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 September 30, 2016

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 November 11, 2016
Common Stock, $0.001 par value per share		53,602,452 shares

 

  

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Table of Contents

 

	PART I – FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS.	1
	Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (Unaudited)	2
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)	3
	Condensed Notes to Consolidated Financial Statements (Unaudited)	55
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	19
ITEM 4.	CONTROLS AND PROCEDURES.	19
	PART II – OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	20
ITEM 1A.	RISK FACTORS.	20
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	20
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	20
ITEM 4.	MINE SAFETY DISCLOSURES.	20
ITEM 5.	OTHER INFORMATION.	20
ITEM 6.	EXHIBITS.	20
SIGNATURES		21

 

  

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PART I – FINANCIAL INFORMATION

 

ITEM 1. 

CONSOLIDATED FINANCIAL STATEMENTS.

 

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		As of September 30,				As of December 31,
		2016				2015
		(Unaudited)
ASSETS
Cash		$	108,107			$	135,266
Accounts receivable trade, net			39,702				156,733
Inventories			1,637,391				1,428,157
Prepaid expenses and other current assets			97,698				89,808
Total current assets			1,882,898				1,809,964
Furniture, fixtures and equipment, net			260,461				134,259
Deposits			16,086				16,086
Total assets		$	2,159,445			$	1,960,309
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable		$	224,957			$	271,566
Accrued expenses			383,205				344,094
Settlement accrual			—				80,000
Deferred revenue			10,667				—
Insurance premium finance contract			43,149				54,611
Total current liabilities			661,978				750,271
Convertible notes - related party, net of discounts			2,953,821				2,946,118
Convertible line of credit – related party, net of discounts			4,347,404				2,746,336
Total liabilities			7,963,203				6,442,725
Commitments and contingencies (Note 5)
Stockholders’ deficit
Preferred stock: $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock: $0.001 par value; 150,000,000 shares authorized; 52,305,513 and 48,972,496 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively.			52,306				48,972
Additional paid in capital			41,063,317				38,754,495
Accumulated deficit			(46,919,381	)			(43,285,883	)
Total stockholders' deficit			(5,803,758	)			(4,482,416	)
Total liabilities and stockholders' deficit		$	2,159,445			$	1,960,309

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

  

1

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
Sales		$	217,437			$	536,456			$	920,741			$	1,070,059
Cost of goods sold			71,131				178,100				282,266				432,471
Gross profit			146,306				358,356				638,475				637,588
Operating expenses:
Selling, general and administrative expenses			1,069,781				1,153,432				3,249,456				3,616,260
Research and development			50,765				37,794				206,228				76,533
Total operating expenses			1,120,546				1,191,226				3,455,684				3,692,793
Loss from operations			(974,240	)			(832,870	)			(2,817,209	)			(3,055,205	)
Other income (expense)
Other income			—				56,956				300,000				58,856
Interest income			2				—				8				5
Gain (loss) on conversion of interest			—				—				(72,765	)			12,841
Loss on extinguishment of debt			—				—				—				(596,648)
Loss on extension of warrants			—				—				(206,620	)			—
Loss on settlement			—				—				(320,631	)			(412,867	)
Interest expense			(188,897	)			(113,694	)			(516,281	)			(281,990	)
Total other income (expense)			(188,895	)			(56,738	)			(816,289	)			(1,219,803	)
Net loss		$	(1,163,135	)		$	(889,608	)		$	(3,633,498	)		$	(4,275,008	)
Net loss per common share - basic and diluted		$	(0.02	)		$	(0.02	)		$	(0.07	)		$	(0.09	)
Weighted average shares outstanding - basic and diluted			51,835,515				47,966,677				50,562,616				47,490,364

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

2

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the Nine Months Ended September 30,
		2016				2015
Cash Flows from Operating Activities
Reconciliation of net loss to net cash used in operating activities:
Net loss		$	(3,633,498	)		$	(4,275,008	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense (recovery)			(21,875	)			2,024
Depreciation			60,064				44,104
Amortization of debt discounts			107,347				50,461
Loss (gain) on conversion of interest			72,765				(12,841	)
Loss on extinguishment of debt			—				596,648
Warrants issued for services			44,477				—
Common stock issued for services			12,167				—
Loss on extension of warrants			206,620				—
Employee stock option compensation expense			367,787				774,470
Changes in assets and liabilities:
Accounts receivable			138,906				(420,552	)
Inventories			(209,234	)			(321,081	)
Prepaid expenses and other current assets			46,764				68,846
Accounts payable			(46,609	)			62,410
Accrued expenses			412,289				187,192
Deferred revenue			10,667				—
Settlement accrual			(9,369)				136,000
Reversal of litigation accrual			—				(56,956	)
Net cash used in operating activities			(2,440,732	)			(3,164,283	)
Cash flows from Investing Activities
Purchases of equipment			(186,266	)			(18,156	)
Net cash used in investing activities			(186,266	)			(18,156	)
Cash flows from Financing Activities
Proceeds from sale of stock under stock purchase agreement			610,955				—
Proceeds from sale of stock and warrants			250,000				150,000
Proceeds from sale of stock in private placements			—				114,250
Proceeds from advances on convertible line of credit with related parties			1,805,000				2,865,000
Payments on insurance finance contract			(66,116	)			(74,089	)
Net cash provided by financing activities			2,599,839				3,055,161
Net decrease in cash			(27,159	)			(127,278	)
Cash - beginning			135,266				195,615
Cash - ending		$	108,107			$	68,337

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

Continued

3

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

		For the Nine Months Ended September 30,
		2016				2015
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest		$	1,829			$	2,412
Cash paid for income taxes		$	—			$	—
Supplementary Disclosure of Non-cash Investing and Financing Activities:
Beneficial conversion feature of convertible notes		$	151,788			$	242,100
Loan discount from warrants		$	151,788			$	242,100
Stock issued for vehicle		$	—			$	16,000
Stock issued for services		$	—			$	1,674
Stock issued for accrued interest		$	373,178			$	224,811
Warrants issued for settlement accrual		$	70,631			$	—

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

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

NOTE 1 – Organization, Basis of Presentation and Summary of Significant Accounting Policies

Organization

GelTech Solutions, Inc., or GelTech or the Company, generates revenue primarily from marketing products based around the following four product categories (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in wildland and urban firefighting, including fires in underground utility structures, and in wildland firefighting as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) FireIce Shield®, a line of products used by welders, plumbers, first responders and consumers to protect assets from fire; (3) Soil₂O® “Dust Control”, our application which is used for dust mitigation in the construction and mining industries, in rural communities with unpaved roads, as well as by equestrian facilities and (4) Soil₂O®, a product which reduces the use of water and is primarily marketed to golf courses and commercial landscapers and most recently to homeowners via the Soil₂O® Home Lawn Kit. The Company also markets equipment that is used in the application of these primary products including (1) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire or explosion;  (2) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires and (3)  the FireIce Shield® spray unit which can be used to protect assets for industrial applications including protecting communication towers during welding.

Our unaudited consolidated 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. See further discussion in Note 2.

The corporate office is located in Jupiter, Florida.

Basis of Presentation

The accompanying unaudited 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 FireIce Gel, Inc., Weather Tech Innovations, Inc. and GelTech International, Inc. and these entities are in the process of being dissolved.  

These unaudited 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 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 Transition Report on Form 10-KT for the six months ended December 31, 2015 filed on March 31, 2016.

Inventories

Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out method. Inventories as of September 30, 2016 consisted of raw materials and finished goods in the amounts of $779,221 and $858,170, respectively.

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 nine months ended September 30, 2016 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.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

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 provides 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 days depending on the arrangement we have with the customer. As such, revenue is recognized when product has been shipped from either the third-party fulfillment company or from the Jupiter, Florida 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.

In June 2016, the Company entered into two agreements with a state forestry agency whereby the Company agreed to pay for and build two fixed airport mixing facilities in order to support the state agency’s aerial wildland firefighting operations.  In connection with the agreement, the state agency has the use of the equipment in exchange for paying a premium price per bucket for our HVO-F aerial FireIce product and also making an initial minimum purchase of 200 buckets per year.  As such, the Company has deferred the premium portion of the bucket price for the minimum purchase amount and will recognize the revenue related to the premium over 12 months.  For the nine months ended September 30, 2016, the Company has recognized $5,333 in revenue and has deferred $10,667 of the minimum purchase amounts.

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. The Company’s diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.  At September 30, 2016, there were options to purchase 11,412,840 shares of the Company’s common stock, warrants to purchase 14,012,579 shares of the Company’s common stock and 20,978,023 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 model. 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.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

The fair values of stock options and warrants granted during the period from January 1, 2016 to September 30, 2016 were estimated using the following assumptions:

Risk free interest rate		0.58% - 1.49%
Expected term (in years)		2.0 - 5.5
Dividend yield		––
Volatility of common stock		103.14% - 104.54%
Estimated annual forfeitures		––

New Accounting Pronouncements

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires an entity to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The accounting standard is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company does not expect this accounting standard to have a significant impact on the Company’s consolidated financial position or results of operations.

 

No additional Accounting Standards Updates (ASUs) which were not effective until after September 30, 2016 are expected to have a significant effect on the Company's consolidated financial position or results of operations.

NOTE 2 – Going Concern

These unaudited consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize it assets and discharge its liabilities in the normal course of business.  As of September 30, 2016, the Company had an accumulated deficit and stockholders’ deficit of $46,919,381 and $5,803,758, respectively, incurred a loss from operations of $2,817,209 for the nine months ended September 30, 2016 and used cash in operations of $2,440,732 during the nine months ended September 30, 2016.  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. These unaudited 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.

During the nine months ended September 30, 2016, the Company received $1,805,000 in advances from its convertible line of credit with its president and principal shareholder. The Company also received $610,955 from Lincoln Park Capital Fund LLC in connection with a $10 million stock purchase agreement entered into in August 2015. See Note 4.

Management believes that the Purchase Agreement with Lincoln Park and additional funding from its president and principal shareholder 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 generate sufficient revenue to attain profitable operations.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

NOTE 3 – Convertible Note Agreements – Related Party

The Company currently has three debt facilities outstanding, all of them held by its president and principal shareholder.

One convertible note in the amount of $1,997,483, dated February 1, 2013 was a consolidation of prior debt instruments. The note bore annual interest of 7.5%, was convertible at $0.35 per share and due December 31, 2016. On February 12, 2015, this note was modified by securing the note with all the assets of the Company and by extending the due date of the note from December 31, 2016 to December 31, 2020. The modification was accounted for as a debt extinguishment in accordance with ASC 470. As a result of the modification the Company recorded a loss on extinguishment of debt of $34,586. During the nine months ended September 30, 2016, the Company recognized interest expense of $112,358. As of September 30, 2016, the principal balance of the note is $1,997,483 and accrued interest amounted to $99,737. In February 2016, the Company issued 428,032 shares of common stock to its president and principal shareholder in payment of accrued interest of $149,811 resulting in a loss on conversion of interest of $72,765.

A second convertible note in the amount of $1,000,000 dated July 11, 2013 related to a new funding on that date. The note bore annual interest of 7.5%, was convertible at $1.00 per share and was due July 10, 2018. In connection with the note, the Company issued five–year warrants to purchase 500,000 shares of common stock at an exercise price of $1.30 per share. On February 12, 2015, this note was modified by securing the note with all the assets of the Company, by extending the due date of the note from July 10, 2018 to December 31, 2020 and by reducing the conversion rate of the note from $1.00 to $0.35 per share. The modification was accounted for as a debt extinguishment in accordance with ASC 470. As a result of the modification, the Company recorded a loss on extinguishment of debt of $562,062. Also, in connection with the modification the Company recorded a note discount of $60,390, related to the relative fair value of the warrants attached to the note. For the nine months ended September 30, 2016 the Company recorded interest expense of $7,703 to amortize the discounts related to the warrants of the note, originated in July 2013. As of September 30, 2016, the balance of the unamortized discount related to the warrants was $43,662. In July 2016, the Company issued 208,333 shares of common stock in payment of accrued interest of $75,000. As of September 30, 2016, the principal balance on this note is $1,000,000 and accrued interest amounted to $16,644.

 

In connection with the debt modifications described above, the Company entered into a Secured Revolving Convertible Promissory Note Agreement for up to $4 million with its president and principal shareholder.  On April 8, 2016, the Company and its president and principal shareholder entered into the First Amendment to Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $4 million to $5 million. On September 27, 2016, the Company and its president and principal shareholder entered into the Second Amendment to Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $5 million to $6 million. Under the agreement, the Company may, with the prior approval of its president and principal shareholder, receive advances under this agreement. Each advance bears an annual interest rate of 7.5%, is due December 31, 2020 and is convertible at the rate equal to the closing price of the Company’s common stock on the day prior to the date the parties agree to the advance. In addition, the Company will issue the Company’s president and principal shareholder two year warrants to purchase shares of common stock at an exercise price of $2.00 per share. The number of warrants issued equals 50% of the number of shares issuable upon the conversion of the related advance.

For the nine months ended September 30, 2016, the Company received twelve advances totaling $1,805,000 with conversion rates between $0.28 and $0.55 per share, and issued two year warrants to purchase 2,481,568 shares of common stock at an exercise price of $2.00 per share. In connection with these advances, the Company has recorded loan discounts related to the warrants and the beneficial conversion features of the advances amounting to $151,788 and $151,788, respectively. During the nine months ended September 30, 2016, the Company has recognized interest expense of $60,538 related to the amortization of loan discounts.  As of September 30, 2016, the principal balance of the advances was $5,070,000, the balance of the unamortized discounts related to the warrants and the beneficial conversion feature was $361,298 and $361,298, respectively, and the balance of accrued interest was $210,740.

The calculated loan discounts were based on the relative fair value of the warrants which were calculated by the Company using the Black Scholes option pricing model, using volatilities of between 103.14% and 105.41%, based on the Company’s historical stock price, discount rates from 0.58% to 0.90%, and expected terms of 2 years, the term of the warrants.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

NOTE 4 – Stockholders’ Deficit

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

On August 12, 2015, GelTech signed a $10 million Purchase Agreement with Lincoln Park. The Company also entered into a Registration Rights Agreement with Lincoln Park whereby we agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to Lincoln Park under the Purchase Agreement.

 

Under the terms and subject to the conditions of the Purchase Agreement, GelTech has the right to sell, and Lincoln Park is obligated to purchase, up to $10 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 30-month period commencing on the date that a registration statement, which the Company agreed to file with the SEC pursuant to the Registration Rights Agreement, is declared effective by the SEC.  The Company filed the registration statement with the SEC on October 5, 2015 and it was declared effective by the SEC on October 16, 2015.

During the three months ended March 31, 2016, the Company issued 508,822 shares of common stock in exchange for $225,245 in connection with the Lincoln Park Purchase Agreement.

During the three months ended June 30, 2016, the Company issued 507,129 shares of common stock in exchange for $182,030 in connection with the Lincoln Park Purchase Agreement.

During the three months ended September 30, 2016, the Company issued 657,946 shares of common stock in exchange for $203,680 in connection with the Lincoln Park Purchase Agreement.

In February 2016, the Company issued 428,032 shares of common stock to its president and principal shareholder in payment of accrued interest of $149,811 resulting in a loss on conversion of interest of $72,765.

During the three months ended March 31, 2016, the Company issued 13,947 shares of common stock in payment of investor relation services values at $6,000.  In addition, the Company issued 3,581 shares of common stock in payment of consulting services valued at $1,656.

During the three months ended June 30, 2016, the Company issued 4,167 shares of common stock in payment of investor relation services valued at $2,000.  In addition, the Company issued 3,489 shares of common stock in payment of consulting services valued at $1,611.

In April 2016, the Company issued 296,371 shares of commons stock to its president and principal shareholder upon the conversion of accrued interest in the amount of $148,365 related to the advances under the Secured Revolving Convertible Promissory Note Agreement. No gain or loss will be recognized on the conversion as the conversion price used was the current price of the stock.

In June 2016, the Company issued 428,572 shares of common stock and two year warrants to purchase 214,286 shares of common stock at an exercise price of $2.00 per share to a director and his wife in exchange for $150,000 in connection with a private placement.

In July 2016, the Company issued 270,270 shares of common stock and two year warrants to purchase 135,135 shares of common stock for $2.00 per share in exchange for $100,000 in a private placement with an accredited investor.

In July 2016, the Company issued 208,333 shares of common stock to its president and principal shareholder in payment of interest of $75,000 on a convertible note.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

In August 2016, the Company issued 2,328 shares of common stock to a consultant in exchange for services with a value of $900.

Stock-Based Compensation

Stock-based compensation expense recognized under ASC 718-10 for the period January 1, 2016 to September 30, 2016, was $351,053 for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the unaudited consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At September 30, 2016 the total compensation cost for stock options not yet recognized was approximately $195,076.  This cost will be recognized over the remaining vesting term of the options of approximately two years.

Stock-based awards granted to non-employees, in the form of warrants to purchase the Company’s common stock, are valued at fair value in accordance with the measurement and recognition criteria of ASC 505-50 "Equity Based payments to Non-Employees.” Stock based compensation to non-employees recognized for the nine months ended September 30, 2016 was $61,211.

In April 2016, the Company issued ten year options to purchase 30,000 shares of common stock at an exercise price of $0.39 per share to a new director.  The options vest annually over three years, subject to the continued service on the board.  The options were valued using the Black-Scholes option pricing model using a volatility of 103.79% based upon the historical price of the company’s stock, a term of 6.5 years, using the simplified method and a risk free rate of 1.52%.  The calculated fair value, $9,631 will be recognized over the requisite service period.

Warrants to Purchase Common Stock

Warrants Issued as Settlements

In July 2016, the Company issued five year warrants to purchase 250,000 shares of common stock at an exercise price of $0.37 per share as part of a settlement.  The warrants were valued using the Black-Scholes option pricing model using a volatility of 104.54% based upon the historical price of the company’s stock, a term of five years, the term of the warrants and a risk free rate of 1.01%, resulting in a fair value of $70,631 which was included in loss on settlement for the nine months ended September 30, 2016.

Warrants Issued for Cash or Services

In January 2016, the Company granted a one year extension for warrants to purchase 3,968,258 shares of common stock which were set to expire at various dates in 2016.  Of the warrants extended, 2,443,565 were held by our president and principal shareholder and a director.  In connection with the extension, the Company recorded other expense of approximately $207,000 for the nine months ended September 30, 2016 representing the difference between the fair value of the old warrants and the extended warrants.

In January 2016, the Company issued five year warrants to purchase 150,000 shares of common stock at an exercise price of $0.39 per share in exchange for legal services.  The warrants were valued with the Black-Scholes option pricing model using a volatility of 103.14% based upon the historical price of the company’s stock, a term of five years, the term of the warrants and a risk free rate of 1.49%.  The calculated fair value, $44,477 was recorded as expense for the nine months ended September 30, 2016.

During the nine months ended September 30, 2016, the Company issued two year warrants to purchase 2,570,854 shares of common stock at an exercise price of $2.00 per shares in connection with advances of $1,805,000 from its president and principal shareholder related to the convertible line of credit agreement.

In June 2016, the Company issued two year warrants to purchase 214,286 shares of common stock at an exercise price of $2.00 per share to a director and his wife in connection with a private placement.

In July 2016, the Company issued two year warrants to purchase 135,135 shares of common stock at an exercise price of $2.00 per share in exchange for $100,000 in private placement with an accredited investor.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

NOTE 5 – Commitments and Contingencies

In January 2016, the Company entered into a settlement agreement with a former shareholder of the Company’s predecessor company under which the Company paid $80,000 in exchange for a general release. The Company recorded an accrual for this settlement as of December 31, 2015.

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 sought 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.  On October 14, 2015, the Court issued an order on Defendant GelTech’s Motion for Attorney’s Fees and Costs granting GelTech attorney fees and costs in excess of the amount of its litigation accrual for the case.  As such, the Company reversed the litigation accrual resulting in other income of $56,956 which was included in the Company’s statement of operations for the nine months ended December 31, 2015.  In November 2015, the Court issued a Final Judgement against the plaintiff in the amount of $510,499.  The plaintiff filed appeals which were pending.

In July 2016, the Company entered into a settlement agreement with the plaintiff whereby the Company agreed to pay the plaintiff $250,000 and issue the plaintiff five year warrants to purchase 250,000 shares of common stock at an exercise price of $0.37 per share, in exchange for the dismissal of all claims against the Company.  The warrants were valued using the Black-Scholes option pricing model using a volatility of 104.54% based upon the historical price of the company’s stock, a term of five years, the term of the warrants and a risk free rate of 1.01%, resulting in a fair value of $70,631.  As such, the Company recorded a loss on settlement of $320,631 for the nine months ended September 30, 2016.  

In June 2016, the Company entered into a settlement agreement with its employment practices insurance company related to the Company’s suit against the insurance company for failure to cover post trial legal costs related to the suit described above in this Note 5.  Under the settlement agreement, the insurance company agreed to pay the Company $300,000, which payment was received in July 2016.  As such the Company recorded a gain on settlement of $300,000 for the nine months ended September 30, 2016.

NOTE 6 – Related Party Transactions

During the nine months ended September 30, 2016, the Company issued warrants to its president and principal shareholder in exchange for cash as more fully described in Notes 3 and 8.

In April 2016, the Company appointed a new director to its board.  The new board member is a principal in a firm the Company hired to perform engineering and design services for the Company.  For the nine months ended September 30, 2016, the Company has paid $154,000 to the board member’s firm for engineering and design services, which are include in research and development costs in the consolidated statement of operations.  

In August 2016, the board of directors awarded our acting CEO and Chief Technology Officer an incentive bonus of $75,000 to be paid over a 12 month period in recognition of the new products developed for the Company during 2016.

NOTE 7 – Concentrations

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2016. As of September 30, 2016, there were no cash balances held in depository accounts that are not insured.

At September 30, 2016, three customers accounted for 23.3%, 21.0%, and 13.0% of accounts receivable.

For the nine months ended September 30, 2016, four customers accounted for 19.0%, 16.8%, 15.7% and 13.2% of sales.

Approximately 18.3% of revenue was generated from customers outside the United States during the nine months ended September 30, 2016.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

During the nine months ended September 30, 2016, sales primarily resulted from three products, FireIce®, Soil₂O® and FireIce Shield® which made up 68.9%, 16.8% and 11.2%, respectively, of total sales. Of the FireIce® sales, 89.2% related to the sale of FireIce® products and 10.8% related to sales of the FireIce extinguishers and educator equipment.  Of the Soil₂O® sales, 37.8% related to traditional sales of Soil₂O® and 62.2% related to sales of Soil₂O® Dust Control.  Of the FireIce Shield® sales, 47.9% consisted sales of asset protection canisters and refills and 52.1% consisted of sale of spray bottles for use by welders and plumbers.  

Two vendors accounted for 40.8% and 17.7% of the Company’s approximately $505,000 in purchases of raw material, finished goods and packaging during the nine months ended September 30, 2016.

During the nine months ended September 30, 2016, our president and principal shareholder provided 100% of the Company’s debt financing.  

NOTE 8 – Subsequent Events

In accordance with the 2007 Equity Incentive Plan, on October 24, 2016, the Company issued options to purchase 5,000 shares of common stock to a director upon his appointment to the compensation committee. The options have an exercise price of $0.27 per share and vest over a three year period, subject to continued service on the committee.  The options were valued using the Black-Scholes model using a volatility of 105.8% (derived using the historical market price for the Company’s common stock), an expected term of 6.5 years (using the simplified method) and a discount rate of 1.42%. The fair value of these options, $1,117, will be recognized as expense over the requisite service period.

Since October 1, the Company has issued two year warrants to purchase 218,596 shares of common stock at an exercise price of $2.00 per share in exchange for advances in the amount of $125,000 from the Company’s president and principal shareholder in connection with the secured convertible line of credit agreement.  The conversion rate of the advances ranged from $0.28 to $0.29.  

Since October 1, 2016, the Company has issued 404,081 shares of common stock to Lincoln Park in exchange for $104,120 in connection with the Purchase Agreement.

Since October 1, 2016, the Company has issued 892,858 shares of common stock and two year warrants to purchase 446,429 shares of common stock at an exercise price of $2.00 per share in exchange for $250,000 in connection with a private placement with an accredited investor.

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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.  Factors that could cause or contribute to these differences include those discussed in the Risk Factors contained in our Transition Report on Form 10-KT filed with the Securities and Exchange Commission, or the SEC, on March 31, 2016.

Overview

GelTech Solutions, Inc., or GelTech or the Company, generates revenue primarily from marketing products based around the following four product categories (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in wildland and urban firefighting, including fires in underground utility structures, and in wildland firefighting as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) FireIce Shield®, a line of products used by welders, plumbers, manufacturers, first responders and consumers to protect assets from fire; (3) Soil₂O® “Dust Control”, our application which is used for dust mitigation in the road construction and mining industries, as well as in rural communities with unpaved roads to deal with daily dust control issues and (4) Soil₂O®, a product which reduces the use of water required for irrigation and is primarily marketed to golf courses and commercial landscapers and most recently to homeowners via the Soil₂O® Home Lawn Kit. The Company also markets equipment that is used in the application of these primary products including (1) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire or explosion; (2) the FireIce Shield CTP System, a mobile spray unit that can be used to protect communication tower electronics during hot work and (3) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires.

USDA Correspondence

On October 3, 2016, the Company received a letter from United States Department of Agriculture, which oversees the U.S Forestry Service (“USFS”) regarding the clarification of the ingredients used in our FireIce product as well as a request by the USFS to provide an alternative name to be listed on the Qualified Products List (“QPL”) which distinguishes the product from the Company’s brand of FireIce.

 

The USFS letter requested the Company provide an alternative name to distinguish the QPL listed product, FireIce, from the Company’s unique and registered brand name FireIce®. The Company will be submitting a name change request from FireIce to FireIce 561-F, which maintains the root word FireIce, but in addition contains a distinguishing identifier that meets the approval of the USFS. The Company believes that the change in the name of FireIce will satisfy both the request of the USFS while maintaining the brand recognition of the Company.

If the Company is unable to come to a positive resolution with the USFS relating to the name change or our clarification of the ingredients, the USFS may remove FireIce from the QPL. In such event, the Company will be prohibited from selling FireIce for use on certain federal lands. This will have no effect on any federal agency contract now in existence, but may have an effect on future federal agency contracts with respect to FireIce, but not the next generation line of products, including but not limited to FireIce HVOF and other products in which the Company may seek USFS approval.  

The FireIce HVOF product currently being used by state and provincial agencies is a formulation that includes the product, FireIce that is listed on the QPL, plus additional compounds to improve the visibility and performance of the product. The FireIce HVOF product produced by the Company is its next generation line of product which is superior to FireIce, its QPL listed product formulation. The Company anticipates it will be applying for USFS approval with respect to its next generation line of products, including FireIce HVOF.

Although state agencies are not required to purchase products listed on the QPL, there is no assurance that states will not be deterred from buying or continuing to buy FireIce HVOF should FireIce no longer be listed on the QPL.

Our unaudited consolidated financial statements have been prepared on a going concern basis, and we need to generate sufficient material revenues to support the ongoing business of the Company.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2015.

The following tables set forth, for the periods indicated, results of operations information from our interim unaudited consolidated financial statements:

 

		Nine Months Ended September 30,								Change				Change
		2016				2015				(Dollars)				(Percentage)
Sales		$	920,741			$	1,070,059			$	(149,318	)			(13.9	%)
Cost of Goods Sold			282,266				432,471				(150,205	)			(34.7	%)
Gross Profit			638,475				637,588				887				0.1	%
Operating Expenses:
Selling General and Administrative			3,249,456				3,616,260				(366,804	)			(10.1	%)
Research and Development			206,228				76,533				129,695				169.5	%
Loss from Operations			(2,817,209	)			(3,055,205	)			237,996				7.8	%
Other Income (Expense)			(816,289	)			(1,219,803	)			403,514				(33.1	%)
Net Loss		$	(3,633,498	)		$	(4,275,008	)		$	641,510				15.0	%

Sales

Sales of product during the nine months ended September 30, 2016 consisted of $634,398 for FireIce® and related products, $155,027 for Soil₂O® and Soil₂O® Dust Control, $103,261 for FireIce Shield® and $5,555 for GT-W14.  FireIce® sales consisted of $572,922 related to product and equipment, sales primarily to state and provincial wildland firefighting agencies and $42,457 related to sales of extinguishers and product to our municipal distributor. Our Wildland sales declined in 2016 as several state agencies had inventory remaining from 2015 purchases and there was a decline in the number and severity of wildfires this season in the states and provinces that use our product. The Soil₂O® sales consisted of sales of Soil₂O® topical of $58,547 and sales of Soil₂O® dust control of $96,480. Sales of FireIce Shield® consisted of sales of asset protection canisters of $48,554 plus sales of FireIce Shield spray bottles of $53,091.  Both FireIce® wildland sales and Soil₂O® dust control sales are seasonal in nature with both peak seasons lasting from March through October.  We anticipate FireIce Shield® sales to be less seasonal. We do not expect the USFS QPL issue, described above under USDA Correspondence to significantly affect wildland sales as our current customer base consists of state and provincial agencies who are not restricted from using products not on the QPL. We expect sales of FireIce Shield to increase with the hiring of a sales professional with experience in both the plumbing and welding supply businesses, plus the launch of our new ChargeSafe™ Case product which uses our FireIce Shield® product.  Based on these factors, we expect that our revenues will increase in the future.

Cost of Goods Sold

The decrease in cost of goods sold was the result of the decrease in sales, plus inventory amounting to $67,439 having been written off for obsolescence during the nine months ended September 30, 2015. Cost of sales as a percentage of sales was 30.7% for the nine months ended September 30, 2016 as compared to 34.10% for the nine months ended September 30, 2015, after factoring out the obsolescence write off.  The difference is due to differences in 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 September 30, 2016.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Selling, General and Administrative Expenses (SG&A)

The decrease in SG&A expenses for the nine months ended September 30, 2016 resulted primarily from (1) a decrease in equity base compensation of $406,683 resulting from fewer warrants granted to consultants during the nine months ended September 30, 2016; (2) a decrease in professional fees resulting from a reduction of fees related to litigation of $118,429; (3) a decrease in sales and marketing expense related to last year’s marketing campaign for the Soil₂O® Home Lawn Kit and (4) a decrease in bad debt expense of $23,899 due to the receipt of payment for an account that was previously written off.  These decreases were partially offset by (1) an increase in salaries and employee benefits of $140,812 as a result of additional consulting fees and commissions which were partially offset by reductions in staff; (2) an increase in investor relations expense of $17,933 as a result of our hiring a new investor relations firm; and (3) an increase in travel expense of $72,876 related primarily to setting up multiple airbases in one state and one Canadian province.

Research and Development Expenses

The research and development expenses for the nine months ended September 30, 2016 related primarily to third party testing to determine the efficacy of GelTech’s products for new and existing applications.

Loss from Operations

The decrease in loss from operations resulted from the higher gross profit and the lower operating expenses as described above.

Other Income (Expense)

Other expense during the nine months ended September 30, 2016 consisted of (1) interest expense of $516,281; (2) a loss on litigation settlement of $320,631 resulting from claims brought against the Company by a former employee, which was partially offset by a gain on settlement of $300,000 relating to a claim filed by the Company against its employment practices insurance carrier; (3) a loss resulting from extending the term of certain warrants for an additional one year period of $206,620; and (4) a loss on conversion of interest of $72,765.  Other expense for the nine months ended September 30, 2015 consisted of (1) a loss on extinguishment of debt of $596,648; (2) a loss on settlement of $412,867 related to a former director and employee, and (3) interest expense of $281,990 which was partially offset by a gain on conversion of interest of $12,841 and the reversal of a litigation accrual of $56,956 based on a court ruling.

Net Loss

The lower net loss for the nine months ended September 30, 2016 resulted from the higher gross profit, and lower operating costs and lower other expense as described above. Net loss per common share was $0.07 and $0.09, respectively, for the nine months ended September 30, 2016 and 2015. The weighted average number of shares outstanding for the nine months ended September 30, 2016 and 2015 were 50,562,616 and 47,490,364, respectively.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2015.

The following tables set forth, for the periods indicated, results of operations information from our interim unaudited consolidated financial statements:

 

		Three Months Ended September 30,								Change				Change
		2016				2015				(Dollars)				(Percentage)
Sales		$	217,437			$	536,456			$	(319,019	)			(59.1	%
Cost of Goods Sold			71,131				178,100				(106,969	)			(60.1	%)
Gross Profit			146,306				358,356				(212,050	)			(59.2	%)
Operating Expenses:
Selling General and Administrative			1,069,781				1,153,432				(83,651	)			(7.3	%)
Research and Development			50,765				37,794				12,971				34.3	%
Loss from Operations			(974,420	)			(832,870	)			(141,370	)			17.0	%
Other Income (Expense)			(188,895	)			(56,738	)			(132,157	)			233.0	%
Net Loss		$	(1,163,135	)		$	(889,608	)		$	(273,527	)			(30.7	%)

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Sales

Sales of product during the three months ended September 30, 2016 consisted of $155,466 for FireIce® and related products, $55,545 for Soil₂O®, $4,691 for FireIce Shield® and $1,697 for GT-W14.  FireIce® sales consisted of $148,929 related to product and equipment sales primarily to wildland firefighting agencies and $2,315 related to sales of extinguishers and product to our municipal distributor. Our Wildland sales declined in 2016 as several state agencies had inventory remaining from 2015 purchases and there was a decline in the number and severity of wildfires this season in the states and provinces that use our product. The Soil₂O® sales consisted of sales of Soil₂O® topical of $14,808 and sales of Soil₂O® dust control of $37,893. Sales of FireIce Shield® consisted of sales of asset protection canisters of $2,576 plus sales of FireIce Shield spray bottles of $1,173.  Both FireIce® and Soil₂O® dust control sales are seasonal in nature with both peak seasons lasting from March through October.  We anticipate that FireIce Shield® sales will be less seasonal. Our FireIce Shield product is gaining acceptance with welders, plumbers and others working under flammable and hot conditions. Based on these factors, we expect that our revenues will increase in the future.

Cost of Goods Sold

The decrease in cost of goods sold was the result of the decrease in sales. Cost of sales as a percentage of sales was 32.7% for the three months ended September 30, 2016 as compared to 33.2% for the three months ended September 30, 2015, primarily due to differences in the product 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 September 30, 2016.

Selling, General and Administrative Expenses (SG&A)

The decrease in SG&A expenses for the three months ended September 30, 2016 resulted primarily from (1) a decrease in equity based compensation of $117,364 resulting from fewer warrants granted to consultants during the three months ended September 30, 2016; (2) a decrease in professional fees of $59,250 resulting from a reduction of fees related to litigation; and (3) a decrease in sales and marketing expense of $50,268 related to last year’s marketing campaign for the Soil₂O® Home Lawn Kit. These decreases were partially offset by (1) an increase in salaries and employee benefits of $83,433 as a result of additional consulting fees and commissions which were partially offset by reductions in staff; (2) an increase in facilities expense of $11,727 as a result of our using two additional strategically located third party warehouses for inventory; and (3) an increase in travel expense of $41,863 related primarily to setting up multiple airbases in one state and one Canadian province.

Research and Development Expenses

The research and development expenses for the three months ended September 30, 2016 related to third party testing to determine the efficacy of GelTech’s products for new and existing applications.

Loss from Operations

The increase in the loss from operations for the three months ended September 30, 2016 resulted from the lower gross profit which was only partially offset by the lower operating expenses as described above.

Other Income (Expense)

Other expense during the three months ended September 30, 2016 consisted of (1) interest expense of $188,897.  Other expense for the three months ended September 30, 2015 consisted of interest expense of $113,694 less other income of $56,956 related to the reduction of a litigation accrual based on a court ruling.

  

Net Loss

The higher net loss for the three months ended September 30, 2016 resulted from the lower gross profit and higher other expense which was partially offset by the lower operating expenses as described above. Net loss per common share was $0.02 and $0.02, respectively, for the three months ended September 30, 2016 and 2015. The weighted average number of shares outstanding for the three months ended September 30, 2016 and 2015 were 51,835,515 and 47,966,677, respectively.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

A summary of our cash flows is as follows:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Net cash used in operating activities	$	(911,917	)		$	(1,533,174	)		$	(2,440,732	)		$	(3,164,283	)
Net cash used in investing activities		(32,323	)			(6,263	)			(186,266	)			(18,156	)
Net cash provided by financing activities		884,162				1,480,651				2,599,839				3,055,161
Net decrease in cash	$	(60,078	)		$	(58,786	)		$	(27,159	)		$	(127,278	)

Net Cash Used in Operating Activities

Net cash used during the nine months ended September 30, 2016 resulted primarily from the net loss of $3,633,498, a decrease in accounts payable of $46,609 and increases in inventory of $209,234, which were partially offset by the losses on extension of warrants and conversion of interest of $206,620 and $72,765, respectively, stock based compensation of $367,787 and increases in accrued liabilities of $412,289 and decreases in accounts receivable and prepaid expenses of $138,906 and $46,764, respectively.

Net cash used during the nine months ended September 30, 2015 resulted primarily from the net loss of $4,275,008 and an increase in inventories and accounts receivable of $321,081 and $420,552, respectively.  These were partially offset by the loss on extinguishment of debt of $596,648, stock based compensation of $774,470, increases in accounts payable, accrued settlements and accrued liabilities of $62,410, $79,044 and $187,192, respectively, and a decrease in prepaid expenses of $68,846.

Net Cash Used in Investing Activities

The major difference in net cash used in investing activities for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 resulted from the purchase of equipment to mix and store our wildland product on multiple airbases in the United States and Canada and for an additional vehicle for the Company’s wildland operations.

Net Cash Provided By Financing Activities

During the nine months ended September 30, 2016, the Company received $610,955 in exchange for 1,673,927 shares of common stock in connection with a stock purchase agreement with Lincoln Park, received $1,805,000 from advances under the $5 million secured convertible line of credit facility with our president and principal shareholder, and received $250,000 in exchange for 698,842 shares of common stock and two year warrants to purchase 349,421 shares of common stock at an exercise price of $2.00 per share in connection with two private placements including one with a director and his wife. In addition, the Company issued two year warrants to purchase 3,234,601 shares of common stock at an exercise price of $2.00 per share in connection with the convertible line of credit advances. The amounts received were used to make payments on insurance premium finance contracts of $66,116, as well as providing working capital.

During the nine months ended September 30, 2015, the Company received $150,000 in exchange for 652,174 shares of common stock and two year warrants to purchase 326,087 shares of common stock at an exercise price of $2.00 per share in connection with a private placement and received $2,865,000 from advances under the convertible line of credit facility, all from our president and principal shareholder.  In addition, the Company issued two year warrants to purchase 2,104,990 shares of common stock at an exercise price of $2.00 per share in connection with the convertible line of credit advances. The Company also received $114,250 in exchange for 268,087 shares of common stock in connection with private placements with four accredited investors. The amounts received were used to make payments on insurance premium finance contracts of $74,089 as well as providing working capital.

Historical Financings

From January 1, 2016 through the date of this report, GelTech received $1,930,000 in advances, at conversion rates from $0.28 to $0.55 per share against its convertible secured line of credit agreement with its president and principal shareholder. In connection with these advances the Company has issued two-year warrants to purchase 2,700,164 shares of common stock at $2.00 per share.  

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

From January 1, 2016 through the date of this report, the Company received $715,075 in exchange for 2,078,008 shares of common stock in connection with the stock purchase agreement with Lincoln Park and has received $500,000 in exchange for 1,591,700 shares of common stock and two year warrants to purchase 795,850 shares of common stock at an exercise price of $2.00 per share in connection with three private placements, one with a director and his wife and two with another accredited investor.

Liquidity and Capital Resource Considerations

As of November 14, 2016, we had approximately $120,000 in available cash.

In August 2015, GelTech signed a $10 million Purchase Agreement with Lincoln Park. The Company also entered into a Registration Rights Agreement with Lincoln Park whereby we agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to Lincoln Park under the Purchase Agreement.

 

Under the terms and subject to the conditions of the Purchase Agreement, GelTech has the right to sell, and Lincoln Park is obligated to purchase, up to $10 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 30-month period commencing on the date that a registration statement, which the Company agreed to file with the SEC pursuant to the Registration Rights Agreement, is declared effective by the SEC. The Company filed the registration statement with the SEC on October 5, 2015 and it was declared effective by the SEC on October 16, 2015. Failure of our stock price to increase will impact our ability to meet our working capital needs through Lincoln Park.

In September 2016, the Company and its president and principal shareholder entered into the Second Amendment to a Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $5 million to $6 million.  As of the filing date of this report, Mr. Reger has advanced $5,195,000 to the Company under the credit facility.  

Until the Company generates sufficient revenue to sustain the business, our operations will continue to rely on Mr. Michael Reger’s investments and the Purchase Agreement with Lincoln Park.  If Mr. Reger were to cease providing working capital, the stock price were to fall below the floor price in the Purchase Agreement with Lincoln Park or the Company is unable to generate substantial cash flows from sales of its products or complete financings, the Company may not be able to remain operational. 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 support vehicles or mixing base equipment in the future, depending on demand.

Related Party Transactions

 

For information on related party transactions and their financial impact, see Note 6 to the Unaudited 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. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Company’s results of operations and financial condition.  

There were no material changes to our principal accounting estimates during the period covered by this report.

RECENT ACCOUNTING PRONOUNCEMENTS

 

For information on recent accounting pronouncements, see Note 1 to the Unaudited 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, revenues, number of states ordering our products, impact of the USFS QPL issue on sales of FireIce. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.

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GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders from the utility and mining companies, global and domestic economic conditions, budgetary pressures facing state and local governments, our failure to receive or the potential delay of anticipated orders for our products, failure to receive acceptance of FireIce® by State and Local governments, failure to obtain regulatory approval on our products, obtaining advances under the Reger credit facility, states choosing not to purchase FireIce as a result of the USFS QPL issue, the failure to keep the Lincoln Park registration statement effective, our stock price falling below the minimum stock price requirement under the Lincoln Park Agreement or Lincoln Park suffering unanticipated liquidity issues.

Further information on our risk factors is contained in our filings with the SEC, including our Prospectus dated April 6, 2016. 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 and Rule 15d-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) and Rule 15d-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) and Rule 15d-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.

There were no material changes to outstanding legal proceedings during the three months ended September 30, 2016.

 

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 SEC, we have sold securities without registration under the Securities Act of 1933, or the Securities Act, as described below:

Name or Class of Investor		Date of Sale		No. of Securities		Reason for Issuance
Investor (1)		July 2016		270,270 shares of common stock and warrants to purchase 135,135 shares of common stock for $2.00 per share		Private Placement
Consultant (1)		August 2016		2,328 shares of common stock		Wildland consulting services valued at $900

————————

(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.
November 14, 2016		/s/ Peter Cordani
		Peter Cordani
		Chief Executive Officer (Principal Executive Officer)
November 14, 2016		/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		Lincoln Park Purchase Agreement dated August 11, 2015		8-K		8/12/15		10.1
10.2		Lincoln Park Registration Rights Agreement dated August 11, 2015		8-K		8/12/15		10.2
10.3		Amendment No. 1 Lincoln Park Warrant		8-K		8/12/15		10.3
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.