stock options with exercise price of $0.667 per share |
| Private placement investors | March 29, 2010 | 15,000 shares of common stock and 45,000 warrants exercisable at $1.60 per share | To put prior private placement investors in similar position as new private placement investors |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None
| ITEM 4. | (REMOVED AND RESERVED). |
| ITEM 5. | OTHER INFORMATION. |
None
| ITEM 6. | EXHIBITS. |
| Exhibit | Incorporated by Reference | Filed or Furnished | |||||||||
| # | Exhibit Description | Form | Date | Number | Herewith | ||||||
| 3.1 | Certificate of Incorporation | SB-2 | 7/20/07 | 3.1 | |||||||
| 3.2 | Amended and Restated Bylaws | SB-2 | 7/20/07 | 3.2 | |||||||
| 3.3 | First Amendment to the Amended and Restated Bylaws | Filed | |||||||||
| 4.1 | Form of Private Placement Warrant | Filed | |||||||||
| 10.1 | Form of Private Placement Subscription Agreement | Filed | |||||||||
| 31.1 | Certification of Principal Executive Officer (Section 302) | Filed | |||||||||
| 31.2 | Certification of Principal Financial Officer (Section 302) | Filed | |||||||||
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer (Section 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 GelTech Solutions, Inc., 1460 Park Lane South, Suite 1, Jupiter, Florida 33458, Attention: Darlene Cordani.
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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.
| GELTECH SOLUTIONS, INC. | ||
| May 17, 2010 | /s/ Michael Cordani | |
| Michael Cordani | ||
Chief Executive Officer (Principal Executive Officer) | ||
| May 17, 2010 | /s/ Michael R. Hull | |
| Michael R. Hull | ||
Chief Financial Officer (Principal Financial Officer) |
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