UNITED STATES
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 September 30, 2011 | |
| 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 þ 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 November 4, 2011 | |
| Common Stock, $0.001 par value per share | 22,134,570 shares |
Table of Contents
| PAGE | |||||
| PART I – FINANCIAL INFORMATION | |||||
| Item 1. | Consolidated Financial Statements | ||||
| Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and June 30, 2011 | 3 | ||||
| Condensed Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010 (Unaudited) | 4 | ||||
| Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2011 and 2010 (Unaudited) | 5 | ||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 17 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 21 | |||
| Item 4. | Controls and Procedures. | 21 | |||
| 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. | 23 | |||
| SIGNATURES | 24 | ||||
2
PART I – FINANCIAL INFORMATION
| ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS. |
| GELTECH SOLUTIONS, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
As of September 30, | As of June 30, | |||||||
| 2011 | 2011 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 736,373 | $ | 1,956,976 | ||||
| Accounts receivable trade, net | 110,687 | 103,824 | ||||||
| Inventories | 579,836 | 393,434 | ||||||
| Prepaid consulting | - | 42,500 | ||||||
| Prepaid expenses and other current assets | 44,701 | 29,784 | ||||||
| Total current assets | 1,471,597 | 2,526,518 | ||||||
| Furniture, fixtures and equipment, net | 224,195 | 209,822 | ||||||
| Deposits | 15,631 | 15,631 | ||||||
| Total assets | $ | 1,711,423 | $ | 2,751,971 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Accounts payable | $ | 345,085 | $ | 270,864 | ||||
| Accrued expenses | 72,192 | 168,445 | ||||||
| Insurance premium finance contract | 11,533 | 10,227 | ||||||
| Total current liabilities | 428,810 | 449,536 | ||||||
| Convertible note | 1,497,483 | 1,497,483 | ||||||
| Total liabilities | 1,926,293 | 1,947,019 | ||||||
| Commitments and contingencies (Note 5) | ||||||||
| 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; | ||||||||
| 22,134,570 and 22,104,570 shares issued and outstanding as of September 30, 2011 and June 30, 2011, respectively. | 22,135 | 22,105 | ||||||
| Additional paid in capital | 16,895,368 | 16,452,674 | ||||||
| Accumulated deficit | (17,132,373 | ) | (15,669,827 | ) | ||||
| Total stockholders' equity (deficit) | (214,870 | ) | 804,952 | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 1,711,423 | $ | 2,751,971 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
| GELTECH SOLUTIONS, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
| (UNAUDITED) | ||||||||
For the Three Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| Sales | $ | 178,402 | $ | 28,557 | ||||
| Cost of goods sold | 75,240 | 8,664 | ||||||
| Gross profit | 103,162 | 19,893 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | 1,503,206 | 881,210 | ||||||
| Research and development | 42,249 | 35,583 | ||||||
| Total operating expenses | 1,545,455 | 916,793 | ||||||
| Loss from operations | (1,442,293 | ) | (896,900 | ) | ||||
| Other income (expense) | ||||||||
| Loss on settlement | (1,500 | ) | - | |||||
| Interest income | 406 | 1,274 | ||||||
| Interest expense | (19,159 | ) | (101,521 | ) | ||||
| Total other income (expense) | (20,253 | ) | (100,247 | ) | ||||
| Net loss | $ | (1,462,546 | ) | $ | (997,147 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.07 | ) | $ | (0.06 | ) | ||
| Weighted average shares outstanding - basic and diluted | 22,128,048 | 16,672,024 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
| GELTECH SOLUTIONS, INC. AND SUBSIDIARIES | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (UNAUDITED) | ||||||||
For the Three Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| Cash flows from operating activities | ||||||||
| Reconciliation of net loss to net cash used in operating activities: | ||||||||
| Net loss | $ | (1,462,546 | ) | $ | (997,147 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Depreciation | 12,549 | 3,318 | ||||||
| Amortization of debt issuance costs | - | 69,505 | ||||||
| Amortization of prepaid expenses | - | 69,426 | ||||||
| Amortization of stock based prepaid consulting | 42,500 | - | ||||||
| Stock option employee compensation expense | 412,724 | 60,782 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (6,863 | ) | 1,014 | |||||
| Inventories | (186,402 | ) | (63,565 | ) | ||||
| Prepaid expenses and other current assets | 5,819 | 1,529 | ||||||
| Deposits and other assets | - | 17,198 | ||||||
| Accounts payable | 66,133 | 135,865 | ||||||
| Accrued expenses | (96,253 | ) | (76,806 | ) | ||||
| Net cash used in operating activities | (1,212,339 | ) | (778,881 | ) | ||||
| Cash flows from Investing Activities | ||||||||
| Purchases of equipment | (26,922 | ) | (1,771 | ) | ||||
| Net cash used in investing activities | (26,922 | ) | (1,771 | ) | ||||
| Cash flows from Financing Activities | ||||||||
| Proceeds from sale of stock and warrants, net of expenses | - | 352,000 | ||||||
| Proceeds from exercise of stock options | 30,000 | - | ||||||
| Payments on Insurance Finance Contract | (11,342 | ) | (7,381 | ) | ||||
| Net cash provided by financing activities | 18,658 | 344,619 | ||||||
| Net (decrease) in cash and cash equivalents | (1,220,603 | ) | (436,033 | ) | ||||
| Cash and cash equivalents - beginning | 1,956,976 | 625,796 | ||||||
| Cash and cash equivalents - ending | $ | 736,373 | $ | 189,763 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | 440 | $ | 31,184 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Supplementary Disclosure of Non-cash Investing and Financing Activities: | ||||||||
| Financing of prepaid insurance contracts | $ | 12,648 | $ | 4,001 | ||||
| Stock issued for consulting agreement | $ | - | $ | 65,500 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
NOTE 1 - Organization and Basis of Presentation
Organization
GelTech Solutions, Inc. (“GelTech” or the “Company”) is a Delaware corporation organized in 2006. GelTech is focused on marketing four products: (1) FireIce®, a water soluble fire retardant used to protect firefighters, structures and wildlands; (2) Soil2O™ 'Dust Control’, our new application which is used for dust mitigation in the aggregate, road construction, mining, as well as, other industries that deal with daily dust control issues; (3) Soil2O™, a product which reduces the use of water and is primarily marketed to golf courses and the agriculture market; and (4) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires. Additionally, GelTech owns a United States patent for a method to modify weather.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its two wholly owned subsidiaries: WeatherTech 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 of 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, 2011 filed on September 28, 2011.
Inventories
Inventories as of September 30, 2011 consisted of raw materials and finished goods in the amounts of $178,323 and $401,513, respectively.
Fair Value of Financial Instruments and Fair Value Measurements
We measure our financial assets and liabilities in accordance with ASC 820 "Fair Value Measurements and Disclosures". For certain of our financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses and line of credit, the carrying amounts approximate fair value due to their short maturities. The carrying amount of our convertible debt approximates the fair value because the interest rate on the convertible note does not vary
materially from the market rate for similar debt instruments.
6
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
Effective July 1, 2008, we adopted accounting guidance for fair value measurements of financial assets and liabilities and adopted the same guidance for non-financial assets and liabilities effective July 1, 2009. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted pricesfor similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in marketsthat are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates andassumptions developed by us, which reflect those that a market participant would use.
The Company had no financial or non-financial assets or liabilities measured at fair value and subject to this accounting standard as of September 30, 2011 or 2010.
Revenue Recognition
Revenue from sales of products is recognized when persuasive evidence of an arrangement exists, products have been shipped to the customer, economic risk of loss has passed to the customer, the price is fixed or determinable, collection is reasonably assured, and any future obligations of the Company are insignificant. Revenue is shown net of returns and allowances.
Products shipped from either our third-party fulfillment companies or our Jupiter, Florida location are shipped FOB shipping point. Normal terms are net 30 or net 60 days depending on the arrangement we have with the customer. As such, revenue is recognized when product has been shipped from either the third-party fulfillment company or from the Jupiter, Florida location.
The Company follows the guidance of ASC 605-50-25, “Revenue Recognition, Customer Payments” Accordingly, any incentives received from vendors are recognized as a reduction of the cost of goods sold. Promotional products or samples given to customers or potential customers are recognized as a cost of goods sold. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction of sales.
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 financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Significant estimates for the three months ended September 30, 2011 include the allowance for doubtful accounts, depreciation and amortization, valuation of inventories, valuation of options and warrants granted for services or settlements, valuation of common stock granted for services or debt conversion and the valuation of deferred tax assets.
7
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
Net Earnings (Loss) per Share
The Company computes net 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 September 30, 2011, there were options to purchase 5,992,007 shares of the Company’s common stock, warrants to purchase 5,125,258 shares of the Company’s common stock and 1,337,038 shares of the Company’s common stock are reserved for a convertible note which may dilute future earnings per share.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance with 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, 2011 to September 30, 2011 was $412,724 for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the unaudited condensed 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 September 30, 2011, the total compensation cost for stock options not yet recognized was approximately $2,427,000. This cost will be recognized over the remaining vesting term of the options of approximately three years.
A summary of stock option transactions for all employee stock options for the three month periods ended September 30, 2011 and 2010 is as follows:
| Employee Options | ||||||||||||||||
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Balance at June 30, 2010 | 1,649,007 | $ | 0.88 | 6.40 | ||||||||||||
| Granted | - | $ | - | - | ||||||||||||
| Exercised | - | $ | - | - | ||||||||||||
| Options sold to third party | - | $ | - | |||||||||||||
| Forfeited | - | $ | - | - | ||||||||||||
| Expired | - | $ | - | - | ||||||||||||
| Outstanding at September 30, 2010 | 1,649,007 | $ | 0.88 | 6.15 | $ | 858,511 | ||||||||||
| Exercisable at September 30, 2010 | 1,049,008 | $ | 0.84 | 5.04 | $ | 585,211 | ||||||||||
| Weighted average fair value of options granted during the three months ended September 30, 2010 | N/A | |||||||||||||||
| Balance at June 30, 2011 | 4,439,507 | $ | 1.12 | 5.39 | ||||||||||||
| Granted | 675,000 | $ | 1.06 | 10.00 | ||||||||||||
| Exercised | - | $ | - | - | ||||||||||||
| Forfeited | - | $ | - | - | ||||||||||||
| Expired | (525,000 | ) | $ | 1.00 | ||||||||||||
| Outstanding at September 30, 2011 | 4,589,507 | $ | 1.13 | 6.19 | $ | 54,406 | ||||||||||
| Exercisable at September 30, 2011 | 2,252,924 | $ | 1.04 | 4.38 | $ | 54,406 | ||||||||||
| Weighted average fair value of options granted during the three months ended September 30, 2011 | $ | 0.61 | ||||||||||||||
On September 1, 2011, ten-year options to purchase 150,000 shares of common stock at an exercise price of $1.95 share, which were contingently granted by the Company to its Chief Financial Officer on June 3, 2011, became effective upon his transition from part time consultant to full-time employee. Of the options granted, 50,000 vested immediately and the remaining options vest semi-annually on December 31st and June 30th with the first vesting date being December 31, 2011, subject to continued employment. The options were valued using the Black-Scholes option pricing model using a volatility of 90.6% (derived from the historical market price of 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 2.11%. The value of the options, $224,778, will be recorded as expense over the requisite service period.
8
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
On September 20, 2011, the Company granted ten-year options to purchase 175,000 shares of common stock at an exercise price of $0.81 share to each of its three original executive officers. The options vest semi-annually on December 31st and June 30th with the first vesting date being December 31, 2011, subject to continued employment. The options were valued using the Black-Scholes option pricing model using a volatility of 88.89% (derived from the historical market price of 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 1.25%. The value of the options, $320,271, will be recorded as expense over the requisite service period. These options replaced options to purchase the same number of shares at an exercise price of $1.00 per share which expired on September 15, 2011.
A summary of options issued to non-employees under the 2007 Plan and changes during the period from June 30, 2010 to September 30, 2010 and from June 30, 2011 to September 30, 2011 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, 2010 | 370,000 | $ | 1.28 | 7.41 | ||||||||||||
| Granted | 210,000 | $ | 1.20 | 10.00 | ||||||||||||
| Exercised | - | $ | - | - | ||||||||||||
| Forfeited | - | $ | - | - | ||||||||||||
| Expired | - | $ | - | - | ||||||||||||
| Outstanding at September 30, 2010 | 580,000 | $ | 1.25 | 7.41 | $ | 151,600 | ||||||||||
| Exercisable at September 30, 2010 | 315,833 | $ | 1.20 | 6.77 | $ | 110,050 | ||||||||||
| Weighted average fair value of options granted during the three months ended September 30, 2010 | $ | 0.74 | ||||||||||||||
| Balance at June 30, 2011 | 790,000 | $ | 1.25 | 7.98 | ||||||||||||
| Granted | 245,000 | $ | 1.75 | 10.00 | ||||||||||||
| Exercised | (30,000 | ) | $ | 1.00 | - | |||||||||||
| Forfeited | (142,500 | ) | $ | 1.46 | - | |||||||||||
| Expired | - | $ | - | - | ||||||||||||
| Outstanding at September 30, 2011 | 862,500 | $ | 1.37 | 8.27 | $ | 4,650 | ||||||||||
| Exercisable at September 30, 2011 | 505,498 | $ | 1.23 | 7.42 | $ | 4,650 | ||||||||||
| Weighted average fair value of options granted during the year ended June 30, 2011 | $ | 1.34 | ||||||||||||||
On July 1, 2011, the Company granted options to purchase 245,000 shares of the Company’s common stock to directors of the Company. The options have an exercise price of $1.75 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 89.65% (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 2.35%. The value of the options, $311,001, will be recognized over the vesting term, one year.
On September 28, 2011, in connection with the resignation of a director, options to purchase 142,500 shares of common stock at a weighted average exercise price of $1.46 per share were forfeited.
9
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
A summary of options issued to non-employees under the 2007 Plan and changes during the three month periods from June 30, 2010 to September 30, 2010 and from June 30, 2011 to September 30, 2011 is as follows:
| Non-Employee, Non-Director Options | ||||||||||||||||
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
| Balance at June 30, 2010 | 155,000 | $ | 1.00 | 2.53 | ||||||||||||
| Granted | - | $ | - | - | ||||||||||||
| Options purchased from officer | - | $ | - | |||||||||||||
| Exercised | - | $ | - | - | ||||||||||||
| Forfeited | - | $ | - | - | ||||||||||||
| Expired | - | $ | - | - | ||||||||||||
| Outstanding at September 30, 2010 | 155,000 | $ | 1.00 | 2.27 | $ | 62,000 | ||||||||||
| Exercisable at September 30, 2010 | 155,000 | $ | 1.00 | 2.27 | $ | 62,000 | ||||||||||
| Weighted average fair value of options granted during the year ended June 30, 2010 | N/A | |||||||||||||||
| Balance at June 30, 2011 | 540,000 | $ | 1.16 | 3.14 | ||||||||||||
| Granted | - | $ | - | - | ||||||||||||
| Exercised | - | $ | - | - | ||||||||||||
| Forfeited | - | $ | - | - | ||||||||||||
| Expired | - | $ | - | - | ||||||||||||
| Outstanding at September 30, 2011 | 540,000 | $ | 1.16 | 2.89 | $ | - | ||||||||||
| Exercisable at September 30, 2011 | 540,000 | $ | 1.16 | 2.89 | $ | - | ||||||||||
| Weighted average fair value of options granted during the year ended June 30, 2011 | N/A | |||||||||||||||
10
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
Determining Fair Value Under ASC 718-10
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula. 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 for employee stock options using the simplified method for employees and directors and the contractual term for non-employees. The risk free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.
The fair values of stock option grants for the period from July 1, 2011 to September 30, 2011 were estimated using the following assumptions:
| Risk free interest rate | 1.25% -2.3 | % | ||
| Expected term (in years) | 5.5 - 6.5 | |||
| Dividend yield | –– | |||
| Volatility of common stock | 88.89% - 90.6 | % | ||
| Estimated annual forfeitures | –– |
New Accounting Pronouncements
ASUs which were not effective until after September 30, 2011 are not expected to have a significant effect on the Company's consolidated financial position or results of operations.
NOTE 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 September 30, 2011, the Company had an accumulated deficit and stockholders’ deficit of $17,132,373 and $214,870, respectively, and incurred losses from operations of $1,462,546 for the three months ended September 30, 2011 and used cash from operations of $1,212,339 during the three months ended September 30, 2011. In addition, the Company has not yet generated revenue sufficient to support ongoing operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. These unaudited condensed consolidated 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.
In February 2011, the Company renegotiated its Line of Credit with its largest principal stockholder (the Lender) to replace the Line of Credit with a five-year convertible note with a reduced principal amount (Note 3). Management believes that its working capital needs will be met over the next eight to twelve months via a combination of sales of stock through private investments resulting from the Company’s contacts with institutional and private investors or through additional debt financing. There is no guarantee that such fund raising efforts will be successful. If we are unable to generate substantial cash flows from sales of our products, or through financings, we may not be able to remain operational. Management believes the activities presently being taken provide the opportunity for the Company to continue as a going concern.
11
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
NOTE 3 - Convertible Note Agreement (Formerly Line of Credit Agreement)
On May 29, 2009, the Company entered into a Credit Enhancement and Financing Security Agreement with the Company’s largest principal stockholder. 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.
In May 2010, the Lender extended the due date of the line of credit to May 2011. 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.
In February 2011, the Company renegotiated the Line of Credit Agreement with its largest principal stockholder (the Lender). As part of the renegotiation, the Company issued 892,857 shares of the Company’s common stock and five-year warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share in exchange for a $1,000,000 reduction in the principal amount of the Line of Credit. In addition, the remaining principal amount due under the line of credit of $1,497,483 was replaced by a five-year convertible note of the same amount, convertible at $1.12 per share (fair market value on transaction date based upon the quoted trading price) and bearing annual interest of 5%, due on the maturity date of the note. As an inducement for the Lender to enter into the convertible note agreement, the Company granted the Lender five-year warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.75 per share. The Company did not recognize a note discount related to the beneficial conversion feature of the convertible note because the conversion feature had no intrinsic value on the date the note was issued. As of September 30, 2011, accrued interest related to this convertible note amounted to $45,848. Total interest expense on the convertible note amounted to $18,719 for the three months ended September 30, 2011.
NOTE 4 - Stockholders’ Equity
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, par value $0.001 per share with such rights, preferences and limitation as may be set from time to time by resolution of the board of directors and the filing of a certificate of designation as required by Delaware General Corporation Law.
Common Stock
The issuances of common stock during the three months ended September 30, 2011 were as follows:
In July 2011, the Company issued 30,000 shares of common stock to a director in exchange for $30,000 in connection with the exercise of options with an exercise price of $1.00 per share.
Common Stock Warrants
The Company accounts for warrants issued for services in accordance with ASC 505-50-30-2 Equity Based Payments to Non-Employees. As such, the Company calculates the fair value of the warrants granted using the Black-Scholes option pricing model and records the fair value to either prepaid expense or expense based upon the terms of the underlying contract for services. In applying the Black-Scholes method, the Company calculates volatility based upon the historical market price of the Company’s common stock, utilizes discount rates obtained from the Federal Reserve Statistical Release for treasury instruments of the same duration and expected term as the contractual term of the warrants.
12
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
Warrants issued in connection with the sale of shares of common stock are treated as part of the equity transaction and are recorded in stockholders’ equity or liabilities in accordance with the guidance at ASC 480-10-25.
A summary of warrants issued for cash and changes during the periods July 1, 2010 to September 30, 2010 and from July 1, 2011 to September 30, 2011 is as follows:
| Warrants Issued as Settlements | ||||||||||||
| Number of Warrants | Weighted Average Exercise Price | Remaining Contractual Life | ||||||||||
| Balance at June 30, 2010 | 474,508 | $ | 1.05 | 0.91 | ||||||||
| Granted | - | $ | - | - | ||||||||
| Exercised | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Outstanding at September 30, 2010 | 474,508 | $ | 1.05 | 1.67 | ||||||||
| Exercisable at September 30, 2010 | 474,058 | $ | 1.05 | 1.67 | ||||||||
| Weighted average fair value of warrants granted during the three months ended September 30, 2010 | N/A | |||||||||||
| Balance at June 30, 2011 | 474,058 | $ | 1.05 | 0.92 | ||||||||
| Granted | - | $ | - | - | ||||||||
| Exercised | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Outstanding at September 30, 2011 | 474,058 | $ | 1.05 | 0.67 | ||||||||
| Exercisable at September 30, 2011 | 474,058 | $ | 1.05 | 0.67 | ||||||||
| Weighted average fair value of warrants granted during the three months ended September 30, 2010 | N/A | |||||||||||
| A summary of warrants issued for cash and changes during the periods June 30, 2010 to September 30, 2010 and from June 30, 2011 to September 30, 2011 is as follows: | ||||||||||||
13
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
| Warrants issued for cash | ||||||||||||
| Number of Warrants | Weighted Average Exercise Price | Remaining Contractual Life | ||||||||||
| Balance at June 30, 2010 | 2,733,303 | $ | 1.56 | 2.37 | ||||||||
| Granted | 380,000 | $ | 1.25 | 5.0 | ||||||||
| Exercised | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Outstanding at September 30, 2010 | 3,113,303 | $ | 1.56 | 2.34 | ||||||||
| Exercisable at September 30, 2010 | 3,113,303 | $ | 1.56 | 2.34 | ||||||||
| Weighted average fair value of warrants granted during the three months ended September 30, 2010 | N/A | |||||||||||
| Balance at June 30, 2011 | 4,651,200 | $ | 1.46 | 2.68 | ||||||||
| Granted | - | $ | - | - | ||||||||
| Exercised | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Outstanding at September 30, 2011 | 4,651,200 | $ | 1.46 | 2.43 | ||||||||
| Exercisable at September 30, 2011 | 4,651,200 | $ | 1.46 | 2.43 | ||||||||
| Weighted average fair value of warrants granted during the three months ended September 30, 2011 | N/A | |||||||||||
NOTE 5 - Commitments and Contingencies
The Company leases office and warehouse space located in Jupiter, Florida under a month-to-month lease and leases space in an industrial yard in Irvine, California under a one year lease which commenced in June 2011.
Rent expense for the three months ended September 30, 2011 and 2010 was $33,804 and $24,632, respectively.
In March 2011, the Compensation Committee approved new employment terms for each of the Company’s three executive officers. The Executives will receive a base salary of $150,000 per year with the Committee having the authority to increase the Executive’s base salary for the succeeding 12-month period with the increase based on profitability, positive cash flow or such other factors as the Committee deems important. Following the completion of each fiscal year, the Committee will have the discretion to award each of the executives a target bonus based on each Executive’s job performance, the Company’s revenue growth, positive cash flow, net income before income taxes or other criteria selected by the Committee. In addition, the executives received options as previously described in Note 1.
14
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
Effective September 1, 2011, the Compensation Committee approved an Employment Agreement with the Company's Chief Financial Officer (CFO). The CFO will receive a base salary of $146,000 per year with the Committee having the authority to increase the CFO’s base salary for the succeeding 12-month period with the increase based on profitability, positive cash flow or such other factors as the Committee deems important. Following the completion of each fiscal year, the Committee will have the discretion to award the CFO a target bonus based upon the CFO's job performance, the Company’s revenue growth, positive cash flow, net income before income taxes or other criteria selected by the Committee. In addition, the CFO received options as previously described in Note 1.
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 (which was used in the Company’s business) in the Company’s offices. The lawsuit is pending and the Company believes the lawsuit is without merit.
NOTE 6 - 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, |
| · | The CEO and CTO’s father is a researcher at $1,200 per week, and |
| · | The CEO and CTO’s mother is a receptionist at $600 per week. |
We believe all of these salaries are at or are below the going rate of what such services would cost on the open market.
The Company has employment arrangements with its executive officers which are described under Note 5.
The Company has entered into a series of credit facilities with its largest principal stockholder as more fully described in Note 3.
15
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011
(Unaudited)
NOTE 7 - 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 September 30, 2011. As of September 30, 2011, there were no cash equivalent balances held in depository accounts that are not insured.
At September 30, 2011, two customers each account for 34.9% of accounts receivable.
For the three months ended September 30, 2011 two customers accounted for approximately 30.3% and 30.1 of sales.
During the three months ended September 30, 2011 all sales resulted from two products, FireIce® and Soil2O™ which made up 18.4% and 81.6%, respectively, of total sales. Of the FireIce® sales, 78% related to sales of FireIce product and 22% related to sales of the FireIce Home Defense units. Of the Soil2O™ sales, 97% related to Soil2O™ Dust Control and 3% related to traditional sales of Soil2O™.
Two vendors accounted for 65.5% and 13.4% of the Company’s approximately $268,000 of raw material and packaging purchases during the three months ended September 30, 2011.
In October 2011, the Company entered into employment agreements with its CEO, President and CTO. The terms of the employment agreements were approved by the Compensation Committee of the Company's board of directors in March 2011 as described in Note 5.
16
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
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
GelTech Solutions, Inc. markets four products: (1) FireIce®, a water soluble fire retardant used to protect firefighters, structures and wildlands; (2) Soil₂O™ ‘Dust Control’, our new application which is used for dust mitigation in the aggregate, road construction, mining, as well as, other industries that deal with daily dust control issues (3) Soil₂O™, a product which reduces the use of water and is primarily marketed to golf courses and the agriculture market; and (4) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires. Our financial statements have been prepared on a going concern basis, and we need to generate sufficient material revenues to support the ongoing business of the Company.
In March 2011, the Company was notified by the United States Forest Service (the "Forest Service") that its FireIce® product would be listed on the Forest Service’s Qualified Products List (the “QPL List”). Inclusion on the QPL List qualifies our product for use to fight brush and wildfires on State and National Park lands. The Forest Service testing process began in September 2008 and included a battery of tests including tests for possible toxicity to the environment, decomposition and possible corrosion to land based firefighting equipment and firefighting aircraft.
The Company has recently hired a former Forest Service employee to assist the Company in securing contracts to provide FireIce® to the Forest Service and individual state forest services for use on brush and wildfires. This new hire was a Forest Service employee for eight years and worked with the Forest Service on a contract basis for an additional ten years. In May 2011, the Company purchased a mobile mixing vehicle which will allow the Company to mix up 250,000 gallons per day for use in fighting brush and wildfires.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2010.
Sales
For the three months ended September 30, 2011, we had sales of $178,402 as compared to sale of $28,557 for the three months ended September 30, 2010, an increase of $149,845 or 525%. Sales of product during the three months ended September 30, 2011 consisted of $145,597 for Soil2O™ and $32,805 for FireIce® and related products. Of the Soil2O™ sales, $141,367 related to the new dust control application and $4,230 related to traditional Soil2O™ applications. FireIce® sales consisted of $25,598 product sales and $7,207 related to sales of HDU units. We anticipate that sales of Soil2O™ "Dust Control" in the United States will continue to grow as we add new customers and receive new orders from existing customers while domestic sales of FireIce® will be more sporadic as they are currently primarily dependent on wildfire activity. We anticipate a resumption of FireIce® sales to China in early 2012.
17
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
Cost of Goods Sold
Cost of goods sold was $75,240 for the three months ended September 30, 2011 as compared to a cost of goods sold of $8,664 for the three months ended September 30, 2010. The increase was the direct result of the increase in sales. Cost of sales as a percentage of sales was 42% for the three months ended September 30, 2011 as compared to 30% for the three months ended September 30, 2010. The higher cost of sales percentage in fiscal 2012 relates to the sales mix and an increase in raw material costs. Fiscal 2012 sales include sales of FireIce HDU units which have a lower gross profit percentage. There were no FireIce HDU units sales during the three months ended September 30, 2010. We expect future cost of sales as a percentage of sales will be consistent with the cost of sales percentage for the three months ended September 30, 2011.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were $1,503,206 for the three months ended September 30, 2011 as compared to $881,210 for the three months ended September 30, 2010. The increase in fiscal 2011 expenses resulted from (1) an increase in non-cash stock option expense of $352,000 related to option grants to executive officers, employees and directors; (2) an increase in salaries and employee benefits of $207,000 related to the hiring of a full time CFO and salary increases for executive officers of $126,000 and the addition of five new staff members resulting in an increase of $81,000; (3) an increase in sales and marketing expense as we continue to build the FireIce® and Soil2O™ brands; (4) an increase in travel expenses of $38,000 related to our wildfire efforts in Texas and New Mexico, our dust control efforts in Arizona and a demonstration of FireIce® in Brazil, and (5) an increase of $29,000 in facilities costs with the addition of the storage facility and operations center in California. These increases were partially offset by decreases in investor relations of $55,000 due to the cancellation of our investor relations agreement and the expiration of a 2009 investor relations contract and a decrease of $29,000 in professional fees which resulted from the transition of our CFO from consultant to full time employee and a reduction of legal fees from the prior year. Legal fees for the three months ended September 30, 2010 include fees related to the Company's registration statement filed in connection with the Lincoln Park Capital agreement.
Research and Development Expenses
R&D expenses were $42,249 for the three months ended September 30, 2011 as compared to $35,583 for the three months ended September 30, 2010. The fiscal 2012 expenses relate to research of potential product enhancements for FireIce® and testing of our Soil2O™ "Dust Control" product
Loss from Operations
Loss from operations was $1,442,293 for the three months ended September 30, 2011 as compared to $896,900 for the three months ended September 30, 2010. The increased loss resulted from the higher operating expenses which were partially offset by the higher gross profit resulting from the increase in sales.
Interest Income
Interest income was $406 for the three months ended September 30, 2011 as compared to $1,274 for the three months ended September 30, 2010. The amounts are reflective of the cash balances on hand and the prevailing interest rates during the respective three month periods.
Loss on settlement
Loss on settlement of $1,500 during the three months ended September 30, 2011 resulted from a cash payment to resolve a minor misunderstanding with a prospective individual investor.
18
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
Interest Expense
Interest expense was $19,159 for the three months ended September 30, 2011 as compared to $101,521 for the three months ended September 30, 2010. The higher expense during the three months ended September 30, 2010 resulted from the amortization of the debt issuance costs related to the renewal of the line of credit agreement in May 2010 which was replaced by a five-year convertible note in February 2011. Amortization of these costs was $69,505 for the three months ended September 30, 2010. In addition, interest expense related to accrued interest was lower during the three months ended September 30, 2011 due to the $1 million reduction of the outstanding debt amount in February 2011.
Net Loss
Net loss was $1,462,546 for the three months ended September 30, 2011 as compared to $997,147 for the three months ended September 30, 2010. The higher net loss resulted from the higher operating expenses which were partially offset by the higher gross profit resulting from the higher sales as described above. Net loss per common share was $0.07 for the three months ended September 30, 2011 as compared to $0.06 for the three months ended September 30, 2010. The weighted average number of shares outstanding for the three months ended September 30, 2011 and 2010 were 22,148,048 and 16,672,024, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2011, the Company used net cash of $1,212,339 in operating activities as compared to net cash used in operating activities of $778,881 for the three months ended September 30, 2010. Net cash used during the three months ended September 30, 2011 resulted primarily from the net loss of $1,462,546, a decrease in accrued liabilities of $96,253 and an increase in inventory of $186,402 which were partially offset by non-cash stock based compensation of $412,724, non-cash amortization of stock based prepaid consulting of $42,500, depreciation of $12,549 and an increase in accounts payable of $66,133. For the three months ended September 30, 2010, we used net cash of $778,881 in operating activities resulting from a net loss of $997,147, a decrease in accrued expenses of $76,806 and an increase in inventory of $63,565 which were partially offset by stock option compensation expense of $60,682, amortization of debt issuance costs of $69,505 and stock based prepaid expenses of $69,426 and an increase in accounts payable of $135,865.
Cash flows used in investing activities for the three months ended September 30, 2011 amounted to $26,922 as compared to $1,771 for the three months ended September 30, 2010. This related to purchases of equipment used with our mobile mixing truck and additional computer and office equipment for the corporate office.
Cash flows from financing activities for the three months ended September 30, 2011 were $18,658 as compared to $344,619 for the three months ended September 30, 2010. During the three months ended September 30, 2011, the Company received $30,000 from the exercise of options to purchase 30,000 shares of common stock at an exercise price of $1.00 per share by a director and repaid $11,342 of insurance premium financing. During the three months ended September 30, 2010, we received $352,000 from the sale of common stock and warrants in private placements, net of commissions paid. These proceeds were used for working capital and to repay $7,381 of insurance premium financing.
As of the filing date of this report, we have $383,000 in available cash. We do not anticipate the need to purchase any additional material capital assets in order to carry out our business. The Company believes that its working capital needs of $2.5 - $3.5 million will be met over the next eight to twelve months via a combination of sales of stock through private investments resulting from the Company’s contacts with institutional and private investors or through additional debt financing. There is no guarantee that such fund raising efforts will be successful. If we are unable to generate substantial cash flows from sales of our products, or through financings, we may not be able to remain operational.
Related Person Transactions
For information on related party transactions and their financial impact, see Note 6 to the Unaudited Condensed Consolidated Financial Statements.
19
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
Principal 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. This estimate involves 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.
RECENT ACCOUNTING PRONOUNCEMENTS
For information on recent accounting pronouncements, see Note 1 to the Unaudited Condensed Consolidated Financial Statements.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements including statements regarding anticipated increases in sales of Soil2O™ “Dust Control,” anticipated resumption of FireIce® sales to China in early 2012, our anticipated liquidity and capital asset requirements. 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, failure to receive acceptance of FireIce® by State and Local governments and inability to enter into a definitive agreement with distributors in China.
Further information on our risk factors is contained in our filings with the SEC, including the Form 10-K for the year-ended June 30, 2011. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
20
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable to smaller reporting companies
| ITEM 4. | 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 management has concluded that our disclosure controls and procedures are 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 submit 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.
21
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
PART II – OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
There were no material developments to any legal proceedings. As of the date of this report, we are not aware of any proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.
ITEM 1A. RISK FACTORS.
Not applicable to smaller reporting companies.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None
| ITEM 4. | (REMOVED AND RESERVED). |
| ITEM 5. | OTHER INFORMATION. |
None
22
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
| ITEM 6. | EXHIBITS. |
| Incorporated by Reference | Filed or Furnished | |||||||||
| No. | 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 | Amendment No. 1 to the Amended and Restated Bylaws | 10-K | 9/28/10 | 3.3 | ||||||
| 3.4 | Amendment No. 2 to the Amended and Restated Bylaws | 8-K | 9/26/11 | 3.1 | ||||||
| 10.1 | Michael Hull Employment Agreement * | Filed | ||||||||
| 10.2 | Michael Cordani Employment Agreement* | Filed | ||||||||
| 10.3 | Joe Ingarra Employment Agreement* | Filed | ||||||||
| 10.4 | Peter Cordani Employment 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 (Section 906) | Furnished | ||||||||
| 32.2 | Certification of Principal Financial Officer (Section 906) | Furnished | ||||||||
| 101 INS | XBRL Instance Document | Furnished** | ||||||||
| 101 SCH | XBRL Taxonomy Extension Schema | Furnished** | ||||||||
| 101 CAL | XBRL Taxonomy Extension Calculation Linkbase | Furnished** | ||||||||
| 101 LAB | XBRL Taxonomy Extension Label Linkbase | Furnished** | ||||||||
| 101 PRE | XBRL Taxonomy Extension Presentation Linkbase | Furnished** | ||||||||
| 101 DEF | XBRL Taxonomy Extension Definition Linkbase | Furnished** | ||||||||
* Management compensatory agreement.
** Attached as Exhibit 101 to this report are the Company’s financial statements for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language). The XBRL-related information in Exhibit 101 to this report shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of those sections.
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.
23
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
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. | |||
| November 7, 2011 | /s/ Michael Cordani | ||
| Michael Cordani, | |||
Chief Executive Officer (Principal Executive Officer) | |||
| November 7, 2011 | /s/ Michael Hull | ||
| Michael Hull, | |||
Chief Financial Officer (Principal Financial Officer) |
24