gltc_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-K/A

No. 1

———————

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

For the fiscal year ended: June 30, 2010

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

For the transition period from: _____________ to _____________

GelTech Solutions, Inc.

(Exact name of registrant as specified in its charter)

Delaware	0-52993	56-2600575
(State or Other Jurisdiction	(Commission	(I.R.S. Employer
of Incorporation or Organization)	File Number)	Identification No.)

Address of Principal Executive Office: 1460 Park Lane South, Suite 1, Jupiter, Florida 33458

Registrant’s telephone number, including area code: (561) 427-6144

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001, par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ þ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $11,000,000 based on December 31, 2009 closing price of $2.00 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 16,962,674 shares outstanding as of September 27, 2010.

Explanatory Note: This report on Form 10-K/A No. 1 amends the Form 10-K filed on September 28, 2010. It is being filed to add a consent of the independent registered public accounting firm, which was inadvertently not filed.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See pages F-1 through F- 27.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(1)

Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.

(2)

Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the Consolidated Financial Statements or notes included herein.

(3)

Exhibits.

Exhibit		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 to Amended and Restated Bylaws	10-K	9/28/10	3.3
10.1	Amended and Restated 2007 Equity Incentive Plan	10-K	9/28/10	10.1
10.2	Form of Employee Stock Option Agreement*	10-K	9/28/10	10.2
10.3	Form of Director Option Agreement	10-K	9/28/10	10.3
10.4	Summary of Employment Agreement with Executives*	10-K	9/28/09	10.7
10.5	Credit Enhancement and Financing Security Agreement	10-K	9/28/09	10.1
10.6	Revolving Line of Credit Agreement	10-K	9/28/09	10.2
10.7	Renewal of Promissory Note dated May 20, 2010	10-K	9/28/10	10.7
10.8	Credit Enhancement and Financing Security Agreement dated May 20, 2010	10-K	9/28/10	10.8
10.9	Modification of Revolving Line of Credit Agreement dated May 20, 2010	10-K	9/28/10	10.9
10.10	Reger Warrant	10-K	9/28/10	10.10
10.11	Form of Warrant	10-Q	5/17/10	10.1
10.12	Form of Subscription Agreement	10-Q	5/17/10	10.2
10.13	Lincoln Park Purchase Agreement	8-K	9/7/10	10.1
10.14	Lincoln Park Registration Rights Agreement	8-K	9/7/10	10.2
10.15	Lincoln Park Warrant	8-K	9/7/10	10.3
14.1	Code of Ethics	10-K	9/29/08	14.1
21.1	List of Subsidiaries	10-K	9/28/10	21.1
23.1	Consent of Salberg & Company, P.A.				Filed
31.1	Certification of Principal Financial 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

* Management compensatory plan or arrangement

Copies of this filing (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: Corporate Secretary.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: October 4, 2010

	GelTech Solutions, Inc.


	By:	/s/ Michael Cordani
		Michael Cordani Chief Executive Officer (Principal Executive Officer)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets		F-3

Consolidated Statements of Operations		F-4

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)		F-5

Consolidated Statements of Cash Flows		F-6

Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

GelTech Solutions, Inc.

We have audited the accompanying consolidated balance sheets of GelTech Solutions, Inc. and Subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the two years in the period ended June 30, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GelTech Solutions, Inc. and Subsidiaries at June 30, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a net loss and net cash used in operating activities in 2010 of $3,536,884 and $2,568,345, respectively, and has an accumulated deficit, a stockholders’ deficit and working capital deficit of $9,643,186, $1,114,416 and $1,687,547, respectively, at June 30, 2010. These matters raise substantial doubt about its ability to continue as a going concern. Management’s Plan in regards to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

SALBERG & COMPANY, P.A.

Boca Raton, Florida

September 28, 2010

F-2

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of June 30,
	2010			2009
ASSETS

Cash and cash equivalents	$	625,796		$	245,381
Accounts receivable trade, net		24,647			16,167
Inventories		198,274			249,409
Prepaid expenses and other current assets		43,250			11,103
Total current assets		891,967			522,060

Furniture, fixtures and equipment, net		20,014			23,207
Prepaid consulting		255,436			-
Debt issue costs, net		254,852			316,250
Deposits		42,829			30,630

	$	1,465,098		$	892,147
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable	$	25,213		$	51,778
Accrued expenses		88,010			27,753
Customer deposit		-			25,000
Line of credit		2,458,156			1,550,000
Due to related party		-			60,000
Insurance premium finance contract		8,135			7,060
Total current liabilities		2,579,514			1,721,591
Total liabilities		2,579,514			1,721,591

Commitments and contingencies (Note 10)

Stockholder's equity (deficit)
Preferred stock: $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding		-			-
Common stock: $0.001 par value; 50,000,000 shares authorized;
16,538,200 and 13,858,986 shares issued and outstanding as of June 30, 2010 and 2009, respectively.		16,538			13,859
Additional paid in capital		8,512,232			5,262,999
Accumulated deficit		(9,643,186	)		(6,106,302	)
Total stockholders' equity (deficit)		(1,114,416	)		(829,444	)

Total liabilities and stockholders' equity (deficit)	$	1,465,098		$	892,147

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

F-3

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended June 30,
	2010			2009

Sales	$	566,240		$	334,364

Cost of goods sold		186,483			128,736

Gross profit		379,757			205,628

Operating expenses:
Selling, general and administrative expenses		3,392,456			2,829,850
Research and development		19,541			125,996

Total operating expenses		3,411,997			2,955,846

Loss from operations		(3,032,240	)		(2,750,218	)

Other income (expense)
Other income		-			1,703
Gain (loss) on conversion		-			(841	)
Loss on settlement		(55,000	)		-
Interest income		8,535			14,513
Interest expense		(458,179	)		(80,441	)
Other expense		-			(33,000	)

Total other income (expense)		(504,644	)		(98,066	)

Net loss	$	(3,536,884	)	$	(2,848,284	)


Net loss per common share - basic and diluted	$	(0.24	)	$	(0.21	)

Weighted average shares outstanding - basic and diluted		15,018,756			13,572,287

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

F-4

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED JUNE 30, 2010 and 2009

	Common		Common		Additional
	Stock		Stock		Paid In			Accumulated
	(Shares)		Par Value		Capital			Deficit			Total

Balance at July 1, 2008		13,415,422	$	13,416	$	4,359,504		$	(3,258,018	)	$	1,114,902

Common stock issued for cash		183,333		183		178,567			—			178,750
Common stock issued for a settlement		54,187		54		42,754			—			42,808
Common stock issued for a loan guarantee		150,000		150		284,850			—			285,000
Common stock issued for services		35,000		35		38,465			—			38,500
Common stock issued for cashless warrant exercise		21,044		21		(21	)		—			—
Stock-based compensation		—		—		358,880			—			358,880
Net loss for the fiscal year ended June 30, 2009		—		—		—			(2,848,284	)		(2,848,284	)

Balance at June 30, 2009		13,858,986		13,859		5,262,999			(6,106,302	)		(829,444	)

Common stock and warrants issued for cash		2,180,000		2,180		2,177,820			—			2,180,000
Common stock issued to officer and director		69,211		69		69,142			—			69,211
Common stock issued for services		200,000		200		339,800			—			340,000
Common stock issued to extend line of credit		150,000		150		149,850			—			150,000
Common stock issued upon exercise of options for cash		79,993		80		58,270			—			58,350
Warrants issued to extend line of credit		—		—		59,865			—			59,865
Options issued for services		—		—		85,872			—			85,872
Offering cost of stock and warrants issued for cash		—		—		(90,000	)		—			(90,000	)
Stock-based compensation		—		—		398,614			—			398,614
Net loss for the fiscal year ended June 30, 2010		—		—		—			(3,536,884	)		(3,536,884	)

Balance at June 30, 2010		16,538,190	$	16,538	$	8,512,232		$	(9,643,186	)	$	(1,114,416	)

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

F-5

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended June 30,
	2010			2009
Cash flows from operating activities
Reconciliation of net loss to net cash used in operating activities:
Net loss	$	(3,536,884	)	$	(2,848,284	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation		10,756			18,266
Bad debt expense		7,463			16,457
Amortization of debt issuance costs		339,418			28,750
Amortization of prepaid expenses		76,891			23,616
Common stock issued to officer and director		69,211
Amortization of prepaid consulting		170,436			-
Common stock issued for services		-			38,500
Stock option compensation expense		398,614			358,880
Loss on settlement		-			841
Write-off of obsolete packaging inventory		33,510			-
Changes in assets and liabilities:
Accounts receivable		(40,943	)		52,816
Inventories		17,625			(76,653	)
Prepaid expenses and other current assets		(75,935	)		4,234
Deposits and other assets		(12,199	)		(2,034	)
Accounts payable		(26,565	)		(7,394	)
Related party payable		(60,000	)		-
Customer deposits		-			25,000
Accrued expenses		60,257			(66,146	)
Net cash used in operating activities		(2,568,345	)		(2,433,151	)
Cash flows from Investing Activities
Sales of short term marketable debt securities		-			750,000
Purchases of equipment		(7,563	)		(6,071	)
Net cash provided by (used in) investing activities		(7,563	)		743,929
Cash flows from Financing Activities
Payments on Insurance Finance Contract		(32,028	)		(24,205	)
Proceeds from sale of stock and warrants, net of expenses		2,090,000			178,750
Debt issue costs		(68,155	)		-
Proceeds from exercise of stock options		58,350			-
Proceeds from revolving line of credit, net		908,156			1,550,000
Net cash provided by financing activities		2,956,323			1,704,545
Net increase in cash and cash equivalents		380,415			15,323
Cash and cash equivalents - beginning		245,381			230,058
Cash and cash equivalents - ending	$	625,796		$	245,381

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	117,631		$	41,011
Cash paid for income taxes	$	-		$	-
Supplementary Disclosure of Non-cash Investing and Financing Activities:
Financing of prepaid insurance contracts	$	33,103		$	23,097
Related party liability recorded for debt issuance costs	$	-		$	60,000
Stock issued as loan guarantee	$	-		$	285,000
Stock issued to extend loan	$	150,000		$	-
Options issued to extend loan	$	59,865		$	-
Prepaid option and stock-based consulting	$	425,872		$	-
Accounts payable and debt repaid with common stock	$	-		$	41,967

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

F-6

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Basis of Presentation

GelTech Solutions, Inc. (“GelTech” or the “Company”) is a Delaware corporation. GelTech is primarily engaged in business activities that include finalizing the development of products in three distinct markets and beginning the marketing and delivery of products in two of those markets: (i) FireIce® a patented fire suppression product, which is non-toxic and when combined with water becomes a water-based gel product used to suppress fires involving structures, personal property and forest wildfires; (ii) Soil2O™ (formerly RootGel), a moisture preservation solution that has many applications useful in the agricultural industry including water and nutrient retention in golf course maintenance, landscaping and forestry and (iii) Skin Armor™, an ointment used for protecting skin from direct flame and high temperature. Additionally, GelTech owns a United States patent for a method to modify weather.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its two wholly-owned subsidiaries: GelTech Innovations, Inc. and Weather Tech Innovations, Inc. There has been no activity in Weather Tech Innovations, Inc., however, all intercompany balances and transactions would be eliminated in consolidation. In July 2008, the Company changed the name of GelTech Innovations to FireIce Gel, Inc. and began conducting the operations related to the sales and marketing of the Company’s FireIce® product through this subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company periodically maintains cash balances in financial institutions in excess of the federally insured limit. For the purposes of the statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The Company’s cash equivalents consist of a brokerage money market account.

Investments in Marketable Securities

The Company invests in various marketable securities and accounts for such investments in accordance with ASC 320-10.

Certain securities that the Company may invest in may be determined to be non-marketable. Non-marketable securities where the Company owns less than 20% of the investee are accounted for at cost pursuant to ASC323-10.

Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. Trading securities that the Company may hold are treated in accordance with ASC 320-10 with any unrealized gains and losses included in earnings. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Investments classified as held-to-maturity are carried at amortized cost. In determining realized gains and losses, the cost of the securities sold is based on the specific identification method.

F-7

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

The Company periodically reviews its investments in marketable and non-marketable securities and impairs any securities whose value is considered non-recoverable. The Company's determination of whether a security is other than temporarily impaired incorporates both quantitative and qualitative information. GAAP requires the exercise of judgment in making this assessment for qualitative information, rather than the application of fixed mathematical criteria. The Company considers a number of factors including, but not limited to, the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, the reason for the decline in fair value, changes in fair value subsequent to the balance sheet date, and other factors specific to the individual investm ent. The Company's assessment involves a high degree of judgment and accordingly, actual results may differ materially from the Company's estimates and judgments.

Accounts Receivable

Accounts receivable are customer obligations due under normal trade terms. Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Inventories

Inventories are stated at the lower of cost or market, with cost determined using a first-in, first-out method.

Property and Equipment and Depreciation

Property and equipment is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of 3 to 5 years. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the improvements. Expenditures for maintenance and repairs are expensed as incurred.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Fair Value Measurements

We measure our financial assets and liabilities in accordance with generally accepted accounting principles. 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.

F-8

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

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 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 June 30, 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 company 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 in sales.

F-9

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Included in costs of goods sold for the year ended June 30, 2010, was a charge of $33,510 for packaging inventory which became obsolete due to updates in our FireIce® packaging and as a result of the change in our soil moisture retention product branding from RootGel to Soil2O™.

Shipping and Handling Costs

Amounts invoiced to customers for shipping and handling are included in revenues. Shipping and handling costs related to sales of products are included in selling, general and administrative expenses and were $42,222 and $42,252 in 2010 and 2009, respectively.

Research and Development

In accordance with ASC 730-10 expenditures for research and development of the Company's products are expensed when incurred, and are included in operating expenses. The Company recognized research and development costs of $19,541 and $125,996 for the fiscal years ended June 30, 2010 and 2009, respectively.

Advertising

The Company conducts advertising for the promotion of its products and services. In accordance with ASC 720-35, advertising costs are charged to operations when incurred; such amounts aggregated $120,305 in fiscal 2010 and $48,133 in fiscal 2009.

New Product Startup Expenses

In October 2008, the Company entered into a Master Joint Venture Agreement with a California company. Under the agreement, the Company has agreed to pay the distributor up to $450,000 over an eighteen month period in order to assist the distributor to market the Company’s FireIce Gel product. As of June 30, 2009, the Company had made payments of $50,000 and had recorded a credit of $50,000 against the accounts receivable of the distributor, both of which have been treated as start-up expenses in accordance with ASC 720-15 “Start-up Costs” and are recorded in operating expense in the accompanying consolidated statements of operations. In September 2009, the Company entered into a settlement agreement with the distributor (Note 10).

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 financial statements are reasonable; however, actual results could differ materially from these estimates. Significant estimates in 2010 and 2009 include the allowance for doubtful accounts, valuation of marketable debt securities, valuation of inventories, valuation of options and warrants granted for services or settlements, valuation of capital stock granted for services or settlements and the valuation allowance on deferred tax assets.

F-10

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Net Earnings (Loss) per Share

The Company computes net earnings (loss) per share in accordance with ASC 260-10. 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. For the years ended June 30, 2010 and 2009, there was no separate computation of dilutive net loss per share since the common stock equivalents outstanding were anti-dilutive due to the net losses. At June 30, 2010 there were options to purchas e 2,174,008 shares and warrants to purchase 3,207,361 shares of common stock outstanding which may dilute future earnings per share.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718-10 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 years ended June 30, 2010 and 2009 was $398,614 and $358,880, respectively, related to employee, director and advisory board stock options, and is included in selling, general and administrative expenses in the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during t he period. At June 30, 2010, the total compensation cost for stock options not yet recognized was $516,632. This cost will be amortized on a straight-line basis over the remaining vesting term of the options.

2007 Equity Incentive Plan

In January 2007, the Company established the 2007 Equity Incentive Plan under which provided for the issuance of up to 1,500,000 stock options, stock appreciation rights, restricted stock or restricted stock units to our directors, employees and consultants. In September 2008, the Board of Directors approved an amendment to the Company’s 2007 Equity Incentive Plan to increase the number of shares authorized by the plan from 1,500,000 to 3,500,000.

Under the Equity Incentive Plan, all directors who are not employees or own 10% or more of the Company’s outstanding stock at the time of grant shall automatically receive a grant of stock options of grant as follows:

Initial Grants

A – Chairman of the Board - 50,000 options

B – Director - 30,000 options

C – Chair of a Committee - 10,000 options

D – Member of a Committee - 5,000 options

F-11

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Annual Grants

A – Director - 50,000 options

B – Chair of a Committee - 10,000 options

C – Member of a Committee - 5,000 options

All of the options automatically granted to non-employee directors vest over a three year period on each June 30th and December 31st, subject to continuing as a director, Committee member, Chairman of the Board or Chairman of a Committee on the applicable vesting date. Because our Chairman of the Board, is an employee, he is not eligible for a grant. The exercise price of options or stock appreciation rights granted under the 2007 Equity Incentive Plan shall not be less than the fair market value of the underlying common stock at the time of grant. In the case of incentive stock options, the exercise price may not be less than 110% of the fair market value in the case of 10% shareholders. Options and stock appreciation rights granted under the Equity Incentive Plan shall expire no later than ten years after the date of grant. The option price may be paid in United States dollars by check or wire transfer or, at the discretion of the Board of Directors or Compensation Committee, by delivery of shares of our common stock having fair market value equal as of the date of exercise to the cash exercise price, or a combination thereof.

The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, are determined by the Board of Directors or the Compensation Committee, in their sole discretion. The total number of shares with respect to which options or stock awards may be granted under the Equity Incentive Plan the purchase price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a recapitalization, reorganization, merger, consolidation, exchange of shares, stock dividend, stock split, reverse stock split, or other subdivision or consolidation of shares.

The Board of Directors or the Compensation Committee may from time to time alter, amend, suspend, or discontinue the Equity Incentive Plan with respect to any shares as to which awards of stock rights have not been granted. However no rights granted with respect to any awards under this Equity Incentive Plan before the amendment or alteration shall not be impaired by any such amendment, except with the written consent of the grantee. Under the terms of the Equity Incentive Plan, the Board of Directors or the Compensation Committee may also grant awards which will be subject to vesting under certain conditions. The vesting may be time-based or based upon meeting performance standards, or both.

In April 2010, the Company amended the 2007 Equity Incentive Plan to increase the number of stock options granted annually to directors from 20,000 to 50,000.

All of our Stock Option Agreements provide for “clawback” provisions, which enable our Board of Directors to cancel stock awards and recover past profits if the person is dismissed for cause or commits certain acts which harm us.

F-12

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Determining Fair Value Under ASC 718-10

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.

The fair value of stock option grants for the fiscal year ended June 30, 2010 and 2009 were estimated using the following weighted- average assumptions:

	2010			2009
Risk free interest rate		0.76 - 3.03	%		1.51 – 3.12	%
Expected term in years		6.5			5.0 – 6.5
Dividend yield		-			-
Volatility of common stock		94.66% - 166.28	%		52.37% - 52.67	%
Estimated annual forfeitures		-			-

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. In fiscal 2009, the volatility was estimated using the comparable companies’ method since our common stock was not trading during the periods presented. The Company’ ;s common stock began trading in June 2008. As such in fiscal 2010, the Company began using the Company’s trading prices in calculating the stock price volatility and based its volatility on historical volatility. The expected term was estimated using the simplified method for employee stock options since the Company does not have adequate historical exercise data to estimate the expected term.

Options to Purchase Common Stock

A summary of stock option transactions issued to employees under the 2007 Plan for the fiscal years ended June 30, 2010 and 2009 is as follows:

Employee Options
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2008		1,175,000		$	0.82		7.53
Granted		1,540,000		$	1.00		10.00
Exercised		-		$	-		-
Forfeited		(1,000	)	$	1.20		-
Expired		-		$	-		-
Outstanding at June 30, 2009		2,714,000		$	0.92		8.20	$	2,500,310
Exercisable at June 30, 2009		585,003		$	0.87		5.23	$	567,303

Weighted average fair value of options granted during the year ended June 30, 2009				$	0.52

Balance at June 30, 2009		2,714,000		$	0.92		8.20
Granted		-		$	-		-
Exercised		(14,993	)	$	0.6670		-
Options sold to third party		(50,000	)	$	0.6670		-
Forfeited		(1,000,000	)	$	1.00		-
Expired		-		$	-
Outstanding at June 30, 2010		1,649,007		$	0.88		6.40	$	545,199
Exercisable at June 30, 2010		1,049,008		$	0.84		5.29	$	385,999

Weighted average fair value of options granted during the year ended ended June 30, 2010					N/A

F-13

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

A summary of options issued to non-employees under the 2007 Plan and changes during the period from June 30, 2008 to June 30, 2009 and from June 30, 2009 to June 30, 2010 is as follows:

Options Issued to Directors
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2008		110,000	$	0.85		5.89
Granted		95,000	$	0.88		10.00
Exercised		-	$	-		-
Forfeited		-	$	-		-
Expired		-	$	-		-
Outstanding at June 30, 2009		205,000	$	0.86		7.40	$	200,250
Exercisable at June 30, 2009		113,333	$	0.89		6.58	$	107,905

Weighted average fair value of options granted during the year ended June 30, 2009			$	0.43

Balance at June 30, 2009		205,000	$	0.86		7.40
Granted		165,000	$	1.81		10.00
Exercised		-	$	-		-
Forfeited		-	$	-		-
Expired		-	$	-		-
Outstanding at June 30, 2010		370,000	$	1.28		7.41	$	71,100
Exercisable at June 30, 2010		315,833	$	1.20		7.02	$	71,100

Weighted average fair value of options granted during the year ended June 30, 2010			$	1.40

F-14

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Non-Employee, Non-Director Options
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2008		170,000		$	1.00		4.53
Granted		-		$	-		-
Exercised		-		$	-		-
Forfeited		-		$	-		-
Expired		-		$	-		-
Outstanding at June 30, 2009		170,000		$	1.00		3.53	$	142,800
Exercisable at June 30, 2009		103,665		$	0.99		3.53	$	87,079

Weighted average fair value of options granted during the year ended June 30, 2009					N/A

Balance at June 30, 2009		170,000		$	1.00		3.53
Granted		-		$	-		-
Options purchased from officer		50,000		$	0.6670		-
Exercised		(65,000	)	$	0.7400		-
Forfeited		-		$	-		-
Expired		-		$	-		-
Outstanding at June 30, 2010		155,000		$	1.00		2.53	$	32,550
Exercisable at June 30, 2010		155,000		$	1.00		2.53	$	32,550

Weighted average fair value of options granted during the year ended June 30, 2010					N/A

F-15

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

On July 1, 2009, the Company granted options to purchase 100,000 shares of the Company’s common stock to directors of the Company. The options have an exercise price of $1.84 per share, vest over one year and have a ten year term. The options were valued using the Black-Scholes model using a volatility of 166.28% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 3.03%. The value of the options will be recognized over the vesting term, one year. In February 2010, the Company granted options to purchase 30,000 shares of the Company’s common stock to a new director of the Company. The options have an exercise price of $1.92 per share, vest over three years and have a ten year term. The options were valued using the Black-Scholes model using a volatility of 102.31% derived from the market price of the Company’s common stock, an expected term of 6.5 years (using the simplified method) and a discount rate of 2.94%. The value of the options will be recognized over the vesting term, three years.

In February 2010, the Company granted options to purchase 5,000 shares of the Company’s common stock to the new director of the Company upon his appointment to the audit committee. The options have an exercise price of $1.95 per share, vest over three years and have a ten year term. The options were valued using the Black-Scholes model using a volatility of 101.79% derived from the market price of the Company’s common stock, an expected term of 6.5 years (using the simplified method) and a discount rate of 2.96%. The value of the options will be recognized over the vesting term, three years.

In May 2010, the Company granted options to purchase 30,000 shares of the Company’s common stock to a new director of the Company. The options have an exercise price of $1.55 per share, vest over three years and have a ten year term. The options were valued using the Black-Scholes model using a volatility of 95.12% derived from the market price of the Company’s common stock, an expected term of 6.5 years (using the simplified method) and a discount rate of 2.89%. The value of the options will be recognized over the vesting term, three years.

In September 2008, the Company granted options to purchase 95,000 shares of the Company’s common stock to directors of the Company. The options have an exercise price of $0.88 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 52.62% (derived using the comparable companies method due to the thin trading of the Company’s stock since it began trading in June 2008), an expected term of six years (using the simplified method) and a discount rate of 3.05%. The value of the options will be recognized over the vesting term, one year.

During the three months ended December 31, 2008, the Company granted options to purchase 40,000 of the Company’s common stock to employees of the Company. The options have exercise prices from $0.80 to $1.20 per share, based upon the respective grant dates, vest over a two or three year period, and all have a ten year term. The options were valued using the Black-Scholes model using a volatility of 52.37% (derived using the comparable companies method due to the thin trading of the Company’s stock since it began trading in June 2008), an expected term of six years (using the simplified method) and discount rates between 2.56% and 3.12%. The value of the options will be recognized over the vesting term.

In December 2008, the Company granted options to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The options vest over three years, subject to continued employment and subject to the Company meeting certain performance targets. The options expire in ten years. The 2010 and 2009 performance targets were not met and one-third of the options were forfeited in July 2009 and one-third were forfeited in June 2010. The options had been valued at $780,279 using the Black-Scholes model using a volatility of 52.67%, an expected term of 6.5 years and a discount rate of 1.51%. The value of the remaining options will be recognized over the vesting term.

F-16

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Warrants to Purchase Common Stock

Warrants Issued as Settlements
	Number of Warrants			Weighted Average Exercise Price		Remaining Contractual Life
Balance at June 30, 2008		504,058		$	1.05		1.92
Granted		-		$	-		-
Exercised		(30,000	)	$	1.00		-
Forfeited		-		$	-		-
Expired		-		$	-		-
Outstanding at June 30, 2009		474,058		$	1.05		0.91
Exercisable at June 30, 2009		474,058		$	1.05		0.91

Weighted average fair value of warrants granted during the year ended June 30, 2009					N/A

Balance at June 30, 2009		474,058		$	1.05		0.91
Granted		-		$	-		-
Exercised		-		$	-		-
Forfeited		-		$	-		-
Expired		-		$	-		-
Outstanding at June 30, 2010		474,058		$	1.05		1.92
Exercisable at June 30, 2010		474,058		$	1.05		1.92

Weighted average fair value of warrants extended during the year ended June 30, 2010				$	0.55

A summary of warrants issued for cash and changes during the periods June 30, 2008 to June 30, 2009 and from June 30, 2009 to June 30, 2010 is as follows:

F-17

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Warrants issued for cash
	Number of Warrants			Weighted Average Exercise Price		Remaining Contractual Life
Balance at June 30, 2008		528,303		$	1.00		2.92
Granted		-		$	-		-
Exercised		-		$	-		-
Forfeited		-		$	-		-
Expired		-		$	-		-
Outstanding at June 30, 2009		528,303		$	1.14		1.29
Exercisable at June 30, 2009		528,303		$	1.14		1.29

Weighted average fair value of warrants granted during the year ended June 30, 2009					N/A

Balance at June 30, 2009		528,303		$	1.14		1.29
Granted		2,430,000		$	1.59		3.0
Exercised		-		$	-		-
Forfeited		-		$	-		-
Expired		(225,000	)	$	1.00		-
Outstanding at June 30, 2010		2,733,303		$	1.56		2.37
Exercisable at June 30, 2010		2,733,303		$	1.56		2.37

Weighted average fair value of warrants granted during the year ended June 30, 2010					N/A

F-18

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

In connection with private placement transactions, the Company issued three year warrants to purchase 2,180,000 shares of the Company’s common stock at an exercise price of $1.60 per share.

In January 2010, the Company issue warrants to purchase 100,000 shares of the Company’s common stock to a consultant. The warrants are exercisable at $1.60 per share and are exercisable for five years. The Company calculated the fair value of the warrants using the Black-Scholes method and recorded the value of the warrants, $85,872 in prepaid consulting and will recognize the cost over the term of the consulting agreement, one year.

In addition, in May 2010, the Company issued two year warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $1.50 per share to the Company’s largest shareholder in connection with the one year extension of the Company’s $2.5 million line of credit.

Income Taxes

The Company accounts for income taxes pursuant to the provisions of ASC 740-10, "Accounting for Income Taxes," which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

Beginning July 1, 2007, the Company adopted the provisions of the ASC 740 -10 related to, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits.

Effective July 1, 2007, the Company adopted ASC 740-10-25 Definition of Settlement. which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of June 30, 2010, tax years 2008, 2009 and 2010 are still subject to audit.

F-19

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Legal Costs and Contingencies

In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company expenses these costs as the related services are received.

If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. If the Company has the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss, if recovery is also deemed probable.

Reclassifications

Certain amounts included in the 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation.

New Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. This update provides amendments to Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated results of operations or financial condition.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”. This update addresses both the interaction of the requirements of Topic 855, “Subsequent Events”, with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provision related to subsequent events (paragraph 855-10-50-4). The amendments in this update have the potential to change reporting by both private and public entities, however, the nature of the change may vary depending on facts and circumstances. The adoption of ASU 2010-09 did not have a material impact on the Com pany’s consolidated results of operations or financial condition.

In April 2010, the FASB issued ASU No. 2010-13, “Compensation – Stock Compensation”. This update will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This update will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the Company’s consolidated results of operations or financial condition.

2. GOING CONCERN

These 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. The Company has a net loss and net cash used in operating activities in 2010 of $3,536,884 and $2,568,345 respectively and has an accumulated deficit, a stockholder’s deficit and a working capital deficit of $9,643,186, $1,114,416 and $1,687,547, respectively, at June 30, 2010. 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 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.

F-20

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

In May 2010, the Company renewed its $2.5 million line of credit agreement with its largest stockholder to provide working capital for the Company. The stockholder had arranged a similar financing with a bank, which is secured by real property and for which the stockholder is personally responsible. During the year ended June 30, 2010, the Company sold 2,180,000 shares of common stock and 2,180,000 three year warrants to purchase common stock at an exercise price of $1.60 per share in exchange for $2,180,000. In addition, the Company recently signed a purchase agreement with an investment bank which provides for the sale of up to $5 million worth of common stock of the Company (See Note 12). Further, the Company is currently exploring other sources for raising additional equity or debt from private investors and believes that the actions presently being taken provide the opportunity for the Company to continue as a going concern.

3. ACCOUNTS RECEIVABLE

Accounts receivable at June 30, 2010 and 2009 was as follows:

	2010			2009
Accounts receivable	$	48,567		$	32,624
Allowance for doubtful accounts		(23,920	)		(16,457	)
	$	24,647		$	16,167

Bad debt expense on trade accounts receivable for 2010 and 2009 was $7,463 and $16,457 respectively.

4. INVENTORIES

Inventories consisted of the following at June 30, 2010 and 2009:

	2010		2009
Finished goods	$	125,453	$	61,443
Raw materials		72,821		187,966
	$	198,274	$	249,409

F-21

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

5. FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment consisted of the following as of June 30, 2010 and 2009:

	Estimated	June 30,
	Useful Life	2010			2009

Equipment	3 - 5 years	$	46,539		$	39,791
Furniture and fixtures	5 years		17,698			16,883
			64,237			56,674
Accumulated depreciation			(44,223	)		(33,467	)
		$	20,014		$	23,207

Depreciation expense in 2010 and 2009 was $10,756 and $18,266, respectively.

6. LINE OF CREDIT AGREEMENTS

On August 5, 2008, the Company signed a revolving line of credit agreement which would allow the Company to borrow up to $4,000,000 from its largest stockholder. Under the line of credit agreement, borrowings may only be used for direct costs associated with the acquisition and production of inventory in order to fulfill a contract between a third party and the Company pertaining to the sale of the Company’s products and amounts borrowed will be due 120 days after the date of advancement and will bear interest at an annual rate of 5%. The agreement contains a 15% penalty upon any default. The agreement expires on the earlier of (1) default or (2) eleven months from the date of the agreement, July 5, 2009, and no advances may be made within 120 days of July 5, 2009.

In September 2008, the Company entered into a $1 million line of credit with its largest stockholder to provide for the general working capital needs of the Company. This line of credit bears annual interest of 10%. The agreement contains a 15% penalty upon any default. The agreement expires on the earlier of (1) default or (2) September 15, 2009, and no advances may be made after August 15, 2009.

On November 10th and 19th, 2008, the Company received advances of $200,000 and $358,000, respectively, under the $1 million line of credit.

In February 2009, the Company borrowed $250,000 under the $4,000,000 revolving line of credit agreement in two separate fundings. The above line of credit agreements were cancelled on May 29, 2009. (See below)

On May 29, 2009, GelTech Solutions, Inc. entered into a Credit Enhancement and Financing Security Agreement (the “Agreement”) with the Company’s largest stockholder. Also on May 29, 2009, the Company entered into a $2,500,000 Revolving Line of Credit Agreement (the “Credit Agreement”) and borrowed $1,550,000 under the Credit Agreement. Advances under the Credit Agreement may be used for working capital, acquisition of inventory and to repay the amounts due under the $1,000,000 and $4,000,000 credit facilities described above (the Former Credit Facilities).

The Revolving Promissory Note executed by the Company 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 commencing June 20, 2009 and the principal and all accrued interest is due on May 29, 2010. Additionally, the Company may be compelled to pay the outstanding principal balance earlier during which it will not be permitted to borrow any sums for a period of 30 consecutive days.

On May 29, 2009, the Company and its largest stockholder entered into a Loan Cancellation Agreement by which the $1,058,943 due under the Former Credit Facilities was repaid and the Former Credit Facilities were cancelled. This $1,058,943 sum is part of the $1,550,000 borrowed by the Company. As consideration for entering into the Agreement, the Company’s largest stockholder was paid $60,000 and issued 150,000 shares of the Company’s common stock. The fair market value of the stock, $285,000, plus the amount paid in cash have been recorded as debt issue costs were amortized over the term of the May 29, 2009 line of credit agreement, one year.

F-22

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

On May 20, 2010, the Company and its largest stockholder entered into a one year extension of the $2.5 million line of credit agreement. In exchange for the one year extension, the Company gave its largest stockholder, 150,000 shares of common stock, two year warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $1.50 per share and a cash payment of $60,000. The Company has recorded the value of the shares, warrants and cash given as a debt issuance costs and will amortize these costs over the one year period of the extension (See Note 7). The value of the shares issued was calculated to be $150,000 based upon the current price of private placement transactions, $1.00, and the options issued were valued at $ 59,865 using the Black-Scholes option pricing model.

7. STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock Issued for Cash

In January 2009, the Company issued 133,333 shares of the Company’s common stock in a private transaction with an accredited investor in exchange for $100,000 in cash or $0.75 per share.

In May 2009, the Company issued 50,000 shares of the Company’s common stock in a private transaction with an accredited investor in exchange for $78,750 in cash or $1.575 per share.

In October 2009, the Company issued 15,000 shares of common stock in exchange for $15,000 in cash upon the exercise of options by a member of the Company’s advisory board.

From November 2009 through April 2010, the Company issued 2,180,000 shares of common stock, and three year warrants to purchase 2,180,000 shares of common stock at an exercise price of $1.60 per share in exchange for $2,180,000 in cash in private placements with accredited investors. The Company paid $90,000 in commissions related to these private placements.

In March 2010, the Company issued 14,993 shares to its Chief Technology Officer in exchange for $10,000 in connection with the exercise of options with an exercise price of $0.667 per share.

In April 2010, the Company’s Chief Executive Officer sold warrants to purchase 50,000 shares of the Company’s common stock to an investor. The Company issued 50,000 shares of the Company’s common stock to the investor in exchange for $33,350 in connection with the exercise of the options.

Common Stock for Services

On July 21, 2008, the Company issued 35,000 shares of the Company’s common stock in connection with an agreement to provide investor relations services. The shares had a fair market value of $38,500 based upon a quoted trading price of $1.10 per share which was recorded as a prepaid expense and will be amortized over the term of the consulting agreement, one year.

In November 2009, the Company issued 200,000 shares to an investment banking firm as compensation for a two year consulting agreement with an effective date of October 15, 2009. The Company recorded the fair value of the shares, $340,000, based upon the quoted trade price of the shares on the date of the agreement, as prepaid consulting fees and will amortize the amount over the term of the agreement, two years. The Company amortized $127,500 of this amount during the year ended June 30, 2010.

In January 2010, the Company issued 45,282 and 23,929 shares of the Company’s common stock to the Company’s Chairman and a Director, respectively. These shares were issued to compensate the Chairman and Director for the amount of their personal shares that were used to exchange shares of the Company to former Dyn-O-Mat stockholders. The fair value of the shares on the date issued was $69,211, based upon the offering price of recent private placement transactions and is included in general and administrative expense in the accompanying consolidated statement of operations.

F-23

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Common Stock Issued for Cashless Exercise of Warrants

On July 3, 2008, the Company issued 21,044 shares of common stock in connection with the cashless exercise of warrants to purchase 30,000 shares of common stock at an exercise price of $1.25 per share.

In January 2009, the Company issued 54,187 shares of the Company’s common stock in a settlement of $33,000 of debt plus $8,967 of accrued interest, owed by the Company’s predecessor, Dyn-O-Mat, Inc. The fair value of the shares issued, $42,808 exceeded the value of the debt and interest resulting in a loss on conversion of $841.

Common Stock Issued For Arrangement of Line of Credit

In May 2009, the Company issued 150,000 shares of the Company’s common stock to its largest stockholder in exchange for the stockholder arranging line of credit financing for the Company. The fair values of the shares issued, based upon the grant date quoted trading price of $1.90 per share, $285,000, has been recorded as debt issue costs and is being amortized over the period of the line of credit, one year.

In May 2010, the Company issued 150,000 shares of the Company’s common stock to its largest stockholder in exchange for a one year extension of a line of credit for the Company. The fair values of the shares issued, based upon the recent private placement price of the common stock $1.00 per share, $150,000, has been recorded as debt issue costs and is being amortized over the one year extension period of the line of credit. In addition, in May 2010, the Company issued two year warrants to purchase 150,000 shares of the Company’s common stock at an exercise price of $1.50 per share to the Company’s largest stockholder in connection with the one year extension of the Company’s $2.5 million line of credit.

8. INCOME TAXES

Due to the net losses incurred, there was no income tax provision for the fiscal years ended June 30, 2010 and 2009. Deferred tax assets as of June 30, 2010 and 2009, were as follows:

	June 30, 2010			June 30, 2009

Net operating losses	$	3,467,230		$	2,154,454
Stock-based compensation		387,715			236,001
Less: Deferred tax liability - depreciation		(2,867	)		(2,867	)
Net deferred tax asset		3,852,078			2,387,588
Less valuation allowance		(3,852,078	)		(2,387,588	)

Net deferred tax asset	$	—		$	—

The Company had available at June 30, 2010, net operating loss carryforwards for federal and state tax purposes of approximately $9,214,004 that could be applied against taxable income in subsequent years through June 30, 2030.

F-24

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

Based on the weight of available evidence, both positive and negative, a valuation allowance to fully provide for the net deferred tax assets has been recorded since it is more likely than not that the deferred tax assets will not be realized.

Reconciliation of the differences between income tax benefit computed at the federal and state statutory tax rates and the provision for income tax benefit for the fiscal years ended June 30, 2010 and 2009 was as follows:

	For the Fiscal Year Ended June 30,
	2010						2009
	Amount			%			Amount			%

Tax at U.S. statutory rate	$	(1,202,541	)		-34.00	%	$	(968,417	)		-34.00	%
State taxes, net of federal benefit		(127,279	)		-3.60	%		(103,393	)		-3.62	%
Other		(134,669	)		-3.80	%		(95,532	)		0.80	%
Change in valuation allowance		1,464,489			41.40	%		1,167,342			36.82	%
	$	-			0.00	%	$	-			0.00	%

9. 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 as a bookkeeper at $1,000 per week,

·	The CEO and CTO’s father is a researcher at $1,000 per week, and

·	The CEO and CTO’s mother as a receptionist at $600 per week.

·	The CTO's son was employed on a parttime basis as an internet marketer at $12.00 per hour, he is no longer employed by the Company.

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 entered into employment agreements with its executive officers which are described under Note 10.

On May 29, 2009, GelTech Solutions, Inc. (the “Company”) entered into a Credit Enhancement and Financing Security Agreement (the “Agreement”) with the Company’s largest stockholder. Also on May 29, 2009, the Company entered into a $2,500,000 Revolving Line of Credit Agreement (the “Credit Agreement”) and borrowed $1,550,000 under the Credit Agreement (See Note 6).

In addition, on May 29, 2009, the Company and its largest stockholder entered into a Loan Cancellation Agreement by which the $1,058,943 due under the Former Credit Facilities was repaid and the Former Credit Facilities were cancelled. This $1,058,943 sum is part of the $1,550,000 borrowed by the Company. As consideration for entering into the Agreement, the Company’s largest stockholder was paid $60,000 and issued 150,000 shares of the Company’s common stock. The fair market value of the stock, $285,000, plus the amount paid in cash have been recorded as debt acquisition costs and are being amortized over the term of the line of credit agreement, one year (See Note 6).

F-25

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

10. COMMITMENTS AND CONTINGENCIES

The Company leases office and warehouse space located in Jupiter, Florida under a month-to-month lease.

Rent expense for the fiscal year ended June 30, 2010 and 2009 was $98,529 and $97,812, respectively.

In December 2008, the Compensation Committee approved new employment terms for each of the Company’s three executive officers. Each received an annual salary of $125,000 for the balance of fiscal 2009 with increases to $150,000 and $175,000 for fiscal 2010 and 2011, subject to the discretion of the Compensation Committee. Target bonuses, subject to the discretion of the Compensation Committee, are $112,500 and $131,250 for fiscal 2010 and 2011, respectively based upon meeting job performance, revenue growth, positive cash flow and pre-tax income. No bonuses were awarded for fiscal 2010 or fiscal 2009. Additionally, each executive received a grant of 500,000 10-year options exercisable over 10 years. The options vest annually subject to continued employment with the Company and subject to meeting budgeted revenue targe ts. If the Company fails to meet any revenue targets, the Compensation Committee has discretion to vest the options.

The Company was sued by a former employee on June 23, 2008, alleging breach of a consulting agreement and an employment agreement entered into in May and June 2007, respectively. In addition, the plaintiff seeks to recover certain of his personal property, which was used or stored in the Company’s offices, and alleges the Company invaded his privacy by looking at his personal computer in the Company’s offices. The defendants have filed motions to dismiss and contend that the lawsuit is baseless.

In October 2008, the Company entered into a Master Distributing Agreement with a California company (the Distributor). Under the agreement, the Company agreed to pay the Distributor up to $450,000 in costs toward the marketing of the Company’s FireIce Gel product. As of June 30, 2009, the Company had paid $50,000 to the Distributor. In addition, the Company issued a credit in lieu of payment, in the amount of $50,000, against the accounts receivable of the Distributor. As such, the remaining amounts due under the agreement called for the payment of an additional $210,000 in calendar 2009 and $140,000 in calendar 2010. In September 2009, the Company and the Distributor entered into a settlement agreement whereby each party was relieved of any further obligations related to the Mas ter Distributing Agreement.

In fiscal 2009, a California company filed suit against GelTech claiming infringement on the use of the name RootGel. The Company was unaware that the California company had successfully registered that name prior to it being used by GelTech. GelTech and the California company reached a settlement agreement in this action in September 2010. Under the settlement agreement, GelTech will pay the California company $55,000 in four installments and will cease any future use of the RootGel name. The full amount of the settlement has been accrued as of June 30, 2010 and is included in Loss on Settlement in the accompanying consolidated financial statements.

11. 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 June 30, 2010. As of June 30, 2010, the Company a cash balance in one account that exceeded the federally insured limits by $326,000 and had cash equivalent balances held in corporate money market funds that are not insured in the amount of $23,500.

At June 30, 2010, there were accounts receivable from three customers that each exceeded 10% of the total gross accounts receivable at 46%, 15% and 11%.

During 2010, one customer accounted for approximately 73% of sales. No other customer had sales in excess of 10% of revenues. During 2010, all sales resulted from two products, FireIce and Soil₂O™ (formerly RootGel) which made up 88% and 12% of total sales.

F-26

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

During the year ended June 30, 2010, the Company purchased approximately $76,000 of raw material from one vendor which amounted to 58% of the inventory purchases in fiscal 2010.

12. SUBSEQUENT EVENTS

In July 2010, the Company issued options to purchase 165,000 shares of the Company’s common stock to directors. The options are exercisable at $1.21 per share, vest on June 30, 2011 and are exercisable for ten years. The Company valued these options at $128,106 using the Black-Scholes method and will recognize the expense over the vesting period

In August 2010, the Company issued options to purchase 30,000 shares of the Company’s common stock to a new director upon his appointment to the board. The options are exercisable at $1.08 per share, vest annually in equal installments over a three year period and are exercisable for ten years. The Company valued these options at $23,344 using the Black-Scholes method and will recognize the expense over the vesting period.

On September 1, 2010, the Company signed a $5 million purchase agreement with Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPC”). Upon signing the agreement, the Company received $200,000 from LPC as an initial purchase under the $5 million commitment in exchange for 200,000 shares of the Company’s common stock and five year warrants to purchase 200,000 shares common stock at an exercise price of $1.25 per share. The Company also entered into a registration rights agreement with LPC whereby it agreed to file a registration statement related to the transaction with the Securities and Exchange Commission (“SEC”) covering the shares that may be issued to LPC under the purchase agreement within five days after the filing of the Company’s Form 10-K fo r the year ended June 30, 2010. After the SEC has declared effective the registration statement, the Company has the right, in its sole discretion, over a 30-month period to sell shares of common stock to LPC in amounts up to $500,000 per sale, depending on certain conditions as set forth in the purchase agreement, up to an additional $4.8 million.

There are no upper limits to the price LPC may pay to purchase our common stock and the purchase price of the shares related to the $4.8 million of future funding will be based on the prevailing market prices of the Company’s shares immediately preceding the time of sales without any fixed discount, and the Company will control the timing and amount of any future sales of shares to LPC. LPC shall not have the right or the obligation to purchase any shares of common stock on any business day that the price the Company’s common stock is below $1.00.

In consideration for entering into the $5 million agreement, the Company issued to LPC 75,000 shares of common stock as a commitment fee and will issue up to 225,000 shares pro rata as LPC purchases additional shares. The commitment shares are subject to a 30 month lock up restriction. The purchase agreement may be terminated by the Company at any time at our discretion without any cost to it. Except for a limitation on variable priced financings, there are no financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the agreement. Among various default provisions, if the Company does not timely file the registration statement or maintain its effectiveness, it is considered in default.& #160; The Company expects to use the proceeds for working capital and other general corporate purposes.

In September 2010, the Company issued 150,000 shares of common stock and three year warrants to purchase 150,000 shares of the Company’s common stock at and exercise price of $1.25 per share in exchange for $135,000.

In September 2010, the Company reached a settlement with California company over the Company’s use of the name RootGel. In connection with the settlement agreement, GelTech paid $15,000 and will pay an additional four payments of $10,000 monthly beginning in October 2010.

Management evaluated all activity of the Company through the issue date of the Company’s consolidated financial statements and concluded that no subsequent events, other than those disclosed above, have occurred that would require recognition in the consolidated financial statements.

F-27

Dated: October 4, 2010
	/s/ Michael Hull
	Michael Hull
	Chief Financial Officer (Principal Financial Officer)

	/s/ Michael Hull
	Michael Hull
	Chief Financial Officer (Principal Financial Officer)
Dated: October 4, 2010

Dated: October 4, 2010
	/s/ Michael Cordani
	Michael Cordani
	Chief Executive Officer
	(Principal Executive Officer)