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 March 31, 2014

OR

o

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

For the transition period from ________________ to ________________

Commission file number 0-52993

GelTech Solutions, Inc.

(Exact name of registrant as specified in its charter)

Delaware	56-2600575
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1460 Park Lane South, Suite 1, Jupiter, Florida	33458
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o     No  þ

Class	Outstanding at May 9, 2014
Common Stock, $0.001 par value per share	39,045,905 shares

Table of Contents

	PART I – FINANCIAL INFORMATION
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.	1
	Condensed Consolidated Balance Sheets as of  March 31, 2014 (Unaudited) and June 30, 2013	1
	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2014 and 2013 (Unaudited)	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and 2013 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	26
ITEM 4.	CONTROLS AND PROCEDURES.	26
	PART II – OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	27
ITEM 1A.	RISK FACTORS.	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	27
ITEM 4.	MINE SAFETY DISCLOSURES.	27
ITEM 5.	OTHER INFORMATION.	27
ITEM 6.	EXHIBITS.	27
SIGNATURES		28

PART I – FINANCIAL INFORMATION

ITEM 1. 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	As of March 31,			As of June 30,
	2014			2013
	(Unaudited)
ASSETS
Cash and cash equivalents	$	71,049		$	90,275
Accounts receivable trade, net		83,831			37,277
Inventories		837,071			588,703
Prepaid expenses and other current assets		150,185			66,756
Total current assets		1,142,136			783,011
Furniture, fixtures and equipment, net		189,644			158,184
Deposits		28,086			26,886
Total assets	$	1,359,866		$	968,081
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable	$	200,842		$	265,122
Accrued expenses		155,798			176,734
Litigation accrual		505,000			505,000
Accrual for severance agreement		3,519			102,056
Convertible notes - related parties, net of discount		—			79,261
Convertible notes - third parties, net of discount		—			192,163
Insurance premium finance contract		41,033			11,796
Deferred revenue		—			7,019
Total current liabilities		906,192			1,339,151
Convertible notes - related party, net of discounts		2,146,498			1,899,316
Total liabilities		3,052,690			3,238,467
Commitments and contingencies (Note 5)
Stockholders’ equity (deficit)
Preferred stock: $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock: $0.001 par value; 50,000,000 shares authorized; 38,103,760 and 33,084,671 shares issued and outstanding as of March 31, 2014 and June 30, 2013, respectively.		38,104			33,084
Common stock issuable: 428,032 shares issuable at March 31, 2014		428			—
Additional paid in capital		31,883,959			25,718,163
Accumulated deficit		(33,615,315	)		(28,021,633	)
Total stockholders' equity (deficit)		(1,692,824	)		(2,270,386	)
Total liabilities and stockholders' equity (deficit)	$	1,359,866		$	968,081

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

1

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended March 31,						For the Nine Months Ended March 31,
	2014			2013			2014			2013
Sales	$	122,038		$	84,977		$	717,884		$	206,880
Cost of goods sold		44,661			31,425			306,734			81,003
Gross profit		77,377			53,552			411,150			125,877
Operating expenses:
Selling, general and administrative expenses		1,296,995			1,643,710			5,223,267			4,719,808
Research and development		96,861			75,236			234,692			98,967
Total operating expenses		1,393,856			1,718,946			5,457,959			4,818,775
Loss from operations		(1,316,479	)		(1,665,394	)		(5,046,809	)		(4,692,898	)
Other income (expense)
Interest income		14			182			274			747
Other income		—			941,000			17,000			1,141,000
Loss on conversion of interest		(201,175	)		—			(201,175	)		—
Loss on extinguishment of debt		—			(21,311	)		—			(21,311	)
Loss from repricing warrants		—			—			—			(70,491	)
Other expense		—			(19,114	)		(11,413	)		(19,114	)
Interest expense		(111,795	)		(96,514	)		(351,559	)		(399,119	)
Total other income (expense)		(312,956	)		804,243			(546,873	)		631,712
Net loss	$	(1,629,435	)	$	(861,151	)	$	(5,593,682	)	$	(4,061,186	)
Net loss per common share - basic and diluted	$	(0.04	)	$	(0.03	)	$	(0.16	)	$	(0.14	)
Weighted average shares outstanding - basic and diluted		37,539,224			30,299,733			35,403,321			28,443,780

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

2

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended March 31,
	2014			2013
Cash flows from operating activities
Reconciliation of net loss to net cash used in operating activities:
Net loss	$	(5,593,682	)	$	(4,061,186	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		41,391			38,004
Allowance for bad debt		5,801			—
Amortization of debt discounts		173,490			349,548
Vesting of restricted stock units		—			90,000
Stock option employee compensation expense		1,438,050			1,234,945
Cost of repricing warrants to induce exercise		—			70,491
Loss on issuance of stock for interest		201,175			4,205
Payment by insurance company of prior period accrued litigation expense		—			(200,000	)
Reversal of litigation accrual		—			(941,000	)
Loss on disposal of assets		11,413			9,822
Changes in assets and liabilities:
Accounts receivable		(52,355	)		5,831
Inventories		(259,781	)		(123,213	)
Prepaid expenses and other current assets		(15,687	)		33,035
Accounts payable		(64,280	)		202,978
Deferred revenue		(7,019	)		—
Accrued expenses		133,315			67,001
Accrual for termination and release agreement		(98,537	)		144,286
Net cash used in operating activities		(4,086,706	)		(3,075,253	)
Cash flows from Investing Activities
Proceeds from sale of assets		—			15,000
Purchases of equipment		(72,851	)		(27,973	)
Net cash used in investing activities		(72,851	)		(12,973	)
Cash flows from Financing Activities
Proceeds from sale of stock through private placements		2,038,538			1,258,000
Proceeds from the sale of stock and warrants through private placements		730,000			—
Proceeds from sale of stock under stock purchase agreement		570,000			810,003
Proceeds from exercise of warrants		25,000			910,000
Proceeds from exercise of stock options		18,200			—
Payments on related party notes		—			(84,219	)
Proceeds from convertible notes with third parties		—			175,000
Proceeds from convertible notes with related parties		1,000,000			500,000
Repayment on convertible notes with third parties		(115,822	)		—
Repayments on convertible notes with related parties		(85,880	)		—
Payments on insurance finance contracts		(39,705	)		(34,752	)
Net cash provided by financing activities		4,140,331			3,534,032
Net (decrease) increase in cash and cash equivalents		(19,226	)		445,806
Cash and cash equivalents - beginning		90,275			84,194
Cash and cash equivalents - ending	$	71,049		$	530,000

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

Continued

3

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	For the Nine Months Ended March 31,
	2014		2013
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	2,911	$	836
Cash paid for income taxes	$	—	$	—
Supplementary Disclosure of Non-cash Investing and Financing Activities:
Financing of prepaid insurance contracts	$	92,846	$	47,471
Beneficial conversion feature of convertible notes	$	311,949	$	195,770
Loan discount from warrants	$	601,949	$	—
Stock issued for interest	$	149,811	$	73,579
Conversion of notes for common stock	$	82,132	$	459,067

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 NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013 filed on September 27, 2013.

Inventories

Inventories as of March 31, 2014 consisted of raw materials and finished goods in the amounts of $316,101 and $520,970, 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 NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 March 31, 2014 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 three and nine months ended March 31, 2014 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 NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 March 31, 2014, there were options to purchase 10,022,840 shares of the Company’s common stock, warrants to purchase 2,473,112 shares of the Company’s common stock and 6,707,094 shares of the Company’s common stock are reserved for convertible notes which may dilute future earnings per share.

Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.

Determining Fair Value Under ASC 718-10

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

The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term for employee stock options using the simplified method for employees and directors and the contractual term for non-employees.  The risk free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.

The fair values of stock option grants for the period from July 1, 2013 to March 31, 2014 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	89.98% - 91.94%
Estimated annual forfeitures	––

New Accounting Pronouncements

Accounting Standards Updates which were not effective until after March 31, 2014 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 March 31, 2014, the Company had a an accumulated deficit and stockholders’ deficit of $33,615,315 and $1,692,824, respectively, and incurred losses from operations of $5,593,682 for the nine months ended March 31, 2014 and used cash from operations of $4,086,706 during the nine months ended March 31, 2014.  In addition, the Company has not yet generated revenue sufficient to support ongoing operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

7

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 Company’s 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 Company’s common stock and five-year warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share in exchange for a $1,000,000 reduction in the principal amount of the Line of Credit. In addition, the remaining principal amount due under the Line of Credit of $1,497,483 was replaced by a five-year convertible note of the same amount, convertible at $1.12 per share (fair market value on transaction date based upon the quoted trading price) and bearing annual interest of 5%, due on the maturity date of the note (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 Company’s 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 Company’s 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 NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

On March 10, 2012, the Company received $75,000 from a director in exchange for a nine 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 nine 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 $45,353 has been amortized as of March 31, 2014.  As of February 1, 2014, in accordance with the note agreement, the Company was obligated to issue 428,032 shares of common stock in satisfaction of accrued interest in the amount $149,811.  The shares were not issued until April 2014 and are therefore included in common stock issuable as of March 31, 2014.  In connection with the issuance, the Company recorded a loss on conversion of interest of $201,175 representing the difference between the conversion rate of $0.35 per share and the market price of the stock of $0.82 per share.

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 Company’s 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 March 31, 2014, the Company has recognized interest expense from the amortization of the debt discounts related to this note in the amount of $131,701.

9

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 nine months ended March 31, 2014 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 nine months ended March 31, 2014, 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 nine months ended March 31, 2014, 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 nine months ended March 31, 2014, the Company issued 1,766,411 shares of common stock in exchange for $1,113,538 in connection with private placements with fifteen accredited investors.

During the nine months ended March 31, 2014, the Company issued 1,434,060 shares of common stock in exchange for $925,000 in connection with private placements with its COO and Principal Shareholder.

As of February 1, 2014, in accordance with a convertible note agreement, the Company was obligated to issue 428,032 shares of common stock in satisfaction of accrued interest in the amount $149,811.  The shares were not issued until April 2014 and are therefore included in common stock issuable as of March 31, 2014.  In connection with the issuance, the Company recorded a loss on conversion of interest of $201,175 representing the difference between the conversion rate of $0.35 per share and the market price of the stock of $0.82 per share on the date of conversion.

Options to Purchase Common Stock

Stock-based compensation expense recognized under ASC 718-10 for the period July 1, 2013 to March 31, 2014, was $1,438,050 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 March 31, 2014 the total compensation cost for stock options not yet recognized was approximately $1,033,373.  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 NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

A summary of stock option transactions for all employee stock options for the nine month periods ended March 31, 2014 and 2013 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		4,247,500		$	0.50		9.60
Exercised		—		$	—		—
Forfeited		(2,875,000	)	$	0.92
Expired				$			—
Outstanding at March 31, 2013		5,962,007		$	0.75		6.87	$	2,721,109
Exercisable at March 31, 2013		3,375,257		$	0.86		5.97	$	1,159,109
Weighted average fair value of options granted during the nine months ended March 31, 2013				$	0.37
Balance at June 30, 2013		6,337,007		$	0.75		8.25
Granted		1,425,000		$	1.34		7.81
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—
Outstanding at March 31, 2014		7,762,007		$	0.87		6.18	$	1,464,932
Exercisable at March 31, 2014		4,159,340		$	0.92		4.75	$	589,732
Weighted average fair value of options granted during the nine months ended March 31, 2014				$	0.69

A summary of options issued to non-employees under the 2007 Plan and changes during the period from June 30, 2012 to March 31, 2013 and from June 30, 2013 to March 31, 2014 is as follows:

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

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

11

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 Company’s 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 Company’s 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 connection with a Termination and Release Agreement (the “Release Agreement”) effective February 8, 2013, the Company issued its former President options to purchase 112,500 shares of 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. The options are fully vested and have a ten year term. Additionally, in connection with the Release Agreement the Company cancelled options to purchase 1,325,000 shares of common stock at exercise prices from $0.667 to $1.22 per share and cancelled stock appreciation rights for 800,000 shares of common stock at an exercise price of $0.45 per share. Because the value of the options and stock appreciation rights cancelled exceeded the fair value of the new options granted, no expense will be recognized relating to these options.

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 Company’s 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 Company’s 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 Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 2.62%. 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 Company’s 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 Company’s common stock at an exercise price of $1.30 per share to the father of the Company’s 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 Company’s 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 Company’s 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 Company’s common stock since June 2008, an estimated term of 2.5 years, using the Simplified Method and a discount rate of 0.55%.  In February 2014, the Company granted an additional 5,000 fully vested options to an employee at an exercise price of $0.77 per share.  The options were valued at $2,044 using the Black-Scholes option pricing model using a volatility of  90.968% to 90.96%, based upon the historical price of the Company’s common stock since June 2008, estimated term of 2.5 years, using the Simplified Method and a discount rate of 0.55%.  The amount was recorded as expense during the three months ended March 31, 2014.

12

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

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 Company’s 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.

A summary of options issued to directors under the 2007 Plan and changes during the period from July 1, 2012 to March 31, 2013 and from July 1, 2013 to March 31, 2014 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		610,000		$	0.95		10.00
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at March 31, 2013		1,467,500		$	1.19		8.25	$	224,970
Exercisable at March 31, 2013		770,582		$	1.39		7.12	$	60,737
Weighted average fair value of options granted during the nine months ended March 31, 2013				$	0.72
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 March 31, 2014		1,675,833		$	1.12		7.87	$	21,853
Exercisable at March 31, 2014		1,012,918		$	1.20		7.00	$	20,279
Weighted average fair value of options granted during the nine months ended March 31, 2014				$	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 Company’s common stock since it began trading in June 2008), an expected term of 5.5 years (using the simplified method) and a discount rate of 0.82%. The value of these options will be recognized as expense over the requisite service period.

13

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

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 Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 0.90%. The value of these options, $1,360, will be recognized as expense over the requisite service period.

In March 2013, the Company granted each of its three non-employee directors ten year options to purchase 125,000 shares of common stock at an exercise price of $0.99 per share. The options vest annually over a three year period, subject to continued service as a director. The options were valued using the Black-Scholes model using a volatility of 93.11 (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 1.25%. The value of these options, $287,405, 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 Company’s common stock since it began trading in June 2008), an expected term of 5.5 years (using the simplified method) and a discount rate of 1.52%. The value of these options will be recognized as expense over the requisite service period.

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 Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 2.67%. The value of these options was recognized as expense during the nine months ended March 31, 2014.

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 Company’s 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 nine months ended March 31, 2014.

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 Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 1.89%. The value of these options, $54,285 will be recognized as expense over the vesting period.

14

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

A summary of options issued to non-employees under the 2007 Plan and changes during the nine month periods from July 1, 2012 to March 31, 2013 and from July 1, 2013 to March 31, 2014 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		150,000		$	1.33		10.0
Exercised		(100,000	)	$	0.50
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at March 31, 2013		590,000		$	1.19		3.67	$	32,750
Exercisable at March 31, 2013		440,000		$	1.14		1.52	$	32,750
Weighted average fair value of options granted during the nine months ended March 31, 2013				$	1.03
Balance at June 30, 2013		560,000		$	1.22		5.96
Granted		25,000		$	1.11		5.00
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at March 31, 2014		585,000		$	1.21		5.19	$	250
Exercisable at March 31, 2014		360,000		$	1.22		2.73	$	250
Weighted average fair value of options granted during the nine months ended March 31, 2014				$	0.79

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

In March 2013, the Company granted ten year options to purchase 150,000 shares of common stock at an exercise price of $1.33 per share to a consultant. The options vest annually over a three year period, subject to continued service as a consultant. The options were valued using the Black-Scholes model using a volatility of 93.11 (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 1.23%. The value of these options, $154,415, will be recognized as expense over the requisite service period.

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 Company’s common stock since June 2008, an estimated term of 5.0 years, the term of the options and a discount rate of 1.38%.

15

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

In March 2014, the Company granted five-year fully vested options to purchase 5,000 shares of common stock at an exercise price of $0.85 per share to a consultant.  The Company valued the options at $2,962 using the Black-Scholes option pricing model using a volatility of 89.96%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 5.0 years, the term of the options and a discount rate of 1.76%.  The expense was recognized during the three months ended March 31, 2014.

Warrants to Purchase Common Stock

The Company accounts for warrants issued for services in accordance with ASC 505-50-30-2 Equity Based Payments to Non-Employees.  As such, the Company calculates the fair value of the warrants granted using the Black-Scholes option pricing model and records the fair value to either prepaid expense or expense based upon the terms of the underlying contract for services.  In applying the Black-Scholes method, the Company calculates volatility based upon the historical market price of the Company’s common stock, utilizes discount rates obtained from the Federal Reserve Statistical Release for treasury instruments of the same duration and expected term as the contractual term of the warrants.

Warrants issued in connection with the sale of shares of common stock are treated as part of the equity transaction and are recorded in stockholders’ equity or liabilities in accordance with the guidance at ASC 480-10-25.

A summary of warrants issued for settlements and changes during the periods July 1, 2012 to March 31, 2013 and from July 1, 2013 to March 31, 2014 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 March 31, 2013		694,058	$	0.84		2.34
Exercisable at March 31, 2013		694,058	$	0.84		2.34
Weighted average fair value of options granted during the nine months ended March 31, 2013			$	0.33
Balance at June 30, 2013		350,000	$	0.63		4.22
Granted		—	$	—		—
Exercised		—	$	—		—
Forfeited		—	$	—		—
Expired		—	$	—		—
Outstanding at March 31, 2014		350,000	$	0.63		3.47
Exercisable at March 31, 2014		350,000	$	0.63		3.47
Weighted average fair value of options granted during the nine months ended March 31, 2014				N/A

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

16

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

A summary of warrants issued for cash and changes during the periods July 1, 2012 to March 31, 2013 and from July 1, 2013 to March 31, 2014 is as follows:

Warrants issued for cash or services

	Number of Warrants			Weighted Average Exercise Price		Remaining Contractual Life
Balance at June 30, 2012		4,461,200		$	1.46		2.46
Granted		50,000		$	0.63		5.0
Exercised		(1,865,000	)	$	0.50		—
Forfeited		—		$	—		—
Expired		(1,420,000	)	$	1.60		—
Outstanding at March 31, 2013		1,226,200		$	1.25		1.56
Exercisable at March 31, 2013		1,226,200		$	1.25		1.56
Weighted average fair value of warrants granted during the nine months ended March 31, 2013				$	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		(340,000	)	$	1.25		—
Outstanding at March 31, 2014		2,123,112		$	1.21		2.98
Exercisable at March 31, 2014		2,123,112		$	1.21		2.98
Weighted average fair value of warrants granted during the nine months ended March 31, 2014.					N/A

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

During the nine months ended March 31, 2013, 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 Company’s common stock related to an offer by the Company to reduce the exercise price to $0.50 per share. The original exercise prices of the warrants ranged from $1.25 to $1.75 per share. The cost of repricing warrants recognized by the Company amounted to $70,491 for the nine months ended March 31, 2013. 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.

During the nine months ended March 31, 2013, warrants to purchase 1,420,000 shares of the Company’s common stock at an exercise price of $1.60 per share expired unexercised.

During the three months ended March 31, 2013, the Company issued 9,171 shares of common stock in connection with the cashless exercise of warrants to purchase 45,000 shares of common stock with an exercise price of $1.25 and a fair market value of the Company’s common stock of $1.57 on the date of exercise.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(Unaudited)

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.

During the nine months ended March 31, 2014, warrants to purchase 340,000 shares of common stock at an exercise price of $1.25 per share expired unexercised.

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 on a month to month basis and leased a facility in Brooklyn under a one year lease that began in February 2013. In January 2014, the Company extended the Brooklyn lease through August 2014 at a new rental of $4,000 per month.

Rent expense for the nine months ended March 31, 2014 and 2013 was $122,266 and $91,348, respectively.

On November 14, 2012, the Compensation Committee approved new four year employment agreements for the Company’s 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 Company’s 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 a four-year employment agreement for the Company’s Executive Chairman. Prior to his employment agreement being terminated for cause, the Executive Chairman received a base salary of $200,000 per year and was granted 800,000 restricted stock units vesting on identical terms as the SARs (which have been cancelled). All of the five senior executives receive (or were to receive prior to the terminations of their employment) a monthly car allowance of $600 per month. The Compensation Committee has the discretion to award each of the employed executives a bonus based upon job performance, revenue growth or any other factors determined by the Compensation Committee.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 Company’s offices, and alleges the Company invaded his privacy by looking at his personal computer (which was used in the Company’s business) in the Company’s offices. A jury trial was held for the lawsuit in July 2012. At the conclusion of the trial, the plaintiff was awarded $200,000 under his invasion of privacy and fraudulent misrepresentation claim, $5,000 on the trespass claim,$841,000 on the breach of consulting agreement claim and $200,000 against the Company’s CEO on a claim of civil theft, which by law results in an award of $600,000 for the plaintiff. The Company’s board of directors approved the indemnification of the Company’s CEO for the $600,000. The Company filed a post-trial motion for Judgment Notwithstanding Verdict, New Trial and Remittitur, requesting that the judge set aside or reduce the amounts of the jury verdict.

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 March 31, 2013.

In January 2013, the court ruled on the Company’s 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 acting Chief Executive Officer (CEO) and the Chief Technology Officer (CTO) the following related parties are employed at GelTech:

·

The acting CEO’s sister-in-law is a bookkeeper at $1,200 per week,

·

The acting CEO and CTO’s father is a researcher at $2,123 per week, and

·

The acting CEO and CTO’s 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 Company’s common stock to the father of the Company’s acting CEO and CTO as more fully described in Note 4.

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

Effective February 8, 2013, the Company’s 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 Company’s 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 Company’s 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 March 31, 2014, the remaining liability under the agreement amounted to $3,519.

In September 2013, the father of the Company’s Chief Operating Officer and principal stockholder was appointed to the board of directors.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

(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 March 31, 2014. As of March 31, 2014, there were no cash equivalent balances held in depository accounts that are not insured.

At March 31, 2014, four customers accounted for 32.7%, 19.7%, 14.4% and 14.4% of accounts receivable.

For the nine months ended March 31, 2014, one customer accounted for approximately 68.3% of sales.

During the nine months ended March 31, 2014, all sales resulted from two products, FireIce® and Soil₂O® which made up 87.0% and 13.0%, respectively, of total sales. Of the FireIce® sales, 68.1% related to the sale of EMFIDS, 29.1% related to the sale of FireIce® products, 1.6% related to paid for research and 1.2% related to sales of the FireIce Home Defense units. Of the Soil₂O® sales, 5.1% related to traditional sales of Soil₂O® and 94.9% related to sales of Soil₂O® Dust Control.

Three vendors accounted for 30.2%, 14.3% and 11.4% of the Company’s approximately $564,000 in purchases of EMFIDS parts, raw material and packaging during the nine months ended March 31, 2014.

NOTE 8 - Subsequent Events

Since April 1, 2014 the Company has issued 449,113 shares of common stock and two year warrants to purchase 224,557 shares of common stock at an exercise price of $2.00 per share in exchange for $300,000 in connection with private placements with our COO and principal stockholder.  In addition, the Company has issued 65,000 shares of common stock in exchange for $42,989 in private placements with two accredited investors.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

ITEM 2. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.

Overview

GelTech Solutions, Inc., 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 NINE MONTHS ENDED MARCH 31, 2014 COMPARED TO THE NINE MONTHS ENDED MARCH 31, 2013.

Sales

For the nine months ended March 31, 2014, we had sales of $717,884 as compared to $206,880 for the nine months ended March 31, 2013, an increase of $511,004 or 247.01%. Sales of product during the nine months ended March 31, 2014 consisted of $93,452 for Soil₂O® and $624,432 for FireIce® and related products. The Soil₂O® sales consisted primarily of Soil₂O® dust control. FireIce® sales consisted of $435,000 related to the sale of EMFIDS units, $181,898 related to product sales and $7,534 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, at such time as   as we gain traction with state wildland organizations and with the beginning of dust season in the western states.

Cost of Goods Sold

Cost of goods sold was $306,734 for the nine months ended March 31, 2014 as compared to a cost of goods sold of $81,003 for the nine months ended March 31, 2013. The increase was the direct result of the increase in sales. Cost of sales as a percentage of sales was 42.7% for the nine months ended March 31, 2014 as compared to 39.2% for the nine months ended March 31, 2013. The slightly higher cost of sales percentage in fiscal 2014 relates to the sales mix. We expect future cost of sales as a percentage of sales will be consistent with the cost of sales percentage for the nine months ended March 31, 2014.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses were $5,223,267 for the nine months ended March 31, 2014 as compared to $4,719,808 for the nine months ended March 31, 2013. The increase in fiscal 2014 expenses resulted primarily from (1) an increase in salaries and employee benefits of $263,239 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 $169,450 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 $113,105 and (4) an increase in facility costs of $61,889 in connection with facility in Brooklyn. These increases were partially offset by a decreases of $88,185 in sales and marketing expense, $49,452 in travel and $21,711 in investor relations.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

During the three months ended March 31, 2014, the Company analyzed its monthly expenses and identified a number of areas where expenses could be reduced without affecting its ability to commercialize and market its products.   In connection with this cost cutting analysis, the Company terminated its investor relations firm, eliminated certain website expenses and its on-call staffing expenses.  The Company anticipates further reductions will be made as it continues to identify expenses which may be reduced or eliminated in order to effectively manage its costs.   

Research and Development Expenses

R&D expenses were $234,692 for the nine months ended March 31, 2014 as compared to $98,967 for the nine months ended March 31, 2013. The expenses for the nine months ended March 31, 2014 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 $5,046,809 for the nine months ended March 31, 2014 as compared to $4,692,898 for the nine months ended March 31, 2013. The increased loss resulted from the higher operating expenses which were only partially offset by the increase in sales.

Other Income

In November 2013, 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.  During the three months ended March 31, 2013, the Company recognized other income of $941,000 as a result of the court reducing the jury award from $1,446,000 to $505,000.

Loss on Conversion of Interest

The loss on conversion of interest of $201,175 relates to the conversion on February 1, 2014 of accrued interest in the amount of $149,811 in exchange for 432,028 shares of common stock in accordance with a convertible note agreement.  

Cost of Repricing of Warrants to Induce Exercise

The Company recorded a cost of repricing warrants of $70,491 for the nine months ended March 31, 2013 related to the reduction of the exercise price of warrants to purchase 1,820, 000 shares of common stock with exercise prices from $1.25 to $1.75 per share to $0.50 per share.

Interest Expense

Interest expense was $351,559 for the nine months ended March 31, 2014 as compared to $399,119 for the nine months ended March 31, 2013. The higher expense during the nine months ended March 31, 2013 resulted from the amortization of the debt discounts related to short term convertible notes. Amortization of these discounts was $306,982 for the nine months ended March 31, 2013 as compared to $178,428 for the nine months ended March 31, 2014. This decrease was partially offset by an increase in accrued interest of $110,396 for the nine months ended March 31, 2014 which is attributable to a higher interest rate.

Net Loss

Net loss was $5,593,682 for the nine months ended March 31, 2014 as compared to $4,061,186 for the nine months ended March 31, 2013. 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 $0.16 for the nine months ended March 31, 2014 as compared to $0.14 for the nine months ended March 31, 2013. The weighted average number of shares outstanding for the nine months ended March 31, 2014 and 2013 were 35,403,321 and 28,443,780, respectively.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

FOR THE THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2013.

Sales

For the three months ended March 31, 2014, we had sales of $122,038 as compared to $84,977 for the three months ended March 31, 2013, an increase of $37,061 or 43.61%. Sales of product during the three months ended March 31, 2014 consisted of $27,650 for Soil₂O® and $94,389 for FireIce® and related products. The Soil₂O® sales consisted of sales of Soil₂O® dust control amounting to $24,054 and sales of Soil2O of $3,596. FireIce® sales consisted of $93,655 related to product sales and $734 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  as we gain traction with state wildland organizations and with the beginning   of dust season in the western states.

Cost of Goods Sold

Cost of goods sold was $44,661 for the three months ended March 31, 2014 as compared to a cost of goods sold of $31,425 for the three months ended March 31, 2013. The increase was the direct result of the increase in sales. Cost of sales as a percentage of sales was 36.6% for the three months ended March 31, 2014 as compared to 36.9% for the three months ended March 31, 2013. The variance in the cost of sales percentage in fiscal 2014 relates to the sales mix. We expect future cost of sales as a percentage of sales will be consistent with the cost of sales percentage for the nine months ended March 31, 2014.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses were $1,296,995 for the three months ended March 31, 2014 as compared to $1,643,710 for the three months ended March 31, 2013. The decrease in fiscal 2014 expenses resulted primarily from (1) a decrease in salaries and employee benefits of $228,245 relating to severance pay of $158,620 included for the three months ended March 31, 2013 and a decrease in personnel costs in our Brooklyn facility during the three months ended March 31, 2014; (2) an decrease in non-cash compensation of 41,986; (3) a decrease in sales and marketing of $51,660; and (4) a decrease in travel of $31,208.

Research and Development Expenses

R&D expenses were $96,861 for the three months ended March 31, 2014 as compared to $75,236 for the three months ended March 31, 2013. The expenses for the three months ended March 31, 2014 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 $1,316,479 for the three months ended March 31, 2014 as compared to $1,665,394 for the three months ended March 31, 2013. The reduced loss resulted from the lower operating expenses and higher gross profit.

Other Income

During the three months ended March 31, 2013, the Company recognized other income of $941,000 resulting from the reduction of the accrual for losses from litigation related to a lawsuit filed by a former employee as a result of the court reducing the jury award from $1,446,000 to $505,000.

Loss on Conversion of Interest

The loss on conversion of interest of $201,175 relates to the conversion on February 1, 2014 of accrued interest in the amount of $149,811 in exchange for 432,028 shares of common stock in accordance with a convertible note agreement.

Cost of Repricing of Warrants

The Company recorded a cost of repricing warrants of $70,491 for the three months ended March 31, 2013 related to the reduction of the exercise price of warrants to purchase 1,820,000 shares of common stock with exercise prices from $1.25 to $1.75 per share to $0.50 per share.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Interest Expense

Interest expense was $111,795 for the three months ended March 31, 2014 as compared to $96,514 for the three months ended March 31, 2013. The higher expense during the three months ended March 31, 2014 resulted from the primarily from a higher interest rate.

Net Loss

Net loss was $1,629,435 for the three months ended March 31, 2014 as compared to $861,151 for the three months ended March 31, 2013. The higher net loss resulted from the absence of other income during the three months ended March 31, 2014. Net loss per common share was $0.04 for the three months ended March 31, 2014 as compared to $0.03 for the three months ended March 31, 2013. The weighted average number of shares outstanding for the three months ended March 31, 2014 and 2013 were 37,539,224 and 30,299,733, respectively.

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended March 31, 2014, the Company used net cash of $4,086,706 in operating activities as compared to net cash used in operating activities of $3,075,253 for the nine months ended March 31, 2013. Net cash used during the nine months ended March 31, 2014 resulted primarily from the net loss of $5,593,682, an increase in inventories of $259,781, an increase in accounts receivable of $52,355, payments on the accrual for severance agreement for our former president of $98,537 and a reduction of accounts payable of $64,280 which were partially offset by non-cash stock based compensation of $1,438,050, the loss on conversion of interest of 201,175, non-cash amortization of debt discounts of $167,609, depreciation of $41,391 and an increase in accrued expenses of $133,315.  Net cash used during the nine months ended March 31, 2013 resulted primarily from the net loss of $4,061,186, recognition of the reversal of losses from litigation of $941,000, an increase in inventory of $123,213 and an increase in other assets of $11,255 which were partially offset by non-cash stock based compensation of $1,234,945, amortization of convertible note discounts of $259,548, vesting of restricted stock units of $90,0000, loss on repricing of warrants of $70,491, depreciation of $38,004 increases in accounts payable, accrued expenses and severance accrual of $202,978, $67,001 and $144,286, respectively, and a decrease in prepaid expenses of $44,290.

Cash flows used in investing activities for the nine months ended March 31, 2014 amounted to $72,851 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 nine months ended March 31, 2014 were $4,140,331 as compared to $3,534,032 for the nine months ended March 31, 2013. During the nine months ended March 31, 2014, the Company received $1,000,000 from its principal stockholder 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, $2,038,538 from accredited investors in exchange for 3,200,471 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 exercise prices between $1.00 and $1.25 per share in connection with a private placements with accredited investors 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 due to convertible note holders held by third parties and to make payments on insurance premium finance contracts of $39,705. During the nine months ended March 31, 2013, 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, $1,258,000 from ten accredited investors in exchange for 3,054,068 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 nine-month convertible notes with two accredited investors and $500,000 from the Company’s 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 $84,219 and to make payments on insurance premium finance contracts of $34,752.

Historical Financings

Since July 1, 2013, GelTech has raised $2,768,538 from the sale of common stock in connection with private placements with nineteen accredited investors including Michael Reger, our principal stockholder and Chief Operating Officer, and Neil Reger, a director.  In consideration for their investments, GelTech issued 4,158,118 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.

24

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

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 May 12, 2014, we had $39,623 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.

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 SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its most subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company’s financial condition. The accounting estimates are discussed below. This estimate involves certain assumptions that if incorrect could create a material adverse impact on the Company’s results of operations and financial condition.

Revenue Recognition

Under ASC 605-15-25 we recognize sales of our products when each of the following has occurred:

- The price of the product sold is fixed or determinable and evidence of an agreement is present

- The title and risk of loss of the product has passed to the buyer and the sale is not contingent upon the buyer being able to resell the product.

- We have a reasonable expectation that the buyer has the intent and the ability to pay for the product ordered.

- We have no future obligation to the seller related to the product sold.

Stock-Based Compensation

Under ASC 718-10 we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

We estimate the fair value of each stock option and warrant at the grant date using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 1 to the Unaudited Condensed Consolidated Financial Statements contained in this report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of such stock options.

RECENT ACCOUNTING PRONOUNCEMENTS

For information on recent accounting pronouncements, see Note 1 to the Unaudited Condensed Consolidated Financial Statements.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements including 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.

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. 

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on their evaluation, our management has concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 1. 

LEGAL PROCEEDINGS.

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.

RISK FACTORS.

Not applicable to smaller reporting companies.

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In addition to those unregistered securities previously disclosed in reports filed with the 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)	January 7, 2014 to March 27, 2014	1,503,207 shares of common stock	Purchase of shares at prices from $0.55 to $0.65 per share by eight investors
Consultant (1)	March 24, 2014	5,000 five-year warrants exercisable at $0.85 per share	Consulting services

————————

(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. 

MINE SAFETY DISCLOSURES.

Not Applicable

ITEM 5. 

OTHER INFORMATION.

None

ITEM 6. 

EXHIBITS.

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

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GELTECH SOLUTIONS, INC.
May 12, 2014	/s/ Peter Cordani
	Peter Cordani
	Chief Executive Officer (Principal Executive Officer)
May 12, 2014	/s/ Michael R. Hull
	Michael R. Hull
	Chief Financial Officer (Principal Financial Officer)

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INDEX TO EXHIBITS

		Incorporated by Reference			Filed or Furnished
No.	Exhibit Description	Form	Date	Number	Herewith
3.1	Certificate of Incorporation	Sb-2	7/20/07	3.1
3.2	Certificate of Amendment to the Certificate of Incorporation – Increase of Authorized Capital	10-Q	2/12/14	3.2
3.3	Amended and Restated Bylaws	Sb-2	7/20/07	3.2
3.4	Amendment No. 1 to the Amended and Restated Bylaws	10-K	9/28/10	3.3
3.5	Amendment No. 2 to the Amended and Restated Bylaws	8-K	9/26/11	3.1
3.6	Amendment No. 3 to the Amended and Restated Bylaws	8-K	9/27/12	3.1
10.1	Form of Subscription Agreement	10-Q	11/14/13	3.2
10.2	Form of Warrant	10-Q	11/14/13	3.3
10.3	Reger Note dated July 11, 2013				Filed
31.1	Certification of Principal Executive Officer (Section 302)				Filed
31.2	Certification of Principal Financial Officer (Section 302)				Filed
32.1	Certification of Principal Executive Officer and Principal Financial Officer (Section 906)				Furnished*
101 INS	XBRL Instance Document				Filed
101 SCH	XBRL Taxonomy Extension Schema				Filed
101 CAL	XBRL Taxonomy Extension Calculation Linkbase				Filed
101 LAB	XBRL Taxonomy Extension Label Linkbase				Filed
101 PRE	XBRL Taxonomy Extension Presentation Linkbase				Filed
101 DEF	XBRL Taxonomy Extension Definition Linkbase				Filed

———————

*

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.