gltc_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

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

For the quarterly period ended: December 31, 2009
or

¨	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)

(561) 427-6144

(Registrant’s telephone number, including area code)

———————

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the

Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark 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 ¨ No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of outstanding shares of the issuer’s common stock as of February 11, 2009, was 15,557,681.

Table of Contents

	PART I – FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements.	1
	Condensed Consolidated Balance Sheets as of December 31, 2009 (Unaudited) and June 30, 2009	1
	Condensed Consolidated Statements of Cash Flows for the three and six months ended December 31, 2009 and 2008 (Unaudited)	3
	Notes to Condensed Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	19
Item 4.	Controls and Procedures	19
Item 4T.	Controls and Procedures	19

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	21
Item 1A.	Risk Factors.	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	21
Item 3.	Defaults Upon Senior Securities.	21
Item 4.	Submission of Matters to a Vote of Security Holders.	21
Item 5.	Other Information.	21
Item 6.	Exhibits.	22
SIGNATURES		23

PART I – FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

	As of
	December 31,			June 30,
	2009			2009
ASSETS	(Unaudited)

Cash and cash equivalents	$	332,861		$	245,381
Accounts receivable trade, net		224,699			16,167
Inventories		177,917			249,409
Prepaid expenses and other current assets		47,304			11,103
Total current assets		782,781			522,060

Furniture, fixtures and equipment, net		19,650			23,207
Prepaid consulting		297,500			-
Debt issue costs, net		143,750			316,250
Deposits		32,586			30,630

	$	1,276,267		$	892,147
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable	$	62,661		$	51,778
Accrued expenses		96,385			27,753
Customer deposit		-			25,000
Line of credit		2,450,000			1,550,000
Due to related party		-			60,000
Insurance premium finance contract		24,801			7,060
Total current liabilities		2,633,847			1,721,591
Total liabilities		2,633,847			1,721,591

Commitments and contingencies (Note 6)

Stockholder's equity (deficit)
Preferred stock: $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding		-			-
Common stock: $0.001 par value; 50,000,000 shares authorized;
14,529,016 and 13,858,986 shares issued and outstanding as of December 31, 2009 and June 30, 2009, respectively.		14,529			13,859
Additional paid in capital		6,290,588			5,262,999
Accumulated deficit		(7,662,697	)		(6,106,302	)
Total stockholders' equity (deficit)		(1,357,580	)		(829,444	)

Total liabilities and stockholders' equity (deficit)	$	1,276,267		$	892,147

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	For the Three Months Ended December 31,						For the Six Months Ended December 31,
	2009			2008			2009			2008

Sales	$	237,867		$	(41,279	)	$	525,421		$	29,062

Cost of goods sold		68,924			(11,988	)		160,130			7,951

Gross profit		168,943			(29,291	)		365,291			21,111

Operating expenses:
Selling, general and administrative expenses		948,089			642,670			1,686,747			1,365,173
Research and development		3,071			95,980			6,837			112,797

Total operating expenses		951,160			738,650			1,693,584			1,477,970

Loss from operations		(782,217	)		(767,941	)		(1,328,293	)		(1,456,859	)

Other income (expense)
Interest income		49			1,746			61			14,513
Interest expense		(116,906	)		(7,152	)		(228,163	)		(7,490	)

Total other income (expense)		(116,857	)		(5,406	)		(228,102	)		7,023

Net loss	$	(899,074	)	$	(773,347	)	$	(1,556,395	)	$	(1,449,836	)


Net loss per common share - basic and diluted	$	(0.06	)	$	(0.06	)	$	(0.11	)	$	(0.11	)

Weighted average shares outstanding - basic and diluted		14,028,038			13,471,466			13,943,989			13,467,158

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	For the Six Months Ended December 31,
	2009			2008
Cash flows from operating activities
Reconciliation of net loss to net cash used in operating activities:
Net loss	$	(1,556,395	)	$	(1,449,836	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation		4,660			10,749
Amortization of debt issuance costs		172,500			-
Amortization of prepaid stock compensation		-			16,042
Amortization of prepaid consulting		42,500			-
Credit issued		-			65,570
Stock option compensation expense		203,259			116,166
Changes in assets and liabilities:
Accounts receivable		(233,532	)		(7,676	)
Inventories		71,492			(83,840	)
Prepaid expenses and other current assets		(3,098	)		7,430
Deposits and other assets		(1,956	)		938
Accounts payable		10,883			(67,532	)
Related party payable		(60,000	)		-
Accrued expenses		68,632			(40,034	)
Net cash used in operating activities		(1,281,055	)		(1,432,023	)
Cash flows from Investing Activities
Sales of short term marketable debt securities		-			750,000
Purchases of equipment		(1,103	)		(4,857	)
Net cash provided by (used in) investing activities		(1,103	)		745,143
Cash flows from Financing Activities
Payments on Insurance Finance Contract		(15,362	)		(10,903	)
Proceeds from sale of stock and warrants		470,000			-
Proceeds from exercise of stock options		15,000			-
Proceeds from revolving line of credit, net		900,000			558,000
Net cash provided by financing activities		1,369,638			547,097
Net increase in cash and cash equivalents		87,480			(139,783	)
Cash and cash equivalents - beginning		245,381			230,058
Cash and cash equivalents - ending	$	332,861		$	90,275

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	24,986		$	7,490
Cash paid for income taxes	$	-		$	-
Supplementary Disclosure of Non-cash Investing and Financing Activities:
Financing of prepaid insurance contracts	$	55,560		$	23,097
Prepaid stock-based consulting	$	340,000		$	38,500

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

GelTech Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended December 31, 2009

(Unaudited)

1. Organization and Basis of Presentation

Organization

GelTech Solutions, Inc. (“GelTech” or the “Company”) is a Delaware corporation. GelTech is primarily engaged in business activities that include finalizing the development of products in three distinct markets and beginning the marketing and delivery of products in two of those markets: (i) FireIce®, a patented fire suppression product, which is non-toxic and when combined with water becomes a water-based gel product used to suppress fires involving structures, personal property and forest wildfires; (ii) RootGel, a moisture preservation solution that has many applications useful in the agricultural industry including water and nutrient retention in golf course maintenance, landscaping and forestry and (iii) IceWear™, a line of garments that help cool the core body temperature for individuals who work in extreme conditions (e.g., firefighters, police officers, construction workers, race car drivers). Additionally, GelTech owns a United States patent for a method to modify weather.

Beginning July 2008, the Company was no longer in the development stage as defined by Accounting Standards Codification (ASC) 915-10. “Accounting and Reporting for Development Stage Enterprises." The Company will no longer continue to report as a development stage company, since significant revenues have been generated and the company operations have moved beyond the activities of identifying and developing products to the activities of marketing, selling and distributing products. The corporate office is located in Jupiter, Florida.

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its two wholly owned subsidiaries: Weather Tech Innovations, Inc. and FireIce Gel, Inc. (formerly GelTech Innovations, Inc.). Prior to July 1, 2008, there had been no activity in either subsidiary. Beginning on July 1, 2008, the Company began operating the marketing, sales and distribution of FireIce® through FireIce Gel, Inc. These unaudited, condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (”SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by "GAAP" for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009 filed on September 28, 2009.

Inventories

Inventories as of December 31, 2009 consisted of raw materials and finished goods in the amounts of $96,405 and $81,512, respectively.

Revenues

The Company recognizes sales of its products when they are shipped FOB shipping point in accordance with ASC 605-15 and reduces revenues for any credits issued to customers. During the six months ended December 31, 2009, the Company issued credits to customers in the amount of $851 for products returned by a distributor. As a result, sales for the six months ended December 31, 2009 were reduced by the amount of the returns.

Accounting Standard Codification

In June 2009, FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC, have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. Other than changes to authoritative references, there have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.

GelTech Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended December 31, 2009

(Unaudited)

As a result of the Company’s implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, the Company will provide reference to the both the old and new guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification. New references will use the term Accounting Standards Codification (ASC) followed by the relevant ASC section.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable; however, actual results could differ materially from these estimates. Significant estimates in the fiscal 2010 period include the allowance for doubtful accounts, valuation of inventories, valuation of options and warrants granted for services, valuation of common stock granted for services and the deferred tax assets.

Earnings (Loss) per Share

The Company computes earnings (loss) per share in accordance with SFAS No. 128 (ASC 260-10), “Earnings per Share.” ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. At December 31, 2009, there were options to purchase 2,674,000 shares of the Company’s common stock and warrants to purchase 1,457,361 shares of the Company’s commons stock which may dilute future earnings per share.

Stock-Based Compensation

On July 19, 2006 (inception), the Company adopted SFAS No. 123 (revised 2004, “123R”) (ASC 718-10), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.

Stock-based compensation expense recognized under ASC 718-10 for the period July 1, 2009 to December 31, 2009 was $203,259 which consisted of compensation related to employee, director and advisor stock options, and is included in selling, general and administrative expenses on the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At December 31, 2009, the total compensation cost for stock options not yet recognized was approximately $531,381. This cost will be amortized on a straight-line basis over the remaining vesting term of the options.

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

GelTech Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended December 31, 2009

(Unaudited)

A summary of stock option transactions for all stock options for the six months ended December 31, 2009 and 2008 is as follows:

Employee Options
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2008		1,175,000		$	0.82		7.53
Granted		1,540,000		$	1.00		10.0
Exercised		––		$	––		––
Forfeited		––		$	––		––
Expired		––		$	––		––
Outstanding at December 31, 2008		2,715,000		$	0.92		8.71	$	154,050
Exercisable at December 31, 2008		583,253		$	0.87		5.72	$	52,900

Weighted average fair value of options granted during the six months ended December 31, 2008				$	0.42

Balance at June 30, 2009		2,714,000		$	0.92		8.20
Granted		––		$	––		––
Exercised		––		$	––		––
Forfeited		(500,000	)	$	1.00		9.75
Expired		––		$	––
Outstanding at December 31, 2009		2,214,000		$	0.90		7.40	$	2,434,552
Exercisable at December 31, 2009		987,583		$	0.88		5.80	$	1,101,658

Weighted average fair value of options granted during the six months ended December 31, 2009					N/A

GelTech Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended December 31, 2009

(Unaudited)

A summary of options issued to non-employees under the 2007 Plan and changes during the six month periods from June 30, 2008 to December 31, 2008 and from June 30, 2009 to December 31, 2009 is as follows:

Options Issued to Directors
	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2008		110,000	$	0.85		5.89
Granted		95,000	$	0.88		10.00
Exercised		––	$	––		––
Forfeited		––	$	––		––
Expired		––	$	––		––
Outstanding at December 31, 2008		205,000	$	0.86		7.40	$	13,550
Exercisable at December 31, 2008		113,333	$	0.89		7.08	$	5,372

Weighted average fair value of options granted during the six months ended December 31, 2008			$	1.78

Balance at June 30, 2009		205,000	$	0.86		5.89
Granted		100,000	$	1.84		10.00
Exercised		––	$	––		––
Forfeited		––	$	––		––
Expired		––	$	––		––
Outstanding at December 31, 2009		305,000	$	1.18		7.42	$	249,050
Exercisable at December 31, 2009		238,336	$	1.01		6.89	$	236,432

Weighted average fair value of options granted during the six months ended December 31, 2009				N/A

GelTech Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended December 31, 2009

(Unaudited)

Non-Employee, Non-Director Options
	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2008		170,000		$	1.00		4.53
Granted		––		$	––		––
Exercised		––		$	––		––
Forfeited		––		$	––		––
Expired		––		$	––		––
Outstanding at December 31, 2008		170,000		$	1.00		4.27	$	––
Exercisable at December 31, 2008		70,623		$	1.00		4.27	$	––

Weighted average fair value of options granted during the six months ended December 31, 2008					N/A

Balance at June 30, 2009		170,000		$	1.00		3.53
Granted		––		$	––		––
Exercised		(15,000	)	$	1.00		3.25
Forfeited		––		$	––		––
Expired		––		$	––		––
Outstanding at December 31, 2009		155,000		$	1.00		3.02	$	155,000
Exercisable at December 31, 2009		155,000		$	1.00		3.02	$	155,000

Weighted average fair value of options granted during the six months ended December 31, 2009					N/A

Determining Fair Value Under ASC 718-10

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

The Company estimates volatility based upon the historical stock price of the Company and estimates the expected term using the simplified method. The risk free rate is determined based upon the prevailing rate of United States Treasury securities with similar maturities.

The fair value of stock option grants for the period from July 1, 2009 to December 31, 2009 was estimated to have a weighted average fair value of $1.78, using the following assumptions:

Risk free interest rate	3.03	%
Expected term (in years)	6.5
Dividend yield	––
Volatility of common stock	166.28	%
Estimated annual forfeitures	––

GelTech Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended December 31, 2009

(Unaudited)

2. Going Concern

These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize it assets and discharge its liabilities in the normal course of business. As of December 31, 2009, the Company had a working capital deficit of $1,851,066 and had an accumulated deficit and stockholders’ deficit of $7,662,697 and $1,357,580, respectively, and incurred losses from operations of $1,328,293 for the six months ended December 31, 2009 and used cash from operations of $1,281,055 during the six months ended December 31, 2009. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. In May 2009, the Company entered into a $2,500,000 revolving line of credit agreement with its largest shareholder. As of December 31, 2009, the Company had drawn $2,450,000 against this line of credit. This shareholder/lender has assured the Company that he will provide any additional support the Company may require. The Company issued 455,000 shares of common stock and 455,000 warrants to purchase common stock in exchange for $470,000 during the six months ended December 31, 2009. In addition, since January 1, 2010 the Company has received an additional $1,280,000 in cash through the sale of 128 units, each unit consisting of 10,000 shares of common stock and three year warrants to purchase 10,000 shares of common stock. All of these transactions have been through private placements. If the Company is unable to generate substantial cash flows from additional sales of its products, or through financings, including but not limited to the line of credit, the Company may not be able to remain operational.

The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. These 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.

3. Line of Credit Agreement

On May 29, 2009, GelTech Solutions, Inc. (the “Company”) entered into a Credit Enhancement and Financing Security Agreement with the Company’s largest shareholder. In connection with this agreement the Company executed a Revolving Promissory Note which permits the Company to borrow up to $2,500,000. Interest, at an annual rate of 5%, is due monthly on the 20th day of each month