GelTech Solutions, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - GelTech Solutions, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATION - GelTech Solutions, Inc.	gltc_ex32z1.htm
EX-31.1 - CERTIFICATION - GelTech Solutions, Inc.	gltc_ex31z1.htm
EX-31.2 - CERTIFICATION - GelTech Solutions, Inc.	gltc_ex31z2.htm
EX-10.1 - FORM OF WARRANT OFFER LETTER - GelTech Solutions, Inc.	gltc_ex10z1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 October 31, 2012
Common Stock, $0.001 par value per share		28,740,355 shares

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and

June 30, 2012

Condensed Consolidated Statements of Operations for the three months ended

September 30, 2012 and 2011 (Unaudited)

Condensed Consolidated Statements of Cash Flows for the three months ended

September 30, 2012 and 2011 (Unaudited)

Notes to Condensed Consolidated Financial Statements (Unaudited)

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 4.

CONTROLS AND PROCEDURES.

PART II – OTHER INFORMATION

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

ITEM 4.

MINE SAFETY DISCLOSURES.

PART I – FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	As of September 30,			As of June 30,
	2012			2012
	(Unaudited)
ASSETS

Cash and cash equivalents	$	987,844		$	84,194
Accounts receivable trade, net		30,623			55,160
Inventories		562,862			546,118
Prepaid expenses and other current assets		51,132			45,785
Total current assets		1,632,461			731,257

Furniture, fixtures and equipment, net		178,210			188,779
Deposits		15,631			15,631

	$	1,826,302		$	935,667
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable	$	158,311		$	234,375
Accrued expenses		50,525			72,637
Litigation accrual		1,646,000			1,646,000
Notes payable - related parties		51,041			84,380
Convertible notes - related parties, net of discount		53,684			283,230
Convertible notes - third parties, net of discount		175,852			74,214
Insurance premium finance contract		11,386			9,250
Total current liabilities		2,146,799			2,404,086
Convertible note - related party		1,497,483			1,497,483
Total liabilities		3,644,282			3,901,569

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; 28,660,355 and 24,914,474 shares issued and outstanding as of September 30, 2012 and June 30, 2012, respectively.		28,660			24,914
Additional paid in capital		22,758,933			19,809,070
Accumulated deficit		(24,605,573	)		(22,799,886	)
Total stockholders' equity (deficit)		(1,817,980	)		(2,965,902	)

Total liabilities and stockholders' equity (deficit)	$	1,826,302		$	935,667

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	For the Three Months Ended September 30,
	2012			2011

Sales	$	84,540		$	178,402

Cost of goods sold		36,079			75,240

Gross profit		48,461			103,162

Operating expenses:
Selling, general and administrative expenses		1,549,572			1,503,206
Research and development		17,308			42,249

Total operating expenses		1,566,880			1,545,455

Loss from operations		(1,518,419	)		(1,442,293	)

Other income (expense)
Cost of repricing warrants to induce exercise		(70,491	)		—
Loss on settlement		—			(1,500	)
Interest income		51			406
Interest expense		(216,828	)		(19,159	)

Total other income (expense)		(287,268	)		(20,253	)

Net loss	$	(1,805,687	)	$	(1,462,546	)


Net loss per common share - basic and diluted	$	(0.07	)	$	(0.07	)

Weighted average shares outstanding - basic and diluted		25,896,566			22,128,048

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the Three Months Ended September 30,
	2012			2011
Cash flows from operating activities
Reconciliation of net loss to net cash used in operating activities:
Net loss	$	(1,805,687	)	$	(1,462,546	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		12,754			12,549
Amortization of debt discounts		196,797			—
Amortization of stock based prepaid consulting		—			42,500
Stock option employee compensation expense		665,410			412,724
Cost of repricing warrants to induce exercise		70,491			—
Changes in assets and liabilities:
Accounts receivable		24,537			(6,863	)
Inventories		(16,744	)		(186,402	)
Prepaid expenses and other current assets		7,427			5,819
Accounts payable		(76,063	)		66,133
Accrued expenses		(22,113	)		(96,253	)
Net cash used in operating activities		(943,191	)		(1,212,339	)
Cash flows from Investing Activities
Purchases of equipment		(2,185	)		(26,922	)
Net cash (used in) investing activities		(2,185	)		(26,922	)
Cash flows from Financing Activities
Proceeds from sale of stock through private placements		128,000			—
Proceeds from sale of stock to under stock purchase agreement		720,003			—
Proceeds from exercise of warrants		870,000			—
Proceeds from exercise of stock options		—			30,000
Payments on related party notes		(33,339	)		—
Proceeds from convertible notes with third parties		175,000			—
Payments on Insurance Finance Contract		(10,638	)		(11,342	)

Net cash provided by financing activities		1,849,026			18,658
Net increase (decrease) in cash and cash equivalents		903,650			(1,220,603	)
Cash and cash equivalents - beginning		84,194			1,956,976
Cash and cash equivalents - ending	$	987,844		$	736,373

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	296		$	440
Cash paid for income taxes	$	—		$	—
Supplementary Disclosure of Non-cash Investing and Financing Activities:
Financing of prepaid insurance contracts	$	12,774		$	12,648
Beneficial conversion feature of convertible notes	$	166,709		$	—
Conversion of notes for common stock	$	332,996		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 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’, an 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.

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: WeatherTech Innovations, Inc. and FireIce Gel, Inc. (formerly GelTech Innovations, 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 interim 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, 2012 filed on September 28, 2012.

Inventories

Inventories as of September 30, 2012 consisted of raw materials and finished goods in the amounts of $153,422 and $409,440, 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.

We adopted accounting guidance for fair value measurements of financial assets and liabilities and adopted the same guidance for non-financial assets and liabilities. 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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions 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, 2012 or June 30, 2012.

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, 2012 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, valuation of debt discount related to the beneficial conversion feature of convertible notes, accruals for litigation losses and the valuation of deferred tax assets.

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, 2012, there were options to purchase 7,052,007 shares of the Company’s common stock, warrants to purchase 2,791,200 shares of the Company’s common stock and 2,109,068 shares of the Company’s common stock are reserved for convertible notes 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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 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, 2012 to September 30, 2012 were estimated using the following assumptions:


Risk free interest rate		0.53% -0.82%
Expected term (in years)		2.5 - 5.5
Dividend yield		––
Volatility of common stock		89.93% - 91.04%
Estimated annual forfeitures		––

New Accounting Pronouncements

Accounting Standards Updates which were not effective until after September 30, 2012 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, 2012, the Company had a working capital deficit, an accumulated deficit and stockholders’ deficit of $514,338, $24,605,573 and $1,817,980, respectively, and incurred losses from operations of $1,805,687 for the three months ended September 30, 2012 and used cash from operations of $943,191 during the three months ended September 30, 2012. 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.

In January 2012, the Company signed a purchase agreement with Lincoln Park Capital Fund LLC which provided for the sale of up to an additional $4.9 million worth of common stock of the Company, in addition to the $100,000 purchased upon entering into the agreement. To date the Company has issued 2,086,638 shares of common stock in exchange for $1,330,003 under this agreement and has the ability to sell another $3.7 million under the agreement.

Management believes that the actions presently being taken provide the opportunity for the Company to continue as a going concern. Ultimately, the continuation of the Company as a going concern is dependent upon the ability of the Company to generated sufficient revenue to attain 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.

NOTE 3 – Convertible and Non-Convertible Note Agreements

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 permitted the Company to borrow up to $2,500,000. Interest, at an annual rate of 5%, was due monthly on the 20th day of each month which commenced on July 20, 2009. In May 2010, this agreement was extended for an additional one year period.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

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.

In December 2011, the Company received short term advances from its Chief Executive Officer, President and Chief Financial Officer in the amounts of $10,000, $29,380 and $50,000, respectively. The advances bear interest rates of 0.7%, 5.0% and 5.0%, respectively. In addition, as further inducement for the advance from the Chief Financial Officer, the Company approved the reduction in the exercise price of 150,000 options granted to the Chief Financial Officer from $1.95 to $0.60 per share. In connection with this repricing, the expense related to the vesting of these options was increased by $15,067 which will be recognized over the remaining service period. Through September 30, 2012, the Company has made repayments to its President, Chief Executive Officer and Chief Financial Officer on the notes due these individuals in the amounts of $10,000, $8,339 and $20,000, respectively.

On March 9, 2012, the Company received $105,000 from third parties in exchange for six month convertible original issue discount notes in the amount of $107,625. The notes bear an annual interest rate of 5% and are convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the notes, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $84,562 which will be amortized to interest expense over the life of the notes. In September 2012, the Company issued new one-year convertible original issue discount notes in the amount of $120,540, bearing annual interest of 12% and convertible at $0.50 per share in exchange for cancellation of the old notes. This modification was not considered a debt extinguishment. In accordance with ASC 470, the Company will recognize a debt discount related to the change in fair value of the embedded conversion option in the amount of $35,138 which will be amortized to interest expense over the life of the convertible notes. For the three months ended September 30, 2012, the Company has recognized interest expense of $1,201 and $25,545, respectively, related to the amortization of the original issue discount and the beneficial conversion feature discount.

On March 10, 2012, the Company received $75,000 from a director in exchange for a six month convertible original issue discount note in the amount of $76,875. The note bears an annual interest rate of 5% and is convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the note, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $63,038 which will be amortized to interest expense over the life of the note. In September 2012, the Company issued a new one-year convertible original issue discount note in the amount of $86,100, bearing annual interest of 12% and convertible at $0.50 per share in exchange for cancellation of the old note. This modification was not considered a debt extinguishment. In accordance with ASC 470, the Company will recognize a debt discount related to the change in fair value of the embedded conversion option in the amount of $24,971 which will be amortized to interest expense over the life of the convertible note. For the three months ended September 30, 2012, the Company has recognized interest expense of $1,601 and $34,028, respectively, related to the amortization of the original issue discount and the beneficial conversion feature discount.

On March 29, 2012, the Company received $250,000 from its principal stockholder and accrued interest due this stockholder as of February 18, 2012 of $74,874 was paid by including the interest in a new six month convertible original issue discount note in the amount of $332,996. The note bears an annual interest rate of 5% and is convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the note, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $199,798 and an original issue discount of $8,121 which will be amortized to interest expense over the life of the note. For the three months year ended September 30, 2012, the Company recognized interest expense of $3,972 and $97,703, respectively, related to the amortization of the original issue discount and the beneficial conversion feature discount. On September 28, 2012, the holder elected to convert the note into common stock and was issued 665,992 shares of common stock by the Company.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

In August 2012, the Company received $175,000 in exchange for six month convertible original issue discount notes in the amount of $179,375 with two accredited investors. The notes are convertible into common stock at $0.50 per share. The notes bear an annual interest rate of 5% and are convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the notes, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $106,600 and an original issue discount of $4,375 which will be amortized to interest expense over the life of the notes. For the three months ended September 30, 2012, the Company has recognized interest expense of $1,264 and $31,482, respectively, related to the amortization of the original issue discount and the beneficial conversion feature discount.

In September 2012, our principal shareholder converted his $322,996 convertible original issue discount note which was due on September 28, 2012 into 665,992 shares of common stock.

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, 2012 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.

During the three months ended September 30, 2012, the Company has issued 1,083,889 shares of common stock in exchange for $720,003 in connection with the Purchase Agreement with Lincoln Park Capital.

In August 2012, the Company issued 256,000 shares of common stock in exchange for $128,000 in connection with private placement transactions with two accredited investors.

In September 2012, the Company issued 1,740,000 shares of common stock in exchange for $870,000 in connection with the exercise of 1,640,000 warrants and 100,000 options to purchase shares of the Company’s common stock related to an offer by the Company to reduce the exercise price to $0.50 per share. The original exercise prices of the warrants and options ranged from $1.25 to $1.75 per share. The cost of repricing warrants recognized by the Company amounted to $70,491 for the three months ended September 30, 2012. The cost represents the incremental increase in the fair value of the repriced warrants and options as compared to the original warrants and options granted, valued on the exercise date. The fair value of the warrants and options was determined using the Black-Scholes option pricing model.

In September 2012, our principal shareholder converted his $322,996 convertible original issue discount note which was due on September 28, 2012 into 665,992 shares of common stock.

Options to Purchase Common Stock

Stock-based compensation expense recognized under ASC 718-10 for the period July 1, 2012 to September 30, 2012 was $665,410 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, 2012, the total compensation cost for stock options not yet recognized was approximately $1,653,687. This cost will be recognized over the remaining vesting term of the options of approximately three years.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

A summary of stock option transactions for all employee stock options for the three month periods ended September 30, 2012 and 2011 is as follows:

Employee Options


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
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

Balance at June 30, 2012		4,589,507		$	1.04		5.95
Granted		935,000		$	0.69		8.20
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		5,524,507		$	1.02		5.65	$	17,300
Exercisable at September 30, 2012		3,041,839		$	0.98		5.10	$	5,633

Weighted average fair value of options granted during the three months ended September 30, 2012				$	0.48

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 on June 3, 2011, were granted to its Chief Financial Officer, 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.

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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

On September 21, 2012, the Company granted options to purchase 70,000 shares of the Company’s common stock at an exercise price of $0.63 per share to the father of the Company’s CEO and CTO in recognition of his service. Of the options granted, 35,000 vest immediately with the remainder vesting semi-annually each December 31 and June 30 over a three year period, subject to continued employment on the vesting date. The Company valued the options at $28,358 using the Black-Scholes option pricing model using a volatility of 90.09%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 4 years, using the Simplified Method and a discount rate of 0.53%.

On September 25, 2012, the Compensation Committee of the Board of Directors approved the granting of five-year options to purchase 265,000 shares of common stock at an exercise price of $0.60 per share to non-executive employees. The options vest 25% immediately with the remainder vesting annually over three years, subject to continued employment. The Company valued the options at $101,029 using the Black-Scholes option pricing model using a volatility of 89.93%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 4 years, using the Simplified Method and a discount rate of 0.53%. The resulting expense will be recognized 25% immediately and the remainder over the vesting period.

A summary of options issued to directors under the 2007 Plan and changes during the period from June 30, 2011 to September 30, 2011 and from June 30, 2012 to September 30, 2012 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, 2011		790,000		$	1.25		7.41
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 three months ended September 30, 2011				$	1.34

Balance at June 30, 2012		857,500		$	1.36		7.96
Granted		230,000		$	—		10.00
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		1,087,500		$	1.26		8.14	$	2,800
Exercisable at September 30, 2012		725,999		$	1.39		7.58	$	467

Weighted average fair value of options granted during the three months ended September 30, 2012				$	0.66

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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

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.

On July 1, 2012, the Company issued options to purchase 230,000 shares of common stock to directors. The options have an exercise price of $0.91 per share, vest on June 30, 2013¸ subject to continuing service as a director and bear a ten year term. The options were valued using the Black-Scholes model using a volatility of 91.04% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 5.5 years (using the simplified method) and a discount rate of 0.82%. The value of these options will be recognized as expense over the requisite service period.

A summary of options issued to non-employees under the 2007 Plan and changes during the three month periods from June 30, 2011 to September 30, 2011 and from June 30, 2012 to September 30, 2012 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, 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		$	1.00		2.89	$	—

Weighted average fair value of options granted during the three months ended September 30, 2011					N/A

Balance at June 30, 2012		540,000		$	1.16		3.14
Granted		—		$	—		—
Exercised		(100,000	)	$	0.50		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		440,000		$	1.14		2.02	$	—
Exercisable at September 30, 2012		440,000		$	1.14		2.02	$	—

Weighted average fair value of options granted during the three months ended September 30, 2012					N/A

In September 2012, the Company issued 100,000 shares of common stock in exchange for $50,000 in connection with the exercise of 100,000 options to purchase shares of the Company’s common stock related to an offer by the Company to reduce the exercise price to $0.50 per share. The original exercise price of the options was $1.25 per share. The Company recognized a loss resulting from the reduction of the exercise price of the options exercised in the amount of $391 representing the difference in the fair market value of the repriced options as compared to the fair market value of the original options on the exercise date. The fair market value of the options was determined using the Black-Scholes options pricing model.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

Warrants to Purchase Common Stock

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.

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 settlements and changes during the periods July 1, 2011 to September 30, 2011 and from July 1, 2012 to September 30, 2012 is as follows:

Warrants Issued as Settlements


	Number of Warrants		Weighted Average Exercise Price		Remaining Contractual Life
Balance at June 30, 2011		474,508	$	1.05		1.91
Granted		—	$	—		—
Exercised		—	$	—		—
Forfeited		—	$	—		—
Expired		—	$	—		—
Outstanding at September 30, 2011		474,508	$	1.05		1.67
Exercisable at September 30, 2011		474,058	$	1.05		1.67

Weighted average fair value of warrants granted during the three months ended September 30, 2011				N/A

Balance at June 30, 2012		344,058	$	1.05		0.92
Granted		350,000	$	0.60		5.00
Exercised		—	$	—		—
Forfeited		—	$	—		—
Expired		—	$	—		—
Outstanding at September 30, 2012		694,058	$	0.84		2.84
Exercisable at September 30, 2012		694,058	$	0.84		2.84

Weighted average fair value of warrants granted during the three months ended September 30, 2012			$	0.33

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

A summary of warrants issued for cash and changes during the periods June 30, 2011 to September 30, 2011 and from June 30, 2012 to September 30, 2012 is as follows:

Warrants issued for cash or services


	Number of Warrants			Weighted Average Exercise Price		Remaining Contractual Life
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

Balance at June 30, 2012		4,481,200		$	1.46		2.46
Granted		50,000		$	0.63		5.00
Exercised		(1,740,000	)	$	0.50		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		2,791,200		$	1.44		1.10
Exercisable at September 30, 2012		2,791,200		$	1.44		1.10

Weighted average fair value of warrants granted during the three months ended September 30, 2012				$	0.44

On September 21, 2012, the Board of Directors granted five year warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.63 per share to the Company’s Investor Relations firm in recognition of their performance over the past year. The warrants vested immediately. The Company valued the warrants at $21,787 using the Black-Scholes option pricing model using a volatility of 90.09%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 5 years, the term of the warrants, and a discount rate of 0.70%.

On September 21, 2012, the Board of Directors granted five year warrants to purchase 350,000 shares of the Company’s common stock at an exercise price of $0.63 per share to a director in recognition of his exemplary five years of service to the Company. The warrants vested immediately. The Company valued the warrants at $115,883 using the Black-Scholes option pricing model using a volatility of 90.09%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 2.5 years, using the Simplified Method and a discount rate of 0.32%.

In September 2012, the Company issued 1,640,000 shares of common stock in exchange for $820,000 in connection with the exercise of 1,640,000 warrants to purchase shares of the Company’s common stock related to an offer by the Company to reduce the exercise price to $0.50 per share. The original exercise prices of the warrants ranged from $1.25 to $1.75 per share. The cost of repricing warrants recognized by the Company amounted to $70,100 for the three months ended September 30, 2012. The cost represents the incremental increase in the fair value of the repriced warrants as compared to the original warrants granted, valued on the exercise date. The fair value of the warrants was determined using the Black-Scholes option pricing model.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

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, 2012 and 2011 was $30,826 and $33,804, 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 Company granted options to purchase a total of 750,000 shares of the Company’s common stock (250,000 each) to the three executive officers exercisable at $1.25 per share over ten years. The options vest annually over three years, subject to the Company meeting certain performance milestones and are further subject to the officer’s continued employment with the Company. In October 2011, the Company entered into employment agreements with its executive officers.

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 4

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. A jury trial was held for the lawsuit in July 2012. At the conclusion of the trial, the plaintiff was awarded $200,000 under his invasion of privacy and fraudulent misrepresentation claim, $5,000 on the trespass claim, $841,000 on the breach of consulting agreement claim and $200,000 against the Company’s CEO on a claim of civil theft, which by law results in an award of $600,000 for the plaintiff. The Company’s board of directors approved the indemnification of the Company’s CEO for the $600,000. The Company filed a post trial motion for Judgment Notwithstanding Verdict, New Trial and Remittitur, requesting that the judge set aside or reduce the amounts of the jury verdict. If this motion is not granted, the Company will have 30 days to file an appeal of the decision. Of the amounts awarded by the jury, we believe $200,000 will be paid by the Company’s insurance carriers, however the Company is precluded from recognizing the amount covered by insurance until payment is received from the insurance company. Accordingly, based upon the verdicts, the Company recorded a litigation accrual of $1,646,000 as of June 30, 2012. The Company does not expect a ruling on its post trial motions until January 2013.

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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

The Company has entered into a series of credit facilities with its principal stockholder as more fully described in Note 3.

The Company issued short term notes payable to its President, Chief Executive Officer and Chief Financial Officer as more fully described in Note 3.

In September 2012, the Company granted options to purchase 70,000 shares of the Company’s common stock to the father of the Company’s Chief Executive Officer and Chief Technology Officer as more fully described in Note 4.

In September 2012, the Company granted warrants to purchase 350,000 shares of the Company’s common stock to a director as more fully described in Note 4.

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, 2012. As of September 30, 2012, there were cash equivalent balances of $703,292 held in depository accounts that are not insured.

At September 30, 2012, three customers accounted for 57.5%, 17.0% and 16.9%, respectively, of accounts receivable.

For the three months ended September 30, 2012 three customers accounted for approximately 21.3%, 15.7% and 14.5% of sales.

During the three months ended September 30, 2012 all sales resulted from two products, FireIce® and Soil₂O™ which made up 87.5% and 12.5%, respectively, of total sales. Of the FireIce® sales, 77.4% related to sales of FireIce product and 22.6% related to sales of the FireIce Home Defense units. Of the Soil₂O™ sales, 100% related to traditional sales of Soil₂O™.

Two vendors accounted for 56.1% and 14.1% of the Company’s approximately $54,000 of raw material and packaging purchases during the three months ended September 30, 2012.

NOTE 8 - Subsequent Events

On October 1, 2012, the Company issued 80,000 shares of common stock to its principal stockholder in exchange for $40,000 in connection with the Company’s offer to reduce the exercise price of the warrants to $0.50 per share.

On November 1, 2012, the Company’s Compensation Committee ratified and approved a base salary of $200,000 for Mr. Jerome Eisenberg, the Company’s Executive Chairman and Chairman of the Board, for serving as Executive Chairman. The Compensation Committee is discussing an appropriate equity compensation package for Mr. Eisenberg.

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, commercial landscapers 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.

FireIce® has been included on the United States Forest Service (the "Forest Service") Qualified Products List (the “QPL List”) since March 2011. Inclusion on the QPL List qualifies our product for use to fight brush and wildfires on State and National Park lands. In May 2012, the Company received four blanket purchase agreements from the Forest Service which provide the framework for federal and state agencies to use FirecIce® from the air and on the ground to fight wildland fires. To date, we have we have been deployed aerially by the Bureau of Indian Affairs on a few wildfires in New Mexico and have been used on a very limited basis by the Forest Service to fight fires aerially in Washington.

FireIce® has many applications in the municipal and urban firefighting arena. FireIce® has demonstrated the ability to be much more effective than water in extinguishing car fires. In addition, we are currently working with municipal departments on other land and marine based municipal applications.

Although sales of our Soil₂O® ‘Dust Control’ and our Soil2O® agricultural product applications were down during the three months ended September 30, 2012, we continue to believe there are tremendous markets for these products given the heightened federal regulations for mitigating airborne particulate matter and in light of the severe drought conditions experienced by many parts of the United States in 2012.

We have found that sales of our FireIce® HDU units are greatest when wildfires are imminent. The efficacy of the retardant ability of FireIce® was demonstrated in January 2012 when two homes were protected by firefighters from a fast moving grass fire in Montana by applying FireIce® to the homes and surrounding foliage.

International sales of FireIce® and Soil₂O® are expected to increase as our Australian Distributor has been successful in obtaining government approvals of Soil₂O® for use in landscaping applications and our distributor in Turkey is working with a magnesium manufacturing company to incorporate FireIce® in their plant safety program. Shipments under our Chinese distribution agreement have been delayed pending final licensing approvals from the Chinese government. Shipments will not begin until final Chinese government approvals have been received.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2011.

Sales

For the three months ended September 30, 2012, we had sales of $84,540 as compared to sale of $178,402 for the three months ended September 30, 2011, a decrease of $93,862 or 52.6%. Sales of product during the three months ended September 30, 2012 consisted of $10,567 for Soil₂O™ and $73,973 for FireIce® and related products. The Soil₂O™ sales consisted entirely of traditional Soil₂O™ applications. FireIce® sales consisted of $57,255 product sales and $16,718 related to sales of HDU units.

Cost of Goods Sold

Cost of goods sold was $36,079 for the three months ended September 30, 2012 as compared to a cost of goods sold of $72,240 for the three months ended September 30, 2011. The decrease was the direct result of the decrease in sales. Cost of sales as a percentage of sales was 42.6% for the three months ended September 30, 2012 as compared to 42.2% for the three months ended September 30, 2011. The slightly higher cost of sales percentage in fiscal 2012 relates to the sales mix and an increase in raw material costs. Fiscal 2012 and 2013 sales both include sales of FireIce HDU units which have a lower gross profit percentage. 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, 2012.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses were $1,549,572 for the three months ended September 30, 2012 as compared to $1,503,206 for the three months ended September 30, 2011. The increase in fiscal 2013 expenses resulted primarily from an increase in non-cash stock option expense of $253,000 related to option grants to executive officers, employees and directors which was partially offset by ; (1) an decrease in salaries and employee benefits of $35,000 due to lower commissions; (2) a decrease in sales and marketing expense of $99,000 as we discontinued radio and television advertising of the HDU units which proved to be ineffective at generating sales; (3) a decrease in professional fees, investor relations and advertising expense of $17,000, $33,000 and $12,000, respectively, as a result of cost saving measures.

Research and Development Expenses

R&D expenses were $17,308 for the three months ended September 30, 2012 as compared to $42,249 for the three months ended September 30, 2011. The fiscal 2013 expenses relate to research of potential product delivery system enhancements for FireIce® and testing of new processes for the application of our Soil₂O™ "Dust Control" product.

Loss from Operations

Loss from operations was $1,518,419 for the three months ended September 30, 2012 as compared to $1,442,293 for the three months ended September 30, 2011. The increased loss resulted from the decrease in sales and the higher operating expenses.

Interest Income

Interest income was $51 for the three months ended September 30, 2012 as compared to $406 for the three months ended September 30, 2011. The amounts are reflective of the cash balances on hand and the prevailing interest rates during the respective three month periods.

Cost of Repricing of Warrants to Induce Exercise

The Company recorded a cost of repricing warrants of $70,491for the three months ended September 30, 2012 related to the reduction of the exercise price of warrants to purchase 1,740,000 shares of common stock with exercise prices from $1.25 to $1.75 per share to $0.50 per share.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Loss on Settlement

Loss on settlement of $1,500 during the three months ended September 30, 2011 resulted from a cash payment on a court ordered settlement.

Interest Expense

Interest expense was $216,828 for the three months ended September 30, 2012 as compared to $19,159 for the three months ended September 30, 2011. The higher expense during the three months ended September 30, 2012 resulted from the amortization of the debt discounts related to the short term convertible notes. Amortization of these discounts was $196,797 for the three months ended September 30, 2012.

Net Loss

Net loss was $1,805,687 for the three months ended September 30, 2012 as compared to $1,442,546 for the three months ended September 30, 2011. The higher net loss resulted from the higher operating expenses, the lower gross profit resulting from the lower sales and the higher interest expense and the cost of repricing warrants as described above. Net loss per common share was $0.07 for the three months ended September 30, 2012 as compared to $0.07 for the three months ended September 30, 2011. The weighted average number of shares outstanding for the three months ended September 30, 2012 and 2011 were 25,896,566 and 22,148,048, respectively.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended September 30, 2012, the Company used net cash of $943,191 in operating activities as compared to net cash used in operating activities of $1,212,339 for the three months ended September 30, 2011. Net cash used during the three months ended September 30, 2012 resulted primarily from the net loss of $1,805,687, a decrease in accounts payable and accrued liabilities of $98,176 and an increase in inventory of $16,744 which were partially offset by non-cash stock based compensation of $665,410, non-cash amortization of debt discounts of $196,797, depreciation of $12,754, a loss on repricing of warrants of $70,491 and a decrease in accounts receivable of $24,537. 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.

Cash flows used in investing activities for the three months ended September 30, 2012 amounted to $2,185 and related to purchases of office equipment and computer peripherals.

Cash flows from financing activities for the three months ended September 30, 2012 were $1,849,026 as compared to $18,658 for the three months ended September 30, 2011. During the three months ended September 30, 2012, the Company received $870,000 from the exercise of options to purchase 1,740,000 shares of common stock at an exercise price of $0.50 per share, $128,000 from two accredited investors in exchange for 156,000 shares of common stock in connection with a private placement, $720,003 in exchange for 1,083,889 shares of common stock in connection with the stock purchase agreement with Lincoln Park Capital Fund LLC (“LPC”) and $175,000 in exchange for six-month convertible notes with two accredited investors. The amounts received were used to make repayments on notes payable to related parties of $33,339 and to make payments on insurance premium finance contracts of $10,638. 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.

As of the filing date of this report, we have $617,000 in available cash. Although we do not anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary for us to purchase additional mobile mixing trucks and support vehicles in the future, depending on demand. As previously disclosed, in January 2012, the Company signed a $5 million purchase agreement with LPC and filed registration statement related to the transaction covering the shares that may be issued to LPC under the purchase agreement. Provided that the registration statement is effective, which occurred in March 2012, the Company has the right, in its sole discretion, over a 30-month period to sell shares of common stock to LPC in amounts between $30,000 and $500,000 per sale, depending on certain conditions as set forth in the purchase agreement, up to $4.9 million. To date, the Company has issued 2,086,638 shares of common stock in exchange for $1,330,003 under the purchase agreement and has the ability to sell another $3.7 million under the purchase agreement. The price at which the Company may sell shares to LPC is subject to a floor of $0.35 per share. The Company believes the LPC purchase agreement could provide the Company with a sufficient amount of working capital for the next 12 months; however the Company has continued to meet with additional potential investors to explore other financing alternatives.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

In September and October 2012, the Company issued 1,820,000 shares of common stock in exchange for $910,000 in connection with the exercise of 1,820,000 warrants (including 1,200,000 warrants held by our principal shareholder) related to an offer by the Company to reduce the exercise prices of the warrants to $0.50 per share. Additionally, in September 2012, our principal shareholder converted his $322,996 convertible original issue discount note which was due on September 28, 2012 into 665,992 shares of common stock.

Ultimately, if the Company is unable to generate substantial cash flows from sales of our products or complete financings, the Company may not be able to remain operational. If our current motion to vacate the jury award is denied, we will have 10 days to post either a bond and/or cash collateral equal to 115% of the verdict, net of amounts covered by insurance, or up to $1,662,900. The Company is exploring raising significant capital which it believes would permit it to build inventory and infrastructure to fulfill large government orders. There can be no assurance that we will complete any large financing or otherwise be able to meet our working capital needs, including satisfying the adverse jury verdict.

Related Person Transactions

For information on related party transactions and their financial impact, see Note 6 to the Unaudited Condensed Consolidated Financial Statements.

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 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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

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 an expected increase in international sales, our liquidity and anticipated 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, failure to receive final licensing approvals from the Chinese government, and inability to enter into a definitive agreement with distributors in China and Australia.

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, 2012. 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.

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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

David Hopkins, a former employee, sued the Company and its Chief Executive Officer, Michael Cordani, in the Palm Beach County, Florida Circuit Court on June 23, 2008, alleging breach of a consulting agreement and an employment agreement purportedly entered into in May and June 2007, respectively. In addition, the Complaint sought relief for fraud, civil theft, invasion of privacy and trespass. On July 23, 2012, a jury returned a verdict against the Company and its Chief Executive Officer, Mr. Michael Cordani as follows: On Claim 1, the Hopkins’s jury awarded the plaintiff $50,000 for invasion of privacy finding that the defendants took personal files and/or photos of the plaintiff that were stored in the Company’s offices. Further, on Claim 2, the jury awarded the plaintiff $5,000 against the defendants for trespass resulting from their alleged unauthorized access to a computer he owned connected to the Company’s computer network or his digital camera kept at the Company’s offices. Under Claim 3, the plaintiff was awarded $150,000 against both defendants for fraudulent misrepresentation. On Claim 4, the jury awarded the plaintiff $200,000 in damages against Mr. Cordani but not against the Company for civil theft based upon an allegation that Mr. Cordani removed an original Consulting Agreement from the plaintiff’s files maintained at the Company’s offices. The Court may possibly triple this $200,000 verdict, which the Company is contesting. On Claim 5, the plaintiff was awarded $841,000 for breach of the Consulting Agreement against the defendants. The jury further found that the defendants were not liable under any written Employment Agreement.

The defendants filed a Motion for Judgment Notwithstanding the Verdict on Claims 3, 4 and 5. The plaintiff filed a Motion for Judgment Notwithstanding the Verdict alleging that to the extent Mr. Cordani was found liable on the civil theft Count, the Company should be liable as well. Both Motions are pending a ruling by the Court.

The Company has limited insurance coverage covering Claims 1 and 3 where the total verdict amounted to $200,000, less a $25,000 self-insured retention amount. The insurance carrier which provided the defense specifically has claimed that it would not provide insurance on Claims 2 and 4, amounting to $205,000 or Claim 5 amounting to $841,000 alleging that there is no insurance coverage for breach of an Employment Agreement. We retained a law firm which specializes in insurance coverage and bad faith. As stated above, the jury exonerated the defendants on the claims relating to an alleged Employment Agreement and found them liable for breach of an alleged Consulting Agreement. Based upon correspondence with the insurance carrier’s attorneys it is unclear whether the damages arising under the alleged Consulting Agreement relating to warrants to purchase common stock are covered.

If the defendants’ motions are not granted, the Company will have 30 days to file an appeal of the decision. Of the amounts awarded by the jury, it is estimated that $200,000 will be paid by the Company’s insurance carriers, however the Company is precluded from recognizing the insurance coverage amount until payment is received. Accordingly, based upon the verdicts, the Company recorded a reserve for litigation of $1,646,000 as of June 30, 2012.

ITEM 1A.

RISK FACTORS.

Not applicable to smaller reporting companies.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In addition to those unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission, or the SEC, we have sold securities without registration under the Securities Act of 1933, or the Securities Act, as described below.


Name or Class of Investor	Date of Sale	No. of Securities	Reason for Issuance
Private Placement Investors (1)	8/03/12 and 8/06/12	256,000 shares of common stock at $0.50 per share	Investments totaling $128,000
Lenders (1)	8/1/12 and 8/14/12	$75,000 and $100,000 six month notes convertible at $0.50 per share	Loans by two investors
Warrant Holders (1)	9/14/12 to 9/28/12	1,740,000 shares of common stock	Exercise of warrants and options at $0.50 per share for $870,000
Investor relations (1)	9/21/12	50,000 five-year warrants exercisable at $0.63 per share	Services performed
Note holder (2)	9/28/12	665,992 shares of common stock	Conversion of a $332,996 convertible note at $0.50 per share

————————

(1)

Exempt under Section 4(a)(2) of the Securities Act and Regulation 506 thereunder. The securities were issued to accredited investors and there was no general solicitation.

(2)

Exempt under Section 3(a)(9) under the Securities Act. The Note holder was the Company’s principal shareholder.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.

MINE SAFETY DISCLOSURES.

Not Applicable

ITEM 5.

OTHER INFORMATION.

ITEM 6.

EXHIBITS.

The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-Q.

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 2, 2012		/s/ Michael Cordani
		Michael Cordani
		Chief Executive Officer (Principal Executive Officer)

November 2, 2012		/s/ Michael Hull
		Michael Hull
		Chief Financial Officer (Principal Financial Officer)

INDEX TO 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
3.5	Amendment No. 3 to the Amended and Restated Bylaws	8-K	9/27/12	3.1
10.1	Reduced Warrant Exercise Price Offer				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*
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**

———————

This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

Attached as Exhibit 101 to this report are the Company’s financial statements for the quarter ended September 30, 2012 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.

GelTech Solutions, Inc. - FORM 10-Q - November 2, 2012

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GelTech Solutions, Inc. Reports