UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-52993
GelTech Solutions, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 56-2600575 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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1460 Park Lane South, Suite 1, Jupiter, Florida |
| 33458 |
(Address of principal executive offices) |
| (Zip Code) |
Registrants 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 |
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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 February 11, 2014 |
Common Stock, $0.001 par value per share |
| 37,413,095 shares |
Table of Contents
| PART I FINANCIAL INFORMATION |
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1 | ||
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| Condensed Consolidated Balance Sheets as of December 31, 2013 (Unaudited) and June 30, 2013 | 1 |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | 5 |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 20 | |
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25 | ||
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| PART II OTHER INFORMATION |
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26 | ||
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26 | ||
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | 26 | |
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| 27 |
PART I FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| As of December31, |
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| As of June 30, |
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| 2013 |
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| 2013 |
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| (Unaudited) |
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ASSETS |
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Cash and cash equivalents |
| $ | 141,108 |
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| $ | 90,275 |
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Accounts receivable trade, net |
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| 25,022 |
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| 37,277 |
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Inventories |
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| 863,144 |
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| 588,703 |
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Prepaid expenses and other current assets |
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| 146,886 |
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| 66,756 |
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Total current assets |
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| 1,176,160 |
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| 783,011 |
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Furniture, fixtures and equipment, net |
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| 189,165 |
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| 158,184 |
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Deposits |
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| 26,886 |
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| 26,886 |
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Total assets |
| $ | 1,392,211 |
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| $ | 968,081 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
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Accounts payable |
| $ | 234,486 |
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| $ | 265,122 |
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Accrued expenses |
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| 301,376 |
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| 176,734 |
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Litigation accrual |
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| 505,000 |
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| 505,000 |
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Accrual for severance agreement |
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| 17,596 |
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| 102,056 |
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Convertible notes - related parties, net of discount |
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| 79,261 |
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Convertible notes - third parties, net of discount |
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| 192,163 |
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Insurance premium finance contract |
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| 65,268 |
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| 11,796 |
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Deferred revenue |
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| 57,019 |
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| 7,019 |
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Total current liabilities |
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| 1,180,745 |
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| 1,339,151 |
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Convertible notes - related party, net of discounts |
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| 2,091,779 |
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| 1,899,316 |
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Total liabilities |
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| 3,272,524 |
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| 3,238,467 |
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Commitments and contingencies (Note 5) |
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Stockholders equity (deficit) |
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Preferred stock: $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding |
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Common stock: $0.001 par value; 50,000,000 shares authorized; 35,996,039 and 33,084,671 shares issued and outstanding as of December 31, 2013 and June 30, 2013, respectively. |
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| 35,996 |
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| 33,084 |
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Additional paid in capital |
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| 30,069,571 |
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| 25,718,163 |
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Accumulated deficit |
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| (31,985,880 | ) |
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| (28,021,633 | ) |
Total stockholders' equity (deficit) |
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| (1,880,313 | ) |
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| (2,270,386 | ) |
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Total liabilities and stockholders' equity (deficit) |
| $ | 1,392,211 |
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| $ | 968,081 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| For the Three Months Ended December 31, |
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| For the Six Months Ended December 31, |
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| 2013 |
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| 2012 |
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| 2013 |
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| 2012 |
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Sales |
| $ | 65,034 |
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| $ | 37,453 |
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| $ | 595,846 |
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| $ | 121,903 |
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Cost of goods sold |
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| 34,340 |
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| 13,499 |
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| 262,073 |
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| 49,578 |
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Gross profit |
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| 30,694 |
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| 23,954 |
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| 333,773 |
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| 72,325 |
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Operating expenses: |
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Selling, general and administrative expenses |
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| 1,894,228 |
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| 1,526,616 |
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| 3,926,272 |
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| 3,076,098 |
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Research and development |
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| 50,663 |
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| 6,423 |
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| 137,831 |
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| 23,731 |
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Total operating expenses |
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| 1,944,891 |
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| 1,533,039 |
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| 4,064,103 |
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| 3,099,829 |
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Loss from operations |
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| (1,914,197 | ) |
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| (1,509,085 | ) |
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| (3,730,330 | ) |
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| (3,027,504 | ) |
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Other income (expense) |
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Loss on settlement |
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| (11,413 | ) |
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| (11,413 | ) |
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Other income |
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| 200,000 |
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| 17,000 |
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| 200,000 |
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Interest income |
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| 17 |
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| 514 |
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| 260 |
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| 565 |
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Loss on repricing warrants |
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| (70,491 | ) |
Interest expense |
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| (127,392 | ) |
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| (97,226 | ) |
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| (239,764 | ) |
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| (314,054 | ) |
Total other income (expense) |
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| (138,788 | ) |
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| 103,288 |
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| (233,917 | ) |
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| (183,980 | ) |
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Net loss |
| $ | (2,052,985 | ) |
| $ | (1,405,797 | ) |
| $ | (3,964,247 | ) |
| $ | (3,211,484 | ) |
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Net loss per common share - basic and diluted |
| $ | (0.06 | ) |
| $ | (0.05 | ) |
| $ | (0.12 | ) |
| $ | (0.12 | ) |
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Weighted average shares outstanding - basic and diluted |
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| 35,147,692 |
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| 28,877,700 |
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| 34,358,586 |
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| 27,387,133 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| For the Six Months Ended December 31, |
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| 2013 |
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| 2012 |
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Cash flows from operating activities |
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Reconciliation of net loss to net cash used in operating activities: |
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Net loss |
| $ | (3,964,247 | ) |
| $ | (3,211,484 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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| 26,112 |
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| 25,346 |
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Allowance for bad debt |
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| 5,801 |
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Amortization of debt discounts |
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| 118,771 |
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| 274,426 |
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Vesting of restricted stock units |
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| 90,000 |
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Stock option employee compensation expense |
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| 1,235,650 |
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| 990,559 |
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Cost of repricing warrants to induce exercise |
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| 70,491 |
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Loss on stock issued for interest |
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| 4,440 |
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Payment by insurance company of prior period accrued litigation expense |
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| (200,000 | ) |
Changes in assets and liabilities: |
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Accounts receivable |
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| 6,454 |
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| 11,444 |
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Inventories |
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| (274,441 | ) |
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| (29,665 | ) |
Prepaid expenses and other current assets |
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| 12,716 |
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| 21,603 |
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Accounts payable |
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| (30,636 | ) |
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| (32,669 | ) |
Deferred revenue |
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| 50,000 |
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Accrued expenses |
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| 124,642 |
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| (4,542 | ) |
Accrual for termination and release agreement |
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| (84,460 | ) |
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Net cash used in operating activities |
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| (2,769,198 | ) |
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| (1,994,491 | ) |
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Cash flows from Investing Activities |
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Purchases of equipment |
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| (57,093 | ) |
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| (3,285 | ) |
Net cash (used in) investing activities |
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| (57,093 | ) |
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| (3,285 | ) |
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Cash flows from Financing Activities |
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Proceeds from sale of stock through private placements |
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| 775,000 |
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| 128,000 |
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Proceeds from the sale of stock and warrants through private placements |
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| 730,000 |
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Proceeds from sale of stock under stock purchase agreement |
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| 570,000 |
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| 810,003 |
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Proceeds from exercise of warrants |
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| 25,000 |
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| 910,000 |
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Proceeds from exercise of stock options |
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| 18,200 |
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Payments on related party notes |
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| (59,839 | ) |
Proceeds from convertible notes with third parties |
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| 175,000 |
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Proceeds from convertible notes with related parties |
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| 1,000,000 |
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| 250,000 |
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Repayment on convertible notes with third parties |
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| (115,822 | ) |
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Repayments on convertible notes with related parties |
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| (85,880 | ) |
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Payments on Insurance Finance Contract |
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| (39,374 | ) |
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| (19,033 | ) |
Net cash provided by financing activities |
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| 2,877,124 |
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| 2,194,131 |
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Net increase in cash and cash equivalents |
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| 50,833 |
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| 196,355 |
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Cash and cash equivalents - beginning |
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| 90,275 |
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| 84,194 |
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Cash and cash equivalents - ending |
| $ | 141,108 |
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| $ | 280,549 |
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Continued
3
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
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| For the Six Months Ended December 31, |
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| 2013 |
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| 2012 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid for interest |
| $ | 1,219 |
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| $ | 296 |
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Cash paid for income taxes |
| $ | |
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| $ | |
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Supplementary Disclosure of Non-cash Investing and Financing Activities: |
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Financing of prepaid insurance contracts |
| $ | 92,846 |
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| $ | 47,471 |
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Beneficial conversion feature of convertible notes |
| $ | 311,949 |
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| $ | 190,280 |
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Loan discount from warrants |
| $ | 601,949 |
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| $ | |
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Stock issued for interest |
| $ | 4,440 |
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| $ | |
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Conversion of notes for common stock |
| $ | 82,132 |
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| $ | 332,996 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
NOTE 1 - Organization and Basis of Presentation
Organization
GelTech Solutions, Inc., or GelTech, markets the following products: (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in urban firefighting, including underground utility fires, and in wildland firefighting and as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire; (3) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires; (4) 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; and (5) Soil2O®, a product which reduces the use of water and is primarily marketed to golf courses, commercial landscapers and the agriculture market. 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 GelTech.
The corporate office is located in Jupiter, Florida.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its three wholly-owned subsidiaries: FireIce Gel, Inc., GelTech International, Inc. and Weather Tech Innovations, Inc. There has been no activity in Weather Tech Innovations, Inc. and GelTech International, 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 Managements 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 Companys Annual Report on Form 10-K for the year ended June 30, 2013 filed on September 27, 2013.
Inventories
Inventories as of December 31, 2013 consisted of raw materials and finished goods in the amounts of $390,337 and $472,807, 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.
5
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
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.
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 December 31, 2013 or June 30, 2013.
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. The Company does provide certain customers with the right of return for unsold product. Sales to these customers are recorded as the customer sells the product, thus removing the right of return.
Products shipped from either our third-party fulfillment companies or our Jupiter, Florida or Irwindale, California locations are shipped FOB shipping point. Normal payment 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 companies or from the Jupiter, Florida or Irwindale, California locations.
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 products. Promotional products or samples given to customers or potential customers are recognized as a cost of goods sold. However, products we utilize to perform demonstrations for potential customers are recorded as a marketing expense in operations. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction in 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 six months ended December 31, 2013 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.
6
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
Net Earnings (Loss) per Share
The Company computes net earnings (loss) per share in accordance with ASC 260-10, Earnings per Share. ASC 260-10 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders 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 December 31, 2013, there were options to purchase 9,808,340 shares of the Companys common stock, warrants to purchase 2,488,112 shares of the Companys common stock and 6,707,094 shares of the Companys 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.
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 Companys 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, 2013 to December 31, 2013 were estimated using the following assumptions:
Risk free interest rate |
| 0.45% - 2.61% |
Expected term (in years) |
| 2.5 - 6.5 |
Dividend yield |
| |
Volatility of common stock |
| 90.96% - 91.94% |
Estimated annual forfeitures |
| |
New Accounting Pronouncements
Accounting Standards Updates which were not effective until after December 31, 2013 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 December 31, 2013, the Company had a working capital deficit, an accumulated deficit and stockholders deficit of $4,585, $31,985,880 and $1,880,313, respectively, and incurred losses from operations of $3,730,330 for the six months ended December 31, 2013 and used cash from operations of $2,769,198 during the six months ended December 31, 2013. In addition, the Company has not yet generated revenue sufficient to support ongoing operations. These factors raise substantial doubt regarding the Companys ability to continue as a going concern.
7
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
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 2,913,997 shares of common stock in exchange for $1,990,003 under this agreement and has the ability to sell another $3.01 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 received a line of credit (Line of Credit) from the Companys principal stockholder (the Lender). In connection with this Line of Credit, 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 February 2011, the Company renegotiated the Line of Credit Agreement with the Lender. As part of the renegotiation, the Company issued 892,857 shares of the Companys common stock and five-year warrants to purchase 1,000,000 shares of the Companys 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 (the 2011 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 Companys common stock at an exercise price of $1.75 per share. These warrants were exercised in September 2012 in exchange for $150,000 in connection with the Companys offer to all warrant holders to exercise warrants at $0.50 per share instead of the exercise price negotiated on the date of the grant. In February 2013, the 2011 Note, plus a $275,000 convertible original issue discount note were combined into one convertible note agreement, see discussion below.
In December 2011, the Company received short term advances from its Chief Executive Officer, former 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. As of December 31, 2013, the Company has repaid all amounts due on these notes.
On March 9, 2012, the Company received $105,000 from third parties in exchange for nine 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 recognized a debt discount related to the change in fair value of the embedded conversion option in the amount of $35,138 which was amortized to interest expense over the life of the convertible notes. In August 2013, the Company paid one note in the amount of $34,440 by issuing 8,880 shares of common stock and a payment of $30,000. The remaining note in the amount of $86,100 was paid early by the payment of $85,822.
8
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
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 was 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 was amortized to interest expense over the life of the convertible note. In September 2013, the Company repaid the note.
In August 2012, the Company received $75,000 in exchange for a six month convertible original issue discount note in the amount of $76,875 with an accredited investor. The note is convertible into common stock at $0.50 per share and 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 notes, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $1,875 and an original issue discount of $55,350 which will be amortized to interest expense over the life of the notes. In February 2013, the note holder was issued a new one year original issue discount note for $86,100 convertible at $0.35 per share. The Company recorded an original issue discount of $9,225 and a beneficial conversion feature discount of $4,920 in connection with the new note. In August 2013, the Company issued 234,663 shares of common stock in connection with the early conversion of this note.
On December 28, 2012, the Company received $250,000 from its principal stockholder in exchange for a one year convertible original issue discount note in the amount of $275,000 (the 2012 Note). The note bears an annual interest rate of 10% and is convertible into the Company's common stock at the rate of $0.35 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 $23,571 and an original issue discount of $25,000 which will be amortized to interest expense over the life of the note.
In February 2013, the Company entered into a new convertible note agreement in the amount of $1,997,483, convertible into common stock at a conversion price of $0.35 per share, bearing interest at an annual rate of 7.5% and due on December 31, 2016. This note was issued in exchange for the 2011 Note and the 2012 Note and receipt of $250,000. In connection with the transaction, the Company issued 210,226 shares of common stock in exchange for accrued interest of $73,579 due on the 2011 and 2012 notes resulting in a loss on conversion of interest of $4,204. The exchange of cash and the 2011 and 2012 notes was recorded as a debt extinguishment which resulted in a loss on extinguishment of debt in the amount of $21,311 for the year ended June 30, 2013. Because this convertible debt instrument contained an embedded beneficial conversion feature, and was extinguished before conversion, the amount of the reacquisition price to be allocated to the repurchased beneficial feature was measured using the intrinsic value of that conversion feature at the extinguishment date and was immaterial. In connection with the new note agreement, the Company recorded a note discount in the amount of $114,142 related to the beneficial conversion feature of the note calculated using the intrinsic value, of which $35,703 has been amortized as of December 31, 2013.
In July 2013, the Company received $1 million from its Chief Operating Officer and principal stockholder in exchange for a five year, $1 million convertible note with a conversion rate of $1.00 per share and an annual interest of 7.5%, plus five year warrants to purchase 500,000 shares of the common stock at $1.30 per share. The Company calculated the relative fair market value of the warrants to be $311,949 using the Black-Scholes model using a volatility of 91.46% (derived using the historical market price for the Companys common stock since it began trading in June 2008), an expected term of 5 years (the term of the warrants) and a discount rate of 1.4%. In addition, the Company calculated the intrinsic value of the beneficial conversion feature of the note to be $601,949. As of December 31, 2013, the Company recognized interest expense from the amortization of the debt discounts related to this note in the amount of $86,632.
9
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
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 six months ended December 31, 2013 were as follows:
In July 2013, the Company issued 20,000 shares of common stock to a director in exchange for $18,200 in connection with the exercise of options at an exercise price of $0.91 per share.
In August 2013, the Company issued 20,000 shares of common stock in exchange for $25,000 in connection with the exercise of warrants with an exercise price of $1.25 per share.
In August 2013, the Company issued 234,663 shares of common stock in connection with the early conversion of a convertible note in the amount of $82,132.
In October 2013, the Company issued 400,000 shares of common stock and five year warrants to purchase 200,000 shares of common stock at an exercise price of $1.00 per share in exchange for $300,000 in connection with a private placement with a director and his wife.
In October 2013, the Company issued 200,000 shares of common stock and five year warrants to purchase 100,000 shares of common stock at an exercise price of $1.00 per share in exchange for $150,000 in connection with a private placement with its COO and principal shareholder.
During the six months ended December 31, 2013, the Company issued 357,647 shares of common stock and five year warrants to purchase 149,412 shares of common stock at exercise prices between $1.00 and $1.25 per share in exchange for $280,000 in connection with private placements with four accredited investors.
During the six months ended December 31, 2013, the Company issued 577,428 shares of common stock in exchange for $570,000 in connection with the Purchase Agreement with Lincoln Park Capital.
During the six months ended December 31, 2013, the Company issued 263,204 shares of common stock in exchange for $225,000 in connection with private placements with five accredited investors.
During the six months ended December 31, 2013, the Company issued 829,546 shares of common stock in exchange for $550,000 in connection with private placements with its COO and Principal Shareholder.
Options to Purchase Common Stock
Stock-based compensation expense recognized under ASC 718-10 for the period July 1, 2013 to December 31, 2013 was $1,235,650 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 December 31, 2013, the total compensation cost for stock options not yet recognized was approximately $1,659,670. This cost will be recognized over the remaining vesting term of the options of approximately three years.
10
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
A summary of stock option transactions for all employee stock options for the six month periods ended December 31, 2013 and 2012 is as follows:
Employee Options and Stock Appreciation Rights
|
| Number of Options |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life |
|
| Aggregate Intrinsic Value |
| ||||
Balance at June 30, 2012 |
|
| 4,589,507 |
|
| $ | 1.04 |
|
|
| 5.95 |
|
|
|
| |
Granted |
|
| 4,135,000 |
|
| $ | 0.50 |
|
|
| 9.60 |
|
|
|
| |
Exercised |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Forfeited |
|
| (750,000 | ) |
| $ | 1.25 |
|
|
|
|
|
|
|
| |
Expired |
|
|
|
|
| $ |
|
|
|
| |
|
|
|
| |
Outstanding at December 31, 2012 |
|
| 7,974,507 |
|
| $ | 0.77 |
|
|
| 6.93 |
|
| $ | |
|
Exercisable at December 31, 2012 |
|
| 4,500,257 |
|
| $ | 0.89 |
|
|
| 5.90 |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2012. |
|
|
|
|
| $ | 0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013 |
|
| 6,337,007 |
|
| $ | 0.75 |
|
|
| 8.25 |
|
|
|
|
|
Granted |
|
| 1,215,500 |
|
| $ | 1.35 |
|
|
| 9.20 |
|
|
|
|
|
Exercised |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Expired |
|
| |
|
| $ | |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013 |
|
| 7,552,507 |
|
| $ | 0.86 |
|
|
| 6.48 |
|
| $ | 692,330 |
|
Exercisable at December 31, 2013 |
|
| 4,170,173 |
|
| $ | 0.94 |
|
|
| 4.92 |
|
| $ | 222,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2013 |
|
|
|
|
| $ | 0.69 |
|
|
|
|
|
|
|
|
|
A summary of options issued to non-employees under the 2007 Plan and changes during the period from June 30, 2012 to December 31, 2012 and from June 30, 2013 to December 31, 2013 is as follows:
On September 21, 2012, the Company granted options to purchase 70,000 shares of the Companys common stock at an exercise price of $0.63 per share to the father of the Companys 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 Companys 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 Companys 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.
11
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
On November 14, 2012 , the Compensation Committee of the Board of Directors granted its Chief Executive Officer, Chief Financial Officer, Chief Technology Officer and President 800,000 each stock settled stock appreciation rights (SARS) of which (i) 200,000 vested immediately, (ii) 200,000 vest upon the Company generating $3,000,000 in revenue in any 12-month period, (iii) another 200,000 vest upon the Company generating $5,000,000 in revenue in any 12-month period and (iv) another 200,000 vest upon the Company generating $6,000,000 in revenue in any 12-month period. The SARs are exercisable at $0.45 per share over a 10-year period. The Company valued the SARS at $1,086,560 using the Black-Scholes option pricing model using a volatility of 89.67%, based upon the historical price of the Companys common stock since June 2008, an estimated term of 6.5 years, using the Simplified Method and a discount rate of 0.93%. The resulting expense will be recognized 25% immediately and the remainder over the vesting period. The Companys Chief Executive Officer, President and Chief Technology Officer agreed to cancel the 250,000 stock options granted to each of them in their prior employment agreements.
In July 2013, the Company issued ten year options to purchase 250,000 shares of common stock, each to its Chief Executive Officer, Chief Technology Officer and Chief Financial Officer. The options have an exercise price of $1.30 per share and vest 50% upon the market value of the Companys common stock trading at or greater than $2.00 per share for any 10 day period out of a 30 day trading period and the other 50% vesting upon the market value of the Companys common stock trading at or greater than $3.00 per share for any 10 day period out of a 30 day trading period. The options were valued using the Black-Scholes model using a volatility of 93.11% (derived using the historical market price for the Companys 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 2.62%. The value of these options was estimated by management in accordance with ASC 718, which requires an estimate of the probability that these market conditions will occur and for the resulting discounted value be expensed immediately. Accordingly management has expensed $63,180 to stock compensation expense.
In July 2013, the Company granted 100,000 options to a new employee in connection with his employment. Of the options granted, 50,000 are exercisable at $1.25 per share and 50,000 are exercisable at $1.75 per share. Both grants are for a five year term vest 25% immediately and 75% in equal amounts over three years. The options were valued using the Black-Scholes model using a volatility of 91.61% (derived using the historical market price for the Companys common stock since it began trading in June 2008), an expected term of 4.0 years (using the simplified method) and a discount rate of 1.14%. The value of these options, $80,413 will be recognized as expense over the requisite service period.
In July 2013, the Company granted ten year options to purchase 25,000 shares of the Companys common stock at an exercise price of $1.30 per share to the father of the Companys CEO and CTO in recognition of his service. The options vest over a three year period. The Company valued the options at $25,272 using the Black-Scholes option pricing model using a volatility of 91.72%, based upon the historical price of the Companys common stock since June 2008, an estimated term of 1.5 years, using the Simplified Method and a discount rate of 2.61%.
In July 2013, the Board of Directors approved a pool of 400,000 options to be granted to employees at the discretion of the executive management of the Company. In September 2013, management granted 100,000 of these options to employees. The options vested immediately, are exercisable for five years and have an exercise price of $1.30 per share, the market value of our common stock on the date of the grant. The Company valued the options at $69,452 using the Black-Scholes option pricing model using a volatility of 91.72%, based upon the historical price of the Companys common stock since June 2008, an estimated term of 2.5 years, using the Simplified Method and a discount rate of 0.45%. In December 2013, management granted 90,500 of these options to employees. The options vested immediately, are exercisable for five years and have an exercise price of $0.72 per share, the market value of our common stock on the date of the grant. The Company valued the options at $34,610 using the Black-Scholes option pricing model using a volatility of 90.96%, based upon the historical price of the Companys common stock since June 2008, an estimated term of 2.5 years, using the Simplified Method and a discount rate of 0.55%.
In August 2013, the Company granted 150,000 stock settled Stock Appreciation Rights (SARS) to a new employee in connection with his employment. The SARS are exercisable at 1.52 per share, are for a five year term and vest 50,000 immediately and the remaining options will vest 33,334 upon the Company reaching $3 million in sales in any twelve month period, 33,333 upon the Company reaching sales of $5 million in any twelve month period and 33,333 upon the Company reaching sales of $6 million in any twelve month period. The SARS were valued using the Black-Scholes model using a volatility of 91.91% (derived using the historical market price for the Companys common stock since it began trading in June 2008), an expected term of 4.0 years (using the simplified method) and a discount rate of 1.97%. The value of these SARS, $176,413 will be recognized as expense over the period required to meet the performance criteria which is estimated to be approximately two years.
12
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
A summary of options issued to directors under the 2007 Plan and changes during the period from June 30, 2012 to December 31, 2012 and from June 30, 2013 to December 31, 2013 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, 2012 |
|
| 857,500 |
|
| $ | 1.36 |
|
|
| 7.96 |
|
|
|
| |
Granted |
|
| 235,000 |
|
| $ | 0.90 |
|
|
| 10.00 |
|
|
|
| |
Exercised |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Expired |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Outstanding at December 31, 2012 |
|
| 1,092,500 |
|
| $ | 1.26 |
|
|
| 7.90 |
|
| $ | |
|
Exercisable at December 31, 2012 |
|
| 756831 |
|
| $ | 1.38 |
|
|
| 7.37 |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2012 |
|
|
|
|
| $ | 0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013 |
|
| 1,200,833 |
|
| $ | 1.16 |
|
|
| 8.04 |
|
|
|
|
|
Granted |
|
| 495,000 |
|
| $ | 1.19 |
|
|
| 10.00 |
|
|
|
|
|
Exercised |
|
| (20,000 | ) |
| $ | 0.91 |
|
|
| |
|
|
|
|
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Expired |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Outstanding at December 31, 2013 |
|
| 1,675,833 |
|
| $ | 1.12 |
|
|
| 8.11 |
|
| $ | 6,287 |
|
Exercisable at December 31, 2013 |
|
| 885,835 |
|
| $ | 1.23 |
|
|
| 6.98 |
|
| $ | 5,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2013 |
|
|
|
|
| $ | 0.76 |
|
|
|
|
|
|
|
|
|
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 Companys 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.
On December 6, 2012, the Company issued options to purchase 5,000 shares of common stock to a director upon his appointment to the audit committee. The options have an exercise price of $0.36 per share, and vest over three years, subject to continued service and bear a ten year term. The options were valued using the Black-Scholes model using a volatility of 89.86% (derived using the historical market price for the Companys 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 0.90%. The value of these options, $1,360, will be recognized as expense over the requisite service period.
As prescribed by the Company's 2007 Equity Incentive Plan, on July 1, 2013, the Company issued options to purchase 370,000 shares of common stock to directors. The options have an exercise price of $1.15 per share, vest on June 30, 2014¸ 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 93.11% (derived using the historical market price for the Companys 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 1.52%. The value of these options will be recognized as expense over the requisite service period.
13
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
In July 2013, the Company issued ten year options to purchase 50,000 shares of common stock to a director. The options have an exercise price of $1.30 per share and vested immediately. The options were valued using the Black-Scholes model using a volatility of 93.11% (derived using the historical market price for the Companys 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 2.67%. The value of these options will be recognized as expense during the six months ended December 31, 2013.
In September 2013, the Company issued ten year options to purchase 15,000 shares of common stock to a director. The options have an exercise price of $1.01 per share and vested immediately. The options were valued using the Black-Scholes model using a volatility of 91.6% (derived using the historical market price for the Companys common stock since it began trading in June 2008), an expected term of 5.0 years (using the simplified method) and a discount rate of 1.62%. The value of these options, $10,702, was recognized as expense during the six months ended December 31, 2013.
In October 2013, the Company issued ten year options to purchase 60,000 shares of common stock at an exercise price of $1.17 per share to a new director. The options vest annually subject to continued service. The options were valued using the Black-Scholes model using a volatility of 91.94% (derived using the historical market price for the Companys 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 1.89%. The value of these options, $54,285 will be recognized as expense over the vesting period.
A summary of options issued to non-employees under the 2007 Plan and changes during the six month periods from June 30, 2012 to December 31, 2012 and from June 30, 2013 to December 31, 2013 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, 2012 |
|
| 540,000 |
|
| $ | 1.16 |
|
|
| 3.14 |
|
|
|
| |
Granted |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Exercised |
|
| (100,000 | ) |
| $ | 0.50 |
|
|
|
|
|
|
|
| |
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Expired |
|
| |
|
| $ | |
|
|
| |
|
|
|
| |
Outstanding at December 31, 2012 |
|
| 440,000 |
|
| $ | 1.14 |
|
|
| 1.77 |
|
| $ | |
|
Exercisable at December 31, 2012 |
|
| 440,000 |
|
| $ | 1.14 |
|
|
| 1.77 |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2012 |
|
|
|
|
|
| N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013 |
|
| 560,000 |
|
| $ | 1.22 |
|
|
| 5.96 |
|
|
|
|
|
Granted |
|
| 20,000 |
|
| $ | 1.18 |
|
|
| 5.00 |
|
|
|
|
|
Exercised |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Expired |
|
| |
|
| $ | |
|
|
| |
|
|
|
|
|
Outstanding at December 31, 2013 |
|
| 580,000 |
|
| $ | 1.22 |
|
|
| 5.43 |
|
| $ | |
|
Exercisable at December 31, 2013 |
|
| 305,000 |
|
| $ | 1.21 |
|
|
| 1.92 |
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2013 |
|
|
|
|
| $ | 0.96 |
|
|
|
|
|
|
|
|
|
14
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
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 Companys 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.
In October 2013, the Company granted five-year options to purchase 20,000 shares of common stock
at an exercise price of $1.18 per share to two consultants. The Company valued the options at $16,670 using the Black-Scholes option pricing model using a volatility of 91.94%, based upon the historical price of the Companys common stock since June 2008, an estimated term of 5.0 years, the term of the options and a discount rate of 1.38%.
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 Companys 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, 2012 to December 31, 2012 and from July 1, 2013 to December 31, 2013 is as follows:
Warrants Issued as Settlements
|
| Number of Warrants |
|
| Weighted Average Exercise Price |
|
| Remaining Contractual Life |
| |||
Balance at June 30, 2012 |
|
| 344,058 |
|
| $ | 1.05 |
|
|
| 0.92 |
|
Granted |
|
| 350,000 |
|
| $ | 0.60 |
|
|
| 5.00 |
|
Exercised |
|
| |
|
| $ | |
|
|
| |
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
Expired |
|
| |
|
| $ | |
|
|
| |
|
Outstanding at December 31, 2012 |
|
| 694,058 |
|
| $ | 0.84 |
|
|
| 2.58 |
|
Exercisable at December 31, 2012 |
|
| 694,058 |
|
| $ | 0.84 |
|
|
| 2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2012 |
|
|
|
|
| $ | 0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013 |
|
| 350,000 |
|
| $ | 0.63 |
|
|
| 4.22 |
|
Granted |
|
| |
|
| $ | |
|
|
| |
|
Exercised |
|
| |
|
| $ | |
|
|
| |
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
Expired |
|
| |
|
| $ | |
|
|
| |
|
Outstanding at December 31, 2013 |
|
| 350,000 |
|
| $ | 0.63 |
|
|
| 3.74 |
|
Exercisable at December 31, 2013 |
|
| 350,000 |
|
| $ | 0.63 |
|
|
| 3.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2013 |
|
|
|
|
|
| N/A |
|
|
|
|
|
15
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
On September 21, 2012, the Board of Directors granted five year warrants to purchase 350,000 shares of the Companys 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 Companys common stock since June 2008, an estimated term of 2.5 years, using the Simplified Method and a discount rate of 0.32%.
A summary of warrants issued for cash and changes during the periods June 30, 2012 to December 31, 2012 and from June 30, 2013 to December 31, 2013 is as follows:
Warrants issued for cash or services
|
| Number of Warrants |
|
| Weighted Average Exercise Price |
|
| Remaining Contractual Life |
| |||
Balance at June 30, 2012 |
|
| 4,481,200 |
|
| $ | 1.46 |
|
|
| 2.46 |
|
Granted |
|
| 50,000 |
|
| $ | 0.63 |
|
|
| 5.0 |
|
Exercised |
|
| (1,820,000 | ) |
| $ | 0.50 |
|
|
| |
|
Exercise rescission |
|
| |
|
| $ | |
|
|
|
|
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
Expired |
|
| (320,000 | ) |
| $ | 1.60 |
|
|
| |
|
Outstanding at December 31, 2012 |
|
| 2,391,200 |
|
| $ | 1.42 |
|
|
| 1.00 |
|
Exercisable at December 31, 2012 |
|
| 2,91,200 |
|
| $ | 1.42 |
|
|
| 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2012 |
|
|
|
|
| $ | 0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013 |
|
| 1,533,700 |
|
| $ | 1.25 |
|
|
| 2.06 |
|
Granted |
|
| 949,412 |
|
| $ | 1.17 |
|
|
| 5.00 |
|
Exercised |
|
| (20,000 | ) |
| $ | 1.25 |
|
|
| |
|
Forfeited |
|
| |
|
| $ | |
|
|
| |
|
Expired |
|
| (325,000 | ) |
| $ | 1.25 |
|
|
| |
|
Outstanding at December 31, 2013 |
|
| 2,138,112 |
|
| $ | 1.22 |
|
|
| 3.46 |
|
Exercisable at December 31, 2013 |
|
| 2,138,112 |
|
| $ | 1.22 |
|
|
| 3.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the six months ended December 31, 2013 |
|
|
|
|
|
| N/A |
|
|
|
|
|
On September 21, 2012, the Board of Directors granted five year warrants to purchase 50,000 shares of the Companys common stock at an exercise price of $0.63 per share to the Companys 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 Companys common stock since June 2008, an estimated term of 5 years, the term of the warrants, and a discount rate of 0.70%.
During the six months ended December 31, 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 to purchase shares of the Companys 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 $70,491 for the six months ended December 31, 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.
16
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
During December 2012, warrants to purchase 320,000 shares of the Companys common stock at an exercise price of $1.60 per share expired unexercised.
In July 2013, the Company issued five year warrants to purchase 29,412 shares of common stock at an exercise price of $1.30 per share in connection with a private placement with an accredited investor.
In July 2013, the Company issued five year warrants to purchase 500,000 shares of common stock at an exercise price of $1.30 per share to its principal stockholder in connection with a $1 .0 million convertible note agreement.
In August 2013, the Company issued 20,000 shares of common stock in exchange for $25,000 in connection with the exercise of warrants with an exercise price of $1.25 per share.
In October 2013, the Company issued five year warrants to purchase 100,000 shares of common stock at an exercise price of $1.00 per share in connection with a private placement with its Principal Shareholder.
In October 2013, the Company issued five year warrants to purchase 200,000 shares of common stock at an exercise price of $1.00 per share in connection with private placements a director and his wife.
In October 2013, the Company issued five year warrants to purchase 120,000 shares of common stock at an exercise price of $1.00 per share in connection with private placements with three accredited investors.
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 and leases a facility in Brooklyn under a one year lease that began in February 2013.
Rent expense for the six months ended December 31, 2013 and 2012 was $84,009 and $53,479, respectively.
On November 14, 2012, the Compensation Committee approved new employment agreements for the Companys then Chief Executive Officer, then President, Chief Technology Officer and Chief Financial Officer. The employment agreements each provided for base salaries of $150,000 and 800,000 stock settled stock appreciation rights (SARS) of which (i) 200,000 vested immediately, (ii) 200,000 vest upon the Company generating $3,000,000 in revenue in any 12-month period, (iii) another 200,000 vest upon the Company generating $5,000,000 in revenue in any 12-month period and (iv) another 200,000 vest upon the Company generating $6,000,000 in revenue in any 12-month period. The SARs are exercisable at $0.45 per share over a 10-year period. The Companys then Chief Executive Officer, then President and Chief Technology Officer agreed to cancel the 250,000 stock options granted to each of them in their prior employment agreements. These executives base salary will increase to: (i) $170,000 upon the Company generating $3,000,000 in revenue in any 12-month period, (ii) $190,000 upon the Company generating $5,000,000 in any 12-month period and (iii) $200,000 upon the Company generating $6,000,000 in any 12-month period.
Additionally, the Compensation Committee approved an employment agreement for the Companys Executive Chairman. The Executive Chairman receives a base salary of $200,000 per year and was granted 800,000 restricted stock units vesting on identical terms as the SARs. All of the five senior executives receive a monthly car allowance of $600 per month. The Compensation Committee will also have the discretion to award each of the executives a bonus based upon job performance, revenue growth or any other factors determined by the Compensation Committee. Each of the employment agreements was effective as of October 1, 2012 and is for a four-year term. In June 2013, the Company terminated this agreement for cause.
17
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
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 Companys offices, and alleges the Company invaded his privacy by looking at his personal computer (which was used in the Companys business) in the Companys 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 Companys CEO on a claim of civil theft, which by law results in an award of $600,000 for the plaintiff. The Companys board of directors approved the indemnification of the Companys 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.
Based upon the verdicts, the Company recorded a litigation accrual of $1,646,000 as of June 30, 2012. In November 2012, the insurance carrier paid the plaintiff $200,000 in settlement of the invasion of privacy and fraudulent misrepresentation awards. As a result, the Company reduced the amounts accrued for these awards resulting in other income of $200,000 for the period ended December 31, 2012.
In January 2013, the court ruled on the Companys post-trial motions in this litigation dismissing the $200,000 civil theft verdict (which was subject to triple damages) against the CEO and reducing the $841,000 breach of the consulting agreement award to $500,000. The Company then filed a motion seeking a new trial on damages. The Company received a favorable ruling on this motion and received a new trial on the damages. As a result of the reduction in the award for breach of the consulting agreement from $841,000 to $500,000 and the vacating of the award for civil theft which the Company had previously accrued $600,000, the Company recorded other income of $941,000 for the year ended June 30, 2013. The Company expects the trial to determine damages to occur in the spring of 2014.
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 CEOs wife is a bookkeeper at $1,200 per week,
·
The CEO and CTOs father is a researcher at $2,123 per week, and
·
The CEO and CTOs mother is a receptionist at $600 per week.
The Company has employment arrangements with its executive officers which are described under Note 5.
The Company has entered into a series of credit facilities with its principal stockholder as more fully described in Note 3.
In September 2012 and July 2013, the Company granted options to purchase 70,000 shares and 25,000 shares, respectively, of the Companys common stock to the father of the Companys CEO and CTO as more fully described in Note 4.
In September 2012, the Company granted warrants to purchase 350,000 shares of the Companys common stock to a director as more fully described in Note 4.
Effective February 8, 2013, the Companys President and Director resigned from the Company to pursue other opportunities. In connection with his separation, the Company agreed to pay the former President $150,000 plus COBRA payments over 14 months. In addition, the Company agreed to issue the former President ten year fully vested options to purchase 112,500 shares of the Companys common stock at an exercise price of $0.39 per share, subject to a lockup agreement for the option shares and the other shares he currently owns. In addition, options and stock appreciation rights to purchase 2,125,000 shares of the Companys common stock at exercise prices from $0.45 to $1.22 per share, previously issued to him, were cancelled. The Company recognized a severance expense of $168,920 upon the signing of the agreement representing the total liability to the Company under the severance agreement. As of December 31, 2013, the remaining liability under the agreement amounted to $59,826.
In September 2013, the father of the Companys Chief Operating Officer and principal stockholder was appointed to the board of directors.
18
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2013 AND 2012
(Unaudited)
NOTE 7 Concentrations
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through December 31, 2013. As of December 31, 2013, there were no cash equivalent balances held in depository accounts that are not insured.
At December 31, 2013, three customers accounted for 48.4%, 17.7% and 14.0% of accounts receivable.
For the six months ended December 31, 2013 one customer accounted for approximately 76.9% of sales.
During the six months ended December 31, 2013 all sales resulted from two products, FireIce® and Soil2O which made up 89.03% and 11.0%, respectively, of total sales. Of the FireIce® sales, 80.2% related to the sale of EMFIDS, 16.6% related to the sale of FireIce® products, 1.93% related to paid for research and 1.3%% related to sales of the FireIce Home Defense units. Of the Soil2O sales, 1.3%% related to traditional sales of Soil2O® and 98.7% related to sales of Soil2O® Dust Control.
Four vendors accounted for 36.1%, 17.1%, 13.6% and 11.3% of the Companys approximately $471,000 of EMFIDS parts, raw material and packaging purchases during the six months ended December 31, 2013.
NOTE 8 - Subsequent Events
In January 2014, the Companys shareholders approved increasing the number of authorized shares of common stock to 100,000,000. Effective January 21, 2014, the Companys authorized common stock was increased to 100,000,000 shares.
On January 21, 2014, our former Chief Executive Officer (who had taken a leave of absence) passed away. His estate will receive one-years severance and all stock options and SARS will continue to vest as provided in the respective agreements.
Since January 1, 2014 the Company has issued 1,417,056 shares of common stock in exchange for $832,875 in connection with private placements with seven accredited investors.
19
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Certain statements in Managements Discussion and Analysis 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 managements 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., or GelTech, markets the following products: (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in urban firefighting, including underground utility fires, and in wildland firefighting and as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire; (3) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires; (4) 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; and (5) Soil2O®, a product which reduces the use of water and is primarily marketed to golf courses, commercial landscapers and the agriculture market. 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 GelTech.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2013 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2012.
Sales
For the six months ended December 31, 2013, we had sales of $595,846 as compared to $121,903 for the six months ended December 31, 2012, an increase of $473,943 or 388.8%. Sales of product during the six months ended December 31, 2013 consisted of $65,802 for Soil2O® and $530,043 for FireIce® and related products. The Soil2O® sales consisted primarily of Soil2O® dust control. FireIce® sales consisted of $425,000 related to the sale of EMFIDS units, $98,243 related to product sales and $6,800 related to sales of HDU units. We expect that our revenues will increase to the extent we are successful in obtaining orders for our new EMFIDS units and other FireIce® related products.
Cost of Goods Sold
Cost of goods sold was $262,073 for the six months ended December 31, 2013 as compared to a cost of goods sold of $49,578 for the six months ended December 31, 2012. The increase was the direct result of the increase in sales. Cost of sales as a percentage of sales was 44% for the six months ended December 31, 2013 as compared to 40.7% for the six months ended December 31, 2012. The slightly higher cost of sales percentage in fiscal 2014 relates to the sales mix and an increase in raw material costs. We expect future cost of sales as a percentage of sales will be consistent with the cost of sales percentage for the six months ended December 31, 2013.
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were $3,926,272 for the six months ended December 31, 2013 as compared to $3,076,098 for the six months ended December 31, 2012. The increase in fiscal 2014 expenses resulted primarily from (1) an increase in salaries and employee benefits of $491,484 resulting from the addition of two management personnel and five sales personnel and personnel costs supporting the Con Edison manhole fire program at our facility in Brooklyn; (2) an increase in professional fees of $183,863 relating to the cost of litigations, increased patent attorney fees resulting from the development of the EMFIDS and other R & D projects; (3) an increase in non-cash compensation expense related to the vesting of employee, executive management and director options of $155,091 and (4) an increase in facility costs of $61,436 in connection with facility in Brooklyn. These increases were partially offset by a decrease of 36,525 in sales and marketing expense.
20
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
Research and Development Expenses
R&D expenses were $137,821 for the six months ended December 31, 2013 as compared to $23,731 for the six months ended December 31, 2012. The expenses for the six months ended December 31, 2013 related to research of potential product delivery system enhancements for FireIce®, including EMFIDS and testing of new processes for the application of our Soil2O® "Dust Control" product.
Loss from Operations
Loss from operations was $3,730,330 for the six months ended December 31, 2013 as compared to $3,027,504 for the six months ended December 31, 2012. The increased loss resulted from the higher operating expenses which were only partially offset by the increase in sales.
Cost of Repricing of Warrants to Induce Exercise
The Company recorded a cost of repricing warrants of $70,491for the six months ended December 31, 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.
Other Income
In November 2012, the Company recognized other income of $200,000 resulting from the reduction of the accrual for losses from litigation related to a lawsuit filed by a former employee. The reduction was recorded to reflect insurance payments made to the plaintiff.
Interest Expense
Interest expense was $239,764 for the six months ended December 31, 2013 as compared to $314,054 for the six months ended December 31, 2012. The higher expense during the six months ended December 31, 2012 resulted from the amortization of the debt discounts related to short term convertible notes. Amortization of these discounts was $274,426 for the six months ended December 31, 2012 as compared to $118,771 for the six months ended December 31, 2013.
Net Loss
Net loss was $3,964,247 for the six months ended December 31, 2013 as compared to $3,211,484 for the six months ended December 31, 2012. The higher net loss resulted from the higher operating expenses which were only partially offset by the higher gross profit resulting from the increase in sales. Net loss per common share was $0.12 for the six months ended December 31, 2013 as compared to $0.12 for the six months ended December 31, 2012. The weighted average number of shares outstanding for the six months ended December 31, 2013 and 2012 were 34,358,586 and 27,387,133, respectively.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2013 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2012.
Sales
For the three months ended December 31, 2013, we had sales of $65,034 as compared to $37,453 for the three months ended December 31, 2012, an increase of $27,581 or 73.6%. Sales of product during the three months ended December 31, 2013 consisted of $11,520 for Soil2O® and $53,339 for FireIce® and related products. The Soil2O® sales related to sales of Soil2O® dust control. FireIce® sales consisted of $51,139 related to product sales and $2,200 related to sales of HDU units. We expect that our revenues will increase to the extent we are successful in obtaining orders for our new EMFIDS units.
Cost of Goods Sold
Cost of goods sold was $34,340 for the three months ended December 31, 2013 as compared to a cost of goods sold of $13,499 for the three months ended December 31, 2012. The increase was the direct result of the increase in sales. Cost of sales as a percentage of sales was 52.8% for the three months ended December 31, 2013 as compared to 36.0% for the three months ended December 31, 2012. The higher cost of sales percentage in fiscal 2014 relates to the sales mix and an increase in raw material costs. We expect future cost of sales as a percentage of sales will be consistent with the cost of sales percentage for the six months ended December 31, 2013.
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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
Selling, General and Administrative Expenses
Selling, General and Administrative expenses were $1,894,228 for the three months ended December 31, 2013 as compared to $1,526,616 for the three months ended December 31, 2012. The increase in fiscal 2014 expenses resulted primarily from (1) an increase in salaries and employee benefits of $213,351 resulting from the addition of two management personnel and three sales personnel and personnel costs supporting the Con Edison manhole fire program at our facility in Brooklyn; (2) an increase in facility costs of $42,649 related to the rent an related costs of our new facility in Brooklyn; and (3) an increase in non-cash compensation expense related to the vesting of employee, executive management and director options of $227,428. These increases were partially offset by a decrease of $89,869 in sales and marketing expenses and $24,077 in travel expenses.
Research and Development Expenses
R&D expenses were $50,663 for the three months ended December 31, 2013 as compared to $6,423 for the three months ended December 31, 2012. The expenses for the three months ended December 31, 2013 related to research of potential product delivery system enhancements for FireIce®, including EMFIDS and testing of new processes for the application of our Soil2O® "Dust Control" product.
Loss from Operations
Loss from operations was $1,914,197 for the three months ended December 31, 2013 as compared to $1,509,085 for the three months ended December 31, 2012. The increased loss resulted from the higher operating expenses which were only partially offset by the increase in sales.
Cost of Repricing of Warrants to Induce Exercise
The Company recorded a cost of repricing warrants of $70,491 for the three months ended December 31, 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.
Other Income
In November 2012, the Company recognized other income of $200,000 resulting from the reduction of the accrual for losses from litigation related to a lawsuit filed by a former employee. The reduction was recorded to reflect insurance payments made to the plaintiff.
Interest Expense
Interest expense was $127,392 for the three months ended December 31, 2013 as compared to $97,226 for the three months ended December 31, 2012. The higher expense during the three months ended December 31, 2013 resulted from the amortization of the debt discounts related to convertible notes. Amortization of these discounts was $69,147 for the three months ended December 31, 2013 as compared to $52, 576 for the three months ended December 31, 2012.
Net Loss
Net loss was $2,052,985 for the three months ended December 31, 2013 as compared to $1,405,797 for the three months ended December 31, 2012. The higher net loss resulted from the higher operating expenses which was only partially offset by the higher gross profit resulting from the increase in sales and the higher other expense resulting from the absence of the other income of $200,000 during the 3 months ended December 31, 2012. Net loss per common share was $0.06 for the three months ended December 31, 2013 as compared to $0.05 for the three months ended December 31, 2012. The weighted average number of shares outstanding for the three months ended December 31, 2013 and 2012 were 35,147,692 and 28,877,700, respectively.
22
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 2013, the Company used net cash of $2,769,198 in operating activities as compared to net cash used in operating activities of $1,994,491 for the six months ended December 31, 2012. Net cash used during the six months ended December 31, 2013 resulted primarily from the net loss of $3,964,247, an in inventories of $274,441, payments on the accrual for severance agreement for our former president of $84,460 and a reduction of accounts payable of $30,636 which were partially offset by non-cash stock based compensation of $1,235,650, non-cash amortization of debt discounts of $118,771, depreciation of $26,112 and an increase in accrued expenses and deferred revenue of $124,642 and $50,000, respectively. Net cash used during the six months ended December 31, 2012 resulted primarily from the net loss of $3,211,484, a decrease in accounts payable and accrued liabilities of $37,211 and an increase in inventory of $29,665 which were partially offset by non-cash stock based compensation of $1,080,559, non-cash amortization of debt discounts of $274,426, depreciation of $25,346, a loss on repricing of warrants of $70,491 and a decrease in accounts receivable of $11,444.
Cash flows used in investing activities for the six months ended December 31, 2013 amounted to $57,093 and related to purchases of office equipment, computer peripherals and a vehicle and mixing equipment to support sales to the utility market.
Cash flows from financing activities for the six months ended December 31, 2013 were $2,877,124 as compared to $2,194,131 for the six months ended December 31, 2012. During the six months ended December 31, 2013, the Company received $1,000,000 from its principal investor in exchange for a note convertible at $1.00 per share and warrants to purchase 500,000 shares at an exercise price of $1.30 per share in a private placement, received $18,200 from the exercise of options to purchase 20,000 shares of common stock at an exercise price of $0.91 per share, $775,000 from accredited investors in exchange for 1,092,750 shares of common stock in connection with private placements, $570,000 in exchange for 577,428 shares of common stock in connection with the Lincoln Park, or LPC, stock purchase agreement and $730,000 in exchange for the issuance of 957,647 shares of common stock and five year warrants to purchase 449,412 shares of common stock at an exercise prices between $1.00 and $1.25 per share in connection with a private placement with an accredited investor and received $25,000 in connection with the exercise of warrants to purchase 20,000 shares of common stock at an exercise price of $1.25 per share. The amounts received were used to make repayments on convertible notes payable to related parties of $85,880, to make payments of $115,822 on convertible notes with third parties and to make payments on insurance premium finance contracts of $39,374. During the six months ended December 31, 2012, the Company received $910,000 from the exercise of options to purchase 1,820,000 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, $810,003 in exchange for 1,333,820 shares of common stock in connection with the stock purchase agreement with LPC, $175,000 in exchange for six-month convertible notes with two accredited investors and $250,000 from the Companys principal stockholder in exchange for a one year convertible original issue discount note. The amounts received were used to make repayments on notes payable to related parties of $59,839 and to make payments on insurance premium finance contracts of $19,033.
Historical Financings
Since July 1, 2013, GelTech has raised $2,337,875 from the sale of common stock in connection with private placements with eight accredited investors including Michael Reger, our principal stockholder and Chief Operating Officer, and Neil Reger, a director. In consideration for their investments, GelTech issued 4,044,881 shares of common stock at prices ranging from $0.55 to $1.32 per share and 449,512 warrants with exercise prices ranging from $1.00 to $1.30 per share.
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, GelTech has the right, in its sole discretion, through July 4, 2014 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. As of the date of this report, GelTech may sell up to $30,000 per sale. To date, GelTech has issued 2,913,997 shares of common stock in exchange for $1,990,003 under the Purchase Agreement. Since July 1, 2013, GelTech has issued 577,428 shares of common stock in exchange for $570,000 under the Purchase Agreement and has the ability to sell another $3.01 million under the Purchase Agreement. The price at which we may sell shares to LPC is subject to a floor of $0.35 per share.
Liquidity and Capital Resource Considerations
As of February 12, 2014, we had $359,000 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 equipment and support vehicles in the future, depending on demand.
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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
We face a new trial on damages from a former employee and consultant. We cannot predict how much we will be required to pay. In the event that the Plaintiff is awarded a substantial award in the new trial, we may not have the money to secure an appeal bond.
The Company believes the LPC Purchase Agreement plus access to private funding sources will provide the Company with a sufficient amount of working capital for the next 12 months. However, if GelTech is unable to generate substantial cash flows from sales of its products, complete financings or sales to LPC, it may not be able to remain operational.
Related Person Transactions
For information on related party transactions and their financial impact, see Note 6 to the Unaudited Condensed Consolidated Financial Statements.
Principal Accounting Estimates
In response to the SECs 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 Companys financial condition. The accounting estimates are discussed below. This estimate involves certain assumptions that if incorrect could create a material adverse impact on the Companys 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 |
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- | 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. |
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- | We have a reasonable expectation that the buyer has the intent and the ability to pay for the product ordered. |
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- | 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 managements opinion, the existing models may not necessarily provide a reliable single measure of the fair value of such stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
For information on recent accounting pronouncements, see Note 1 to the Unaudited Condensed Consolidated Financial Statements.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements including our liquidity and anticipated capital asset requirements and expected increase in sales of our products. Forward-looking statements can be identified by words such as anticipates, intends, plans, seeks, believes, estimates, expects and similar references to future periods.
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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
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 the failure to receive material orders from the utility and mining companies, global and domestic economic conditions, budgetary pressures facing state and local governments, our failure to receive or the potential delay of anticipated orders for our products, failure to receive acceptance of FireIce® by State and Local governments and an adverse result in the pending litigation.
Further information on our risk factors is contained in our filings with the SEC, including the Prospectus dated November 5, 2013. 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.
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 SECs 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.
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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1.
From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal and ordinary course of business. There were no material changes during the period covered by this report to any pending legal proceedings previously reported.
ITEM 1A.
Not applicable to smaller reporting companies.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In addition to those unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission, 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 |
Investors (1) |
| December 24, 2013 |
| 90,910 shares of common stock |
| Purchase of shares at prices $0.55 per share by one investor |
Investors (1) |
| October 2, 2013 to October 18, 2013 |
| 640,000 shares of common stock and 320,000 five-year warrants at an exercise price of $1.00 per share |
| Purchase of shares and warrants by five investors at $0.75 per share |
(1)
Exempt under Section 4(a)(2) of the Securities Act and Regulation 506(b) thereunder. The securities were issued to accredited investors and there was no general solicitation.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4.
Not Applicable
ITEM 5.
None
ITEM 6.
The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Form 10-Q.
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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
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.
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| GELTECH SOLUTIONS, INC. |
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February 12, 2014 |
| /s/ Peter Cordani |
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| Peter Cordani |
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| Chief Executive Officer (Principal Executive Officer) |
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February 12, 2014 |
| /s/ Michael Hull |
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| Michael Hull |
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| Chief Financial Officer (Principal Financial Officer) |
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INDEX TO EXHIBITS
*
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.
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to GelTech Solutions, Inc., 1460 Park Lane South, Suite 1, Jupiter, Florida 33458, Attention: Corporate Secretary.
Exhibit 3.2
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION
OF GELTECH SOLUTIONS, INC.
GelTech Solutions, Inc. (the Company), a corporation organized and existing under the General Corporation Law of the State of Delaware (the Delaware General Corporation Law), hereby certifies as follows:
1.
Pursuant to Sections 242 and 228 of the Delaware General Corporation Law, the amendment herein set forth has been duly approved by the Board of Directors and holders of a majority of the outstanding capital stock of the Company.
2.
Section 4 of the Certificate of Incorporation is amended to read as follows:
The Company shall have the authority to issue:
(a)
100,000,000 shares of common stock, par value $0.001 per share; and
(b)
5,000,000 shares of preferred stock, par value $0.001 per share, with such rights, preferences and limitations 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 the Delaware General Corporation Law.
3.
This Certificate of Amendment to Certificate of Incorporation was duly adopted and approved by the shareholders of this Company on the 17th day of January 2014 in accordance with Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment to Certificate of Incorporation as of the 20th day of January 2014.
| GELTECH SOLUTIONS, INC. | |
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| By: | /s/ Michael Hull |
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| Michael Hull Chief Financial Officer |
Exhibit 10.3
THE SHARES ISSUABLE UPON CONVERSION OF THIS CONVERTIBLE NOTE AND THE CONVERTIBLE NOTE HAVE NOT BEEN REGISTERED UNDER THE FEDERAL OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR HYPOTHECATED IN ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS AS MAY BE APPLICABLE OR, AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM SUCH APPLICABLE LAWS EXIST.
CONVERTIBLE NOTE
$1,000,000.00 | Issuance Date: July 11, 2013 |
| Maturity Date: Five Years from the Issuance Date |
FOR VALUE RECEIVED, GelTech Solutions, Inc., a Delaware corporation, (the Company) hereby promises to pay to the order of Michael Reger (the Holder), at 777 Yamato Road, Suite 3, Boca Raton, Florida 33431, or at such other office as the Holder designates in writing to the Company, the sum of One Million Dollars ($1,000,000.00), plus interest at the annual rate of 7.5%, payable annually at the Holders option either in cash or in the Companys Common Stock, until the Maturity Date, unless this Note is converted into Common Stock of the Company pursuant to Section 1 hereof. If the Holder elects to receive Common Stock as payment for interest, the Company shall issue a number of shares based on the closing price of the Companys Common Stock on the last trading day preceding the applicable one-year anniversary date of this Note. While in default, this Note shall bear interest at the rate of 12% per annum or such maximum rate of interest allowable under the laws of the State of Florida. Payments shall be made in lawful money of the United States.
1.
Conversion to Common Stock.
(a)
The Holder shall have the right to convert this Note, in whole or in part, into shares of the Companys Common Stock at the rate of $1.00 per share as adjusted (the Conversion Price) at any time, subject to prior prepayment.
(b)
Conversion Formula. The number of shares of Common Stock issuable upon a conversion of this Note shall be determined by dividing (i) the full principal amount of this Note, which includes all interest that will be accrued as of the conversion date, including default interest if converted after the Maturity Date (or the portion thereof to be converted in the event of a partial conversion), less any principal or interest that has been prepaid as of the date of conversion, by (ii) the Conversion Price.
1
2.
Anti-Dilution Protection.
(a)
In the event, prior to the payment of this Note, the Company shall (i) issue any of its shares of Common Stock as a stock dividend on shares of Common Stock, (ii) subdivide the number of outstanding shares of Common Stock into a greater number of shares or (iii) reduce the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then, in such event, the Conversion Price shall be adjusted to equal the product of (A) the total number of shares of Common Stock outstanding immediately prior to such event multiplied by the Conversion Price in effect immediately prior to such event, divided by (B) the total number of shares of Common Stock outstanding immediately after such event.
(b)
In the event, prior to the payment of this Note, the Company shall be recapitalized by reclassifying its outstanding Common Stock (other than into shares of Common Stock with a different par value, or by changing its outstanding shares of Common Stock to shares without par value), or in the event the Company or a successor corporation, partnership, limited liability company or other entity (any of which is defined as a Corporation) shall consolidate or merge with or convey all or substantially all of its, or of any successor Corporations property and assets to any other Corporation or Corporations (any such other Corporation being included within the meaning of the term successor Corporation used in the context of any consolidation or merger of any other Corporation with, or the sale of all or substantially all of the property of any such other Corporation to, another Corporation or Corporations), or in the event of any other material change in the capital structure of the Company or of any successor Corporation by reason of any reclassification, reorganization, recapitalization, consolidation, merger, conveyance or otherwise, then, as a condition of any such reclassification, reorganization, recapitalization, consolidation, merger or conveyance, a prompt, proportionate, equitable, lawful and adequate provision shall be made whereby the Holder of this Note shall thereafter have the right to purchase, upon the basis and the terms and conditions specified in this Note, in lieu of the securities of the Company theretofore purchasable upon the conversion of this Note, such shares, securities or assets as may be issued or payable with respect to or in exchange for the number of securities of the Company theretofore obtainable upon conversion of this Note as provided above had such reclassification, reorganization, recapitalization, consolidation, merger or conveyance not taken place; and in any such event, the rights of the Holder of this Note to any adjustment in the number of shares of Common Stock obtainable upon conversion of this Note, as provided, shall continue and be preserved in respect of any shares, securities or assets which the Holder becomes entitled to obtain. Notwithstanding anything herein to the contrary, this Section 2 shall not apply to a merger with a subsidiary provided the Company is the continuing Corporation and provided further such merger does not result in any reclassification, capital reorganization or other change of the securities issuable under this Note. The foregoing provisions of this Section 2(b) shall apply to successive reclassification, capital reorganizations and changes of securities and to successive consolidation, mergers, sales or conveyances.
(c)
In the event the Company, at any time while this Note shall remain outstanding, shall sell all or substantially all of its assets, dissolve, liquidate, or wind up its affairs (each a Liquidation Event), a prompt, proportionate, equitable, lawful and adequate provision
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shall be made as part of the terms of any such Liquidation Event such that the Holder of this Note may thereafter receive, upon exercise hereof, in lieu of the securities of the Company which it would have been entitled to receive, the same kind and amount of any shares, securities or assets as may be issuable, distributable or payable upon any such Liquidation Event with respect to each share of Common Stock of the Company. Notwithstanding the preceding, in the event of any Liquidation Event, the right to convert this Note shall terminate on a date fixed by the Company, such date so fixed to be not earlier than (i) 6:00 p.m., New York time, on the 30th day after the date on which notice of such termination of the right to convert this Note has been given by mail to the Holder of this Note at such Holders address as it appears on the books of the Company or (ii) the date that the Company received sufficient approval of the Liquidation Event from its shareholders and/or directors, as required by law, if later; provided, however, that if such Liquidation Event is abandoned prior to its consummation or is not otherwise consummated within 180 days from the date of notice referred to in (i) above, then the conversion right of the Holder shall be reinstated.
3.
Event of Default. Upon an Event of Default, the entire unpaid balance of this Note then outstanding, together with accrued interest thereon, if any, shall be and become immediately due and payable upon written notice from the Holder. For purposes of this Note, an Event of Default shall consist of any of the following events:
(a)
The Company shall fail to pay any amounts which shall become due and payable to Holder under this Note, whether at the Maturity Date or at any accelerated date of maturity or at any other date fixed for payment.
(b)
The Company shall commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to its debts; or a court shall enter an order for relief or any such adjudication or appointment, which case, proceeding or action or order, adjudication, or appointment, as the case may be, remains undismissed, undischarged or unbonded for a period of 30 days, then, or any time thereafter during the continuance of any of such events.
(c)
The Company shall fail to issue the shares of Common Stock issuable upon any conversion of this Note within five days following the conversion date, or to perform in any material respect any of the other material covenants or agreements contained in this Note and not cure, if possible to cure, such failure within 10 business days after notice thereof.
(d)
Any material representation or warranty of the Company herein shall prove to have been false in any material respect upon the date when made.
(e)
The occurrence of an event of default, subject to any applicable cure period, under the Agreement.
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(f)
The occurrence of a Liquidation Event.
(g)
The Company shall fail to timely pay any interest or principal pursuant to any material indebtedness of the Company which results in the acceleration of the maturity of such indebtedness.
4.
Prepayment.
(a)
This Note may be prepaid in whole or in part at any time for cash on 15 business days prior written notice, subject to the right of holder of the Note to convert into shares of Common Stock of the Company prior to any prepayment. The Company shall honor any Conversion Notice (as defined in Section 5) delivered by the Holder up to 10 days following the notice of prepayment.
(b)
All payments made on this Note shall be applied first to any interest accrued to the date of such payment with the remainder applied toward principal.
5.
Mechanics of Conversion. To convert the Note into Common Stock on any date (a Conversion Date), the Holder shall (i) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit 1 (the Conversion Notice) to the Company, and (ii) surrender this Note to a common carrier for delivery to the Company as soon as practicable on or following such date (or an indemnification undertaking with respect to this Note in the case of its loss, theft or destruction). On or before the second (2nd) business day following the date of receipt of a Conversion Notice, the Company shall confirm that it has issued to the Holder the number of shares of Common Stock to which the Holder shall be entitled, and shall return to the Holder a new Note with respect to the portion of the original Note which was not converted. The person or persons entitled to receive the Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such Common Stock on the Conversion Date.
6.
Conversion Shares.
(a)
The Company covenants that by December 31, 2013, the Company will hold a shareholders meeting seeking shareholder approval to increase the Companys authorized capital (or effect a reverse stock split) in order to: (i) permit the Holder to convert all of the shares underlying this Note, (ii) to permit the Holder to exercise the warrants which are being issued concurrently with this Note, and (iii) to permit all of the Companys security holders to convert or exercise their outstanding derivative securities. The Holder covenants to vote his shares at any such meeting to approve the increase in authorized capital (or effect a reverse stock split). After the Companys authorized capital is increased (or the reverse stock occurs), the Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of this Note not less than such aggregate number of shares of the Common Stock as shall be issuable (taking into account the adjustments under Section 2) upon the conversion of the Note. The Company
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covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable, and free of all taxes, liens and charges created by the Company.
(b)
No fractional shares shall be issued upon a conversion. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall pay the Holder cash equal to the product of such fraction multiplied by the Common Stocks fair market value at the time of conversion based on the closing price of a share of Common Stock at such time.
(c)
The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder for any documentary stamp or similar taxes or any other expense that may be payable in respect of the issue or delivery of such certificates, all of which taxes and expenses shall be paid by the Company, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
7.
Negative Covenant. As long as any portion of this Note remains outstanding, the Company shall not declare or pay cash dividends or make any distributions of cash or property in respect of any equity securities of the Company, excluding dividends on the Companys Preferred Stock.
8.
Miscellaneous.
(a)
All makers and endorsers now or hereafter becoming parties hereto jointly and severally waive demand, presentment, notice of non-payment and protest.
(b)
This Note may not be changed or terminated orally, but only with an agreement in writing, signed by the parties against whom enforcement of any waiver, change, modification, or discharge is sought with such agreement being effective and binding only upon attachment hereto.
(c)
This Note and the rights and obligations of the Holder and of the undersigned shall be governed and construed in accordance with the laws of the State of Florida.
(d)
Upon the occurrence of an Event of Default under this Note, the Company shall, upon demand, pay to the Holder the amount of any and all reasonable costs and expenses (including reasonable attorneys fees) that Holder may incur in connection with the enforcement or collection of this Note.
5
(e)
No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies.
(f)
The Company hereby, to the fullest extent permitted by applicable law, waives presentment, demand, notice (including without limitation notice of default (except as otherwise specifically set forth herein), notice of protest, notice of intention to accelerate maturity, notice of acceleration of maturity and notice of nonpayment or dishonor), protest and all other demands and notices in connection with delivery, acceptance, performance, default, acceleration or enforcement of or under this Note, and the bringing of suit and diligence in taking any action to collect amounts owing hereunder or in proceeding against any of the rights and properties securing payment hereof, and is directly and primarily liable for the amount of all sums owing or to be owing hereon. The Company agrees that its liability on or with respect to this Note shall not be affected by any release of or change in any guaranty or security at any time or by any failure to perfect or maintain perfection of any lien against or security interest in any such security or the partial or complete unenforceability of any guaranty or other surety obligation, in each case in whole or in part, with or without notice and before or after maturity. No extension of the time for the payment of this Note made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the original liability of the Company under this Note.
(g)
All notices, offers, acceptance and any other acts under this Note (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by Federal Express or similar receipted next business day delivery, or by facsimile delivery followed by overnight next business day delivery to the Company at the address set forth in the Agreement (as it may be changed pursuant to the Agreement) and to the Holder at the address set forth in the Agreement or such other address as the Holder by notice to the Company may designate from time to time. The transmission confirmation receipt from the senders facsimile machine shall be evidence of successful facsimile delivery. Time shall be counted to, or from, as the case may be, the date of delivery.
Signature Page Follows
6
IN WITNESS WHEREOF, the Company has caused this Note to be executed as of the date aforesaid.
| By: |
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| Michael Cordani |
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| Chief Executive Officer |
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7
EXHIBIT 1
CONVERSION NOTICE
Reference is made to the Convertible Note (the Note) issued to the undersigned by GelTech Solutions, Inc., (the Company). In accordance with and pursuant to the Note, the undersigned hereby elects to convert, in whole or in part (as applicable), the principal and any accrued interest of the Note to which this notice is attached into Common Stock of the Company, as of the date specified below.
Date of Conversion: |
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Please confirm the following information: | |||||||||||
Conversion Price: |
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Principal and accrued interest to be converted (if partial): |
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Number of Shares of Common Stock to be issued: |
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Please issue the Common Stock into which the Note is being converted in the following name and to the following address: | |||||||||||
Issue to: |
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Facsimile Number: |
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Authorization: |
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By: |
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Title: |
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Dated: |
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Account Number: |
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(if electronic book entry transfer) |
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Transaction Code Number: |
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(if electronic book entry transfer) |
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8
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Peter Cordani, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of GelTech Solutions, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 12, 2014
/s/ Peter Cordani |
Peter Cordani Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Michael Hull, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of GelTech Solutions, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 12, 2014
/s/ Michael Hull |
Michael Hull Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of GelTech Solutions, Inc. (the Company) on Form 10-Q for the quarter ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof, I, Peter Cordani certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
2.
The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Peter Cordani |
Peter Cordani Chief Executive Officer (Principal Executive Officer) |
Dated: February 12, 2014
In connection with the quarterly report of GelTech Solutions, Inc. (the Company) on Form 10-Q for the quarter ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof, I, Michael Hull, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
2.
The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Michael Hull |
Michael Hull Chief Financial Officer (Principal Financial Officer) |
Dated: February 12, 2014
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