Edgar Filing: GelTech Solutions, Inc.

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

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 12, 2013
Common Stock, $0.001 par value per share		35,075,583 shares

Table of Contents


	PART I – FINANCIAL INFORMATION

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.	1

	Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and June 30, 2013	1

	Condensed Consolidated Statements of Operations for the three months ended September 30, 2013 and 2012 (Unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2013 and 2012 (Unaudited)	3

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	20

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	24

ITEM 4.	CONTROLS AND PROCEDURES.	24

	PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS.	25

ITEM 1A.	RISK FACTORS.	25

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	25

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	25

ITEM 4.	MINE SAFETY DISCLOSURES.	25

ITEM 5.	OTHER INFORMATION.	25

ITEM 6.	EXHIBITS.	25

SIGNATURES		26

PART I – FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	As of September 30,			As of June 30,
	2013			2013
	(Unaudited)
ASSETS

Cash and cash equivalents	$	57,121		$	90,275
Accounts receivable trade, net		476,845			37,277
Inventories		739,649			588,703
Prepaid expenses and other current assets		60,717			66,756
Total current assets		1,334,332			783,011

Furniture, fixtures and equipment, net		188,224			158,184
Deposits		26,886			26,886

	$	1,549,442		$	968,081
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable	$	497,287		$	265,122
Accrued expenses		235,499			176,734
Litigation accrual		505,000			505,000
Accrual for severance agreement		59,826			102,056
Convertible notes - related parties, net of discount		—			79,261
Convertible notes - third parties, net of discount		—			192,163
Insurance premium finance contract		12,084			11,796
Deferred revenue		7,019			7,019
Total current liabilities		1,316,715			1,339,151
Convertible notes - related party, net of discounts		2,022,632			1,899,316
Total liabilities		3,339,347			3,238,467

Commitments and contingencies (Note 5)

Stockholders’ equity (deficit)
Preferred stock: $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock: $0.001 par value; 50,000,000 shares authorized; 34,120,871 and 33,084,671 shares issued and outstanding as of September 30, 2013 and June 30, 2013, respectively.		34,121			33,084
Additional paid in capital		28,108,869			25,718,163
Accumulated deficit		(29,932,895	)		(28,021,633	)
Total stockholders' equity (deficit)		(1,789,905	)		(2,270,386	)

Total liabilities and stockholders' equity (deficit)	$	1,549,442		$	968,081

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 September 30,
	2013			2012

Sales	$	530,812		$	84,540

Cost of goods sold		227,733			36,079

Gross profit		303,079			48,461

Operating expenses:
Selling, general and administrative expenses		2,032,044			1,549,572
Research and development		87,168			17,308

Total operating expenses		2,119,212			1,566,880

Loss from operations		(1,816,133	)		(1,518,419	)

Other income (expense)
Interest income		243			51
Other income		17,000			—
Loss on repricing warrants		—			(70,491	)
Interest expense		(112,372	)		(216,828	)
Total other income (expense)		(95,129	)		(287,268	)

Net loss	$	(1,911,262	)	$	(1,805,687	)


Net loss per common share - basic and diluted	$	(0.06	)	$	(0.07	)

Weighted average shares outstanding - basic and diluted		33,579,683			25,896,566

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	For the Three Months Ended September 30,
	2013			2012
Cash flows from operating activities
Reconciliation of net loss to net cash used in operating activities:
Net loss	$	(1,911,262	)	$	(1,805,687	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		13,425			12,754
Amortization of debt discounts		49,624			196,797
Bad debt expense		5,801			—
Stock option employee compensation expense		593,073			665,410
Cost of repricing warrants to induce exercise		—			70,491
Stock issued for interest		4,440			—
Changes in assets and liabilities:
Accounts receivable		(445,369	)		24,537
Inventories		(150,946	)		(16,744	)
Prepaid expenses and other current assets		22,379			7,427
Other assets		—			—
Accounts payable		232,165			(76,063	)
Accrual for severance agreement		(42,230	)		—
Accrued expenses		58,765			(22,113	)
Net cash used in operating activities		(1,570,135	)		(943,191	)
Cash flows from Investing Activities
Purchases of equipment		(43,465	)		(2,185	)
Net cash (used in) investing activities		(43,465	)		(2,185	)
Cash flows from Financing Activities
Proceeds from sale of stock through private placements		175,000			128,000
Proceeds from sale of stock under stock purchase agreement		480,000			720,003
Proceeds from sale of stock and warrants		100,000			—
Proceeds from exercise of warrants		25,000			870,000
Proceeds from exercise of stock options		18,200			—
Repayments of convertible notes with related parties		(85,880	)		—
Payments on related party notes		—			(33,339	)
Proceeds from convertible notes with third parties		—			175,000
Repayments of convertible notes with third parties		(115,822	)		—
Proceeds from convertible notes with related parties		1,000,000			—
Payments on Insurance Finance Contract		(16,052	)		(10,638	)
Net cash provided by financing activities		1,580,446			1,849,026

Net increase in cash and cash equivalents		(33,154	)		903,650
Cash and cash equivalents - beginning		90,275			84,194
Cash and cash equivalents - ending	$	57,121		$	987,844

(continued)

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)


	For the Three Months Ended September 30,
	2013		2012

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	425	$	296
Cash paid for income taxes	$	—	$	—
Supplementary Disclosure of Non-cash Investing and Financing Activities:
Financing of prepaid insurance contracts	$	16,340	$	12,774
Beneficial conversion feature of convertible notes	$	311,949	$	166,709
Conversion of notes for common stock	$	82,132	$	332,996
Loan discount from issuance of warrants	$	601,949	$	—
Common stock issued for interest	$	4,440	$	—

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 MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

NOTE 1 - Organization and Basis of Presentation

Organization

GelTech Solutions, Inc., or GelTech, markets the following products: (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in urban firefighting, including underground utility fires, and in wildland firefighting and as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire; (3) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires; (4) Soil₂O® “Dust Control”, our new application which is used for dust mitigation in the aggregate, road construction, mining, as well as, other industries that deal with daily dust control issues; and (5) Soil₂O®, a product which reduces the use of water and is primarily marketed to golf courses, commercial landscapers and the agriculture market. Our financial statements have been prepared on a going concern basis, and we need to generate sufficient material revenues to support the ongoing business of GelTech.

The corporate office is located in Jupiter, Florida.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its three wholly-owned subsidiaries: FireIce Gel, Inc., GelTech International, Inc. and Weather Tech Innovations, Inc. There has been no activity in Weather Tech Innovations, Inc. and GelTech International, Inc. These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (”SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by "GAAP" for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The information included in these unaudited condensed consolidated interim financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013 filed on September 27, 2013.

Inventories

Inventories as of September 30, 2013 consisted of raw materials and finished goods in the amounts of $305,421 and $434,228, respectively.

Fair Value of Financial Instruments and Fair Value Measurements

We measure our financial assets and liabilities in accordance with ASC 820 "Fair Value Measurements and Disclosures". For certain of our financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses and line of credit, the carrying amounts approximate fair value due to their short maturities. The carrying amount of our convertible debt approximates the fair value because the interest rate on the convertible note does not vary materially from the market rate for similar debt instruments.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

We adopted accounting guidance for fair value measurements of financial assets and liabilities and adopted the same guidance for non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

The Company had no financial or non-financial assets or liabilities measured at fair value and subject to this accounting standard as of September 30, 2013 or June 30, 2013.

Revenue Recognition

Revenue from sales of products is recognized when persuasive evidence of an arrangement exists, products have been shipped to the customer, economic risk of loss has passed to the customer, the price is fixed or determinable, collection is reasonably assured, and any future obligations of the Company are insignificant. Revenue is shown net of returns and allowances. The Company does provide certain customers with the right of return for unsold product. Sales to these customers are recorded as the customer sells the product, thus removing the right of return.

Products shipped from either our third-party fulfillment companies or our Jupiter, Florida or Irwindale, California locations are shipped FOB shipping point. Normal payment terms are net 30 or net 60 days depending on the arrangement we have with the customer. As such, revenue is recognized when product has been shipped from either the third-party fulfillment companies or from the Jupiter, Florida or Irwindale, California locations.

The Company follows the guidance of ASC 605-50-25, “Revenue Recognition, Customer Payments”. Accordingly, any incentives received from vendors are recognized as a reduction of the cost of products. Promotional products or samples given to customers or potential customers are recognized as a cost of goods sold. However, products we utilize to perform demonstrations for potential customers are recorded as a marketing expense in operations. Cash incentives provided to our customers are recognized as a reduction of the related sale price, and, therefore, are a reduction in sales.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Significant estimates for the three months ended September 30, 2013 include the allowance for doubtful accounts, depreciation and amortization, valuation of inventories, valuation of options and warrants granted for services or settlements, valuation of common stock granted for services or debt conversion, valuation of debt discount related to the beneficial conversion feature of convertible notes, accruals for litigation losses and the valuation of deferred tax assets.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

Net Earnings (Loss) per Share

The Company computes net earnings (loss) per share in accordance with ASC 260-10, “Earnings per Share.” ASC 260-10 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. At September 30, 2013, there were options to purchase 9,937,840 shares of the Company’s common stock, warrants to purchase 2,283,112 shares of the Company’s common stock and 6,707,094 shares of the Company’s common stock are reserved for convertible notes which may dilute future earnings per share.

Stock-Based Compensation

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

Determining Fair Value Under ASC 718-10

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

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

The fair values of stock option grants for the period from July 1, 2013 to September 30, 2013 were estimated using the following assumptions:


Risk free interest rate		0..45% -2.61%
Expected term (in years)		2.5 - 6.5
Dividend yield		––
Volatility of common stock		91.6% - 91.91%
Estimated annual forfeitures		––

New Accounting Pronouncements

Accounting Standards Updates which were not effective until after September 30, 2013 are not expected to have a significant effect on the Company's consolidated financial position or results of operations.

NOTE 2 - Going Concern

These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize it assets and discharge its liabilities in the normal course of business. As of September 30, 2013, the Company had an accumulated deficit and stockholders’ deficit of $29,932,895 and $1,789,905, respectively, and incurred losses from operations of $1,816,133 for the three months ended September 30, 2013 and used cash from operations of $1,570,135 during the three months ended September 30, 2013. 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.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

In January 2012, the Company signed a purchase agreement with Lincoln Park Capital Fund LLC which provided for the sale of up to an additional $4.9 million worth of common stock of the Company, in addition to the $100,000 purchased upon entering into the agreement. To date the Company has issued 2,913,997 shares of common stock in exchange for $1,990,003 under this agreement and has the ability to sell another $3.01 million under the agreement.

Management believes that the actions presently being taken provide the opportunity for the Company to continue as a going concern. Ultimately, the continuation of the Company as a going concern is dependent upon the ability of the Company to generated sufficient revenue to attain profitable operations. These unaudited condensed consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 3 – Convertible and Non-Convertible Note Agreements

On May 29, 2009, the Company received a line of credit (“Line of Credit”) from the Company’s principal stockholder (the “Lender”). In connection with this Line of Credit, the Company executed a Revolving Promissory Note which permitted the Company to borrow up to $2,500,000. Interest, at an annual rate of 5%, was due monthly on the 20th day of each month which commenced on July 20, 2009.

In February 2011, the Company renegotiated the Line of Credit Agreement with the Lender. As part of the renegotiation, the Company issued 892,857 shares of the Company’s common stock and five-year warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.25 per share in exchange for a $1,000,000 reduction in the principal amount of the Line of Credit. In addition, the remaining principal amount due under the Line of Credit of $1,497,483 was replaced by a five-year convertible note of the same amount, convertible at $1.12 per share (fair market value on transaction date based upon the quoted trading price) and bearing annual interest of 5%, due on the maturity date of the note (the “2011 Note”). As an inducement for the Lender to enter into the convertible note agreement, the Company granted the Lender five-year warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.75 per share. These warrants were exercised in September 2012 in exchange for $150,000 in connection with the Company’s offer to all warrant holders to exercise warrants at $0.50 per share instead of the exercise price negotiated on the date of the grant. In February 2013, the 2011 Note, plus a $275,000 convertible original issue discount note were combined into one convertible note agreement, see discussion below.

In December 2011, the Company received short term advances from its Chief Executive Officer, former President and Chief Financial Officer in the amounts of $10,000, $29,380 and $50,000, respectively. The advances bear interest rates of 0.7%, 5.0% and 5.0%, respectively. In addition, as further inducement for the advance from the Chief Financial Officer, the Company approved the reduction in the exercise price of 150,000 options granted to the Chief Financial Officer from $1.95 to $0.60 per share. In connection with this repricing, the expense related to the vesting of these options was increased by $15,067 which will be recognized over the remaining service period. As of September 30, 2013, the Company has repaid all amounts due on these notes.

On March 9, 2012, the Company received $105,000 from third parties in exchange for nine month convertible original issue discount notes in the amount of $107,625. The notes bear an annual interest rate of 5% and are convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the notes, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $84,562 which will be amortized to interest expense over the life of the notes. In September 2012, the Company issued new one-year convertible original issue discount notes in the amount of $120,540, bearing annual interest of 12% and convertible at $0.50 per share in exchange for cancellation of the old notes. This modification was not considered a debt extinguishment. In accordance with ASC 470, the Company recognized a debt discount related to the change in fair value of the embedded conversion option in the amount of $35,138 which was amortized to interest expense over the life of the convertible notes. In August 2013, the Company paid one note in the amount of $34,440 by issuing 8,880 shares of common stock and a payment of $30,000. The remaining note in the amount of $86,100 was paid early by the payment of $85,822.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

On March 10, 2012, the Company received $75,000 from a director in exchange for a six month convertible original issue discount note in the amount of $76,875. The note bears an annual interest rate of 5% and is convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the note, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $63,038 was amortized to interest expense over the life of the note. In September 2012, the Company issued a new one-year convertible original issue discount note in the amount of $86,100, bearing annual interest of 12% and convertible at $0.50 per share in exchange for cancellation of the old note. This modification was not considered a debt extinguishment. In accordance with ASC 470, the Company will recognize a debt discount related to the change in fair value of the embedded conversion option in the amount of $24,971 which was amortized to interest expense over the life of the convertible note. In September 2013, the Company repaid the note.

In August 2012, the Company received $75,000 in exchange for a six month convertible original issue discount note in the amount of $76,875 with an accredited investor. The note is convertible into common stock at $0.50 per share and bears an annual interest rate of 5% and is convertible into the Company's common stock at the rate of $0.50 per share. In connection with the issuance of the notes, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $1,875 and an original issue discount of $55,350 which will be amortized to interest expense over the life of the notes. In February 2013, the note holder was issued a new one year original issue discount note for $86,100 convertible at $0.35 per share. The Company recorded an original issue discount of $9,225 and a beneficial conversion feature discount of $4,920 in connection with the new note. In August 2013, the Company issued 234,663 shares of common stock in connection with the early conversion of this note.

On December 28, 2012, the Company received $250,000 from its principal stockholder in exchange for a one year convertible original issue discount note in the amount of $275,000 (the “2012 Note”). The note bears an annual interest rate of 10% and is convertible into the Company's common stock at the rate of $0.35 per share. In connection with the issuance of the note, the Company recorded a loan discount related to the intrinsic value of the beneficial conversion feature in the amount of $23,571 and an original issue discount of $25,000 which will be amortized to interest expense over the life of the note.

In February 2013, the Company entered into a new convertible note agreement in the amount of $1,997,483, convertible into common stock at a conversion price of $0.35 per share, bearing interest at an annual rate of 7.5% and due on December 31, 2016. This note was issued in exchange for the 2011 Note and the 2012 Note and receipt of $250,000. In connection with the transaction, the Company issued 210,226 shares of common stock in exchange for accrued interest of $73,579 due on the 2011 and 2012 notes resulting in a loss on conversion of interest of $4,204. The exchange of cash and the 2011 and 2012 notes was recorded as a debt extinguishment which resulted in a loss on extinguishment of debt in the amount of $21,311 for the year ended June 30, 2013. Because this convertible debt instrument contained an embedded beneficial conversion feature, and was extinguished before conversion, the amount of the reacquisition price to be allocated to the repurchased beneficial feature was measured using the intrinsic value of that conversion feature at the extinguishment date and was immaterial. In connection with the new note agreement, the Company recorded a note discount in the amount of $114,142 related to the beneficial conversion feature of the note calculated using the intrinsic value, of which $25,839 has been amortized as of September 30, 2013.

In July 2013, the Company received $1 million from its Chief Operating Officer and principal stockholder in exchange for a five year, $1 million convertible note with a conversion rate of $1.00 per share and an annual interest of 7.5%, plus five year warrants to purchase 500,000 shares of the common stock at $1.30 per share. The Company calculated the relative fair market value of the warrants to be $311,949 using the Black-Scholes model using a volatility of 91.46% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 5 years (the term of the warrants) and a discount rate of 1.4%. In addition, the Company calculated the intrinsic value of the beneficial conversion feature of the note to be $601,949. During the three months ended September 30, 2013, the Company recognized interest expense from the amortization of the debt discounts related to this note in the amount of $27,349.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

NOTE 4 - Stockholders’ Equity

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, par value $0.001 per share with such rights, preferences and limitation as may be set from time to time by resolution of the board of directors and the filing of a certificate of designation as required by Delaware General Corporation Law.

Common Stock

The issuances of common stock during the three months ended September 30, 2013 were as follows:

During the three months ended September 30, 2013, the Company has issued 289,941 shares of common stock and five year warrants to purchase 29,412 shares of common stock at an exercise price of $1.25 per share in exchange for $275,000 in connection with private placements with five accredited investors.

In August and September 2013, the Company issued 462,716 shares of common stock in exchange for $480,000 in connection with the Purchase Agreement with Lincoln Park Capital.

In July, the Company issued 20,000 shares of common stock to a director in exchange for $18,200 in connection with the exercise of options at an exercise price of $0.91 per share.

In August, the Company issued 20,000 shares of common stock in exchange for $25,000 in connection with the exercise of warrants with an exercise price of $1.25 per share.

Options to Purchase Common Stock

Stock-based compensation expense recognized under ASC 718-10 for the period July 1, 2013 to September 30, 2013 was $593,073 for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At September 30, 2013, the total compensation cost for stock options not yet recognized was approximately $2,772,075. This cost will be recognized over the remaining vesting term of the options of approximately three years.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

A summary of stock option transactions for all employee stock options for the three month periods ended September 30, 2013 and 2012 is as follows:

Employee Options and Stock Appreciation Rights


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2012		4,589,507	$	1.04		5.95
Granted		935,000	$	0.69		8.20
Exercised		—	$	—		—
Forfeited		—	$	—
Expired		—	$	—		—
Outstanding at September 30, 2012		5,524,507	$	1.02		5.65	$	17,300
Exercisable at September 30, 2012		3,041,839	$	0.98		5.10	$	5,633

Weighted average fair value of options granted during the three months ended September 30, 2012.			$	0.48

Balance at June 30, 2013		6,337,007	$	0.75		8.25
Granted		1,425,000	$	1.34		9.60
Exercised		—	$	—		—
Forfeited		—	$	—		—
Expired		—	$	—
Outstanding at September 30, 2013		7,762,007	$	0.87		6.68	$	2,615,329
Exercisable at September 30, 2013		3,689,258	$	0.91		5.28	$	1,070,034

Weighted average fair value of options granted during the three months ended September 30, 2013			$	0.69

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

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

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

In July 2013, the Company issued ten year options to purchase 250,000 shares of common stock, each to its Chief Executive Officer, Chief Technology Officer and Chief Financial Officer. The options have an exercise price of $1.30 per share and vest 50% upon the market value of the Company’s common stock trading at or greater than $2.00 per share for any 10 day period out of a 30 day trading period and the other 50% vesting upon the market value of the Company’s common stock trading at or greater than $3.00 per share for any 10 day period out of a 30 day trading period. The options were valued using the Black-Scholes model using a volatility of 93.11% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 2.62%. The value of these options was estimated by management in accordance with ASC 718, which requires an estimate of the probability that these market conditions will occur and for the resulting discounted value be expensed immediately. Accordingly management has expensed $63,180 to stock compensation expense.

In July 2013, the Company granted 100,000 options to a new employee in connection with his employment. Of the options granted, 50,000 are exercisable at $1.25 per share and 50,000 are exercisable at $1.75 per share. Both grants are for a five year term vest 25% immediately and 75% in equal amounts over three years. The options were valued using the Black-Scholes model using a volatility of 91.61% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 4.0 years (using the simplified method) and a discount rate of 1.14%. The value of these options, $80,413 will be recognized as expense over the requisite service period.

In July 2013, the Company granted ten year options to purchase 25,000 shares of the Company’s common stock at an exercise price of $1.30 per share to the father of the Company’s CEO and CTO in recognition of his service. The options vest over a three year period. The Company valued the options at $25,272 using the Black-Scholes option pricing model using a volatility of 91.72%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 1.5 years, using the Simplified Method and a discount rate of 2.61%.

In July 2013, the Board of Directors approved a pool of 400,000 options to be granted to employees at the discretion of the executive management of the Company. In September 2013, management granted 100,000 of these options to employees. The options vested immediately, are exercisable for three years and have an exercise price of $1.30 per share, the market value of our common stock on the date of the grant. The Company valued the options at $277,808 using the Black-Scholes option pricing model using a volatility of 91.72%, based upon the historical price of the Company’s common stock since June 2008, an estimated term of 1.5 years, using the Simplified Method and a discount rate of 0.45%.

In August 2013, the Company granted 150,000 stock settled Stock Appreciation Rights (SARS) to a new employee in connection with his employment. The SARS are exercisable at 1.52 per share, are for a five year term and vest 50,000 immediately and the remaining options will vest 33,334 upon the Company reaching $3 million in sales in any twelve month period, 33,333 upon the Company reaching sales of $5 million in any twelve month period and 33,333 upon the Company reaching sales of $6 million in any twelve month period. The SARS were valued using the Black-Scholes model using a volatility of 91.91% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 4.0 years (using the simplified method) and a discount rate of 1.97%. The value of these SARS, $176,413 will be recognized as expense over the period required to meet the performance criteria which is estimated to be approximately two years.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

A summary of options issued to directors under the 2007 Plan and changes during the period from June 30, 2012 to September 30, 2012 and from June 30, 2013 to September 30, 2013 is as follows:

Options Issued to Directors


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2012		857,500		$	1.36		7.98
Granted		230,000		$	0.91		10.00
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		1,087,500		$	1.26		8.14	$	2,800
Exercisable at September 30, 2012		725,999		$	1.39		7.58	$	467

Weighted average fair value of options granted during the three months ended September 30, 2012				$	0.66

Balance at June 30, 2013		1,200,833		$	1.16		8.04
Granted		435,000		$	1.19		10.00
Exercised		(20,000	)	$	0.91		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2013		1,615,833		$	1.12		8.31	$	243,653
Exercisable at September 30, 2013		862,919		$	1.24		7.22	$	108,158

Weighted average fair value of options granted during the three months ended September 30, 2013				$	0.74

On July 1, 2012, the Company issued options to purchase 230,000 shares of common stock to directors. The options have an exercise price of $0.91 per share, vest on June 30, 2013¸ subject to continuing service as a director and bear a ten year term. The options were valued using the Black-Scholes model using a volatility of 91.04% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 5.5 years (using the simplified method) and a discount rate of 0.82%. The value of these options will be recognized as expense over the requisite service period.

As prescribed by the Company's 2007 Equity Incentive Plan, on July 1, 2013, the Company issued options to purchase 370,000 shares of common stock to directors. The options have an exercise price of $1.15 per share, vest on June 30, 2014¸ subject to continuing service as a director and bear a ten year term. The options were valued using the Black-Scholes model using a volatility of 93.11% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 5.5 years (using the simplified method) and a discount rate of 1.52%. The value of these options will be recognized as expense over the requisite service period.

In July 2013, the Company issued ten year options to purchase 50,000 shares of common stock to a director. The options have an exercise price of $1.30 per share and vested immediately. The options were valued using the Black-Scholes model using a volatility of 93.11% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 6.5 years (using the simplified method) and a discount rate of 2.67%. The value of these options will be recognized as expense in the quarter ending September 30, 2013.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

In September 2013, the Company issued ten year options to purchase 15,000 shares of common stock to a director. The options have an exercise price of $1.01 per share and vested immediately. The options were valued using the Black-Scholes model using a volatility of 91.6% (derived using the historical market price for the Company’s common stock since it began trading in June 2008), an expected term of 5.0 years (using the simplified method) and a discount rate of 1.62%. The value of these options, $10,702, will be recognized as expense in the quarter ending September 30, 2013.

A summary of options issued to non-employees under the 2007 Plan and changes during the three month periods from June 30, 2012 to September 30, 2012 and from June 30, 2013 to September 30, 2013 is as follows:

Non-Employee, Non-Director Options


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at June 30, 2012		540,000		$	1.16		3.14
Granted		—		$	—		—
Exercised		(100,000	)	$	0.50
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		440,000		$	1.14		2.02	$	—
Exercisable at September 30, 2012		440,000		$	1.14		2.02	$	—

Weighted average fair value of options granted during the three months ended September 30, 2012					N/A

Balance at June 30, 2013		560,000		$	1.22		5.96
Granted		—		$	—		—
Exercised		—		$	—		—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2013		560,000		$	1.22		5.71	$	9,450
Exercisable at September 30, 2013		285,000		$	1.21		1.97	$	700

Weighted average fair value of options granted during the three months ended September 30, 2013					N/A

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

Warrants to Purchase Common Stock

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

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

A summary of warrants issued for settlements and changes during the periods July 1, 2012 to September 30, 2012 and from July 1, 2013 to September 30, 2013 is as follows:

Warrants Issued as Settlements


	Number of Warrants		Weighted Average Exercise Price		Remaining Contractual Life
Balance at June 30, 2012		344,058	$	1.05		0.92
Granted		350,000	$	0.60		5.00
Exercised		—	$	—		—
Forfeited		—	$	—		—
Expired		—	$	—		—
Outstanding at September 30, 2012		694,058	$	0.84		2.84
Exercisable at September 30, 2012		694,058	$	0.84		2.84

Weighted average fair value of options granted during the three months ended September 30, 2012			$	0.33

Balance at June 30, 2013		350,000	$	0.60		4.22
Granted		—	$	—		—
Exercised		—	$	—		—
Forfeited		—	$	—		—
Expired		—	$	—		—
Outstanding at September 30, 2013		350,000	$	0.60		3.97
Exercisable at September 30, 2013		350,000	$	0.60		3.97

Weighted average fair value of options granted during the three months ended September 30, 2013				N/A

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

A summary of warrants issued for cash and changes during the periods June 30, 2012 to September 30, 2012 and from June 30, 2013 to September 30, 2013 is as follows:

Warrants issued for cash or services


	Number of Warrants			Weighted Average Exercise Price		Remaining Contractual Life
Balance at June 30, 2012		4,481,200		$	1.46		2.46
Granted		50,000		$	0.63		5.0
Exercised		(1,640,000	)	$	0.50		—
Exercise recission		—		$	—
Forfeited		—		$	—		—
Expired		—		$	—		—
Outstanding at September 30, 2012		2,891,200		$	1.44		1.10
Exercisable at September 30, 2012		2,891,200		$	1.44		1.10

Weighted average fair value of options granted during the three months ended September 30, 2012				$	0.44

Balance at June 30, 2013		1,533,700		$	1.25		2.06
Granted		529,412		$	1.30		5.00
Exercised		(20,000	)	$	1.25		—
Forfeited		—		$	—		—
Expired		(110,000	)	$	1.25		—
Outstanding at September 30, 2013		1,933,112		$	1.27		2.75
Exercisable at September 30, 2013		1,933,112		$	1.27		2.75

Weighted average fair value of options granted during the three months ended September 30, 2013					N/A

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

In September 2012, the Company issued 1,640,000 shares of common stock in exchange for $820,000 in connection with the exercise of 1,640,000 warrants to purchase shares of the Company’s common stock related to an offer by the Company to reduce the exercise price to $0.50 per share. The original exercise prices of the warrants ranged from $1.25 to $1.75 per share. The cost of repricing warrants recognized by the Company amounted to $70,100 for the three months ended September 30, 2012. The cost represents the incremental increase in the fair value of the repriced warrants as compared to the original warrants granted, valued on the exercise date. The fair value of the warrants was determined using the Black-Scholes option pricing model.

In July 2013, the Company issued five year warrants to purchase 29,412 shares of common stock at an exercise price of $1.30 per share in connection with a private placement with an accredited investor.

In July 2013, the Company issued five year warrants to purchase 500,000 shares of common stock at an exercise price of $1.30 per share to its principal stockholder in connection with a $1 .0 million convertible note agreement.

In August 2013, the Company issued 20,000 shares of common stock in exchange for $25,000 in connection with the exercise of warrants with an exercise price of $1.25 per share.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

NOTE 5 - Commitments and Contingencies

The Company leases office and warehouse space located in Jupiter, Florida under a month-to-month lease and leases space in an industrial yard in Irvine, California under a one year lease which commenced in June 2011 and leases a facility in Brooklyn under a one year lease that began in February 2013.

Rent expense for the three months ended September 30, 2013 and 2012 was $37,179 and $30,826, respectively.

On November 14, 2012, the Compensation Committee approved new employment agreements for the Company’s Chief Executive Officer, then President, Chief Technology Officer and Chief Financial Officer. The employment agreements each provide for base salaries of $150,000 and 800,000 stock settled stock appreciation rights (“SARS”) of which (i) 200,000 vested immediately, (ii) 200,000 vest upon the Company generating $3,000,000 in revenue in any 12-month period, (iii) another 200,000 vest upon the Company generating $5,000,000 in revenue in any 12-month period and (iv) another 200,000 vest upon the Company generating $6,000,000 in revenue in any 12-month period. The SARs are exercisable at $0.45 per share over a 10-year period. The Company’s Chief Executive Officer, then President and Chief Technology Officer agreed to cancel the 250,000 stock options granted to each of them in their prior employment agreements. These executives’ base salary will increase to: (i) $170,000 upon the Company generating $3,000,000 in revenue in any 12-month period, (ii) $190,000 upon the Company generating $5,000,000 in any 12-month period and (iii) $200,000 upon the Company generating $6,000,000 in any 12-month period.

Additionally, the Compensation Committee approved an employment agreement for the Company’s Executive Chairman. The Executive Chairman receives a base salary of $200,000 per year and was granted 800,000 restricted stock units vesting on identical terms as the SARs. All of the five senior executives receive a monthly car allowance of $600 per month. The Compensation Committee will also have the discretion to award each of the executives a bonus based upon job performance, revenue growth or any other factors determined by the Compensation Committee. Each of the employment agreements was effective as of October 1, 2012 and is for a four-year term. In June 2013, the Company terminated this agreement for cause.

The Company was sued by a former employee on June 23, 2008, alleging breach of a consulting agreement and an employment agreement entered into in May and June 2007, respectively. In addition, the plaintiff seeks to recover certain of his personal property, which was used or stored in the Company’s offices, and alleges the Company invaded his privacy by looking at his personal computer (which was used in the Company’s business) in the Company’s offices. A jury trial was held for the lawsuit in July 2012. At the conclusion of the trial, the plaintiff was awarded $200,000 under his invasion of privacy and fraudulent misrepresentation claim, $5,000 on the trespass claim,$841,000 on the breach of consulting agreement claim and $200,000 against the Company’s CEO on a claim of civil theft, which by law results in an award of $600,000 for the plaintiff. The Company’s board of directors approved the indemnification of the Company’s CEO for the $600,000. The Company filed a post trial motion for Judgment Notwithstanding Verdict, New Trial and Remittitur, requesting that the judge set aside or reduce the amounts of the jury verdict.

Based upon the verdicts, the Company recorded a litigation accrual of $1,646,000 as of June 30, 2012. In November 2012, the insurance carrier paid the plaintiff $200,000 in settlement of the invasion of privacy and fraudulent misrepresentation awards. As a result, the Company reduced the amounts accrued for these awards resulting in other income of $200,000 for the period ended December 31, 2012.

In January 2013, the court ruled on the Company’s post-trial motions in this litigation dismissing the $200,000 civil theft verdict (which was subject to triple damages) against the CEO and reducing the $841,000 breach of the consulting agreement award to $500,000. The Company then filed a motion seeking a new trial on damages. The Company received a favorable ruling on this motion and received a new trial on the damages. As a result of the reduction in the award for breach of the consulting agreement from $841,000 to $500,000 and the vacating of the award for civil theft which the Company had previously accrued $600,000, the Company recorded other income of $941,000 for the year ended June 30, 2013. The Company expects the trial to determine damages to occur in early 2014.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

The Company may be subject to rescission rights from an investor who purchased 249,931 shares of the Company’s common stock in December 2012 at an average price of $0.36 per share during a time when the Registration Statement for those shares was stale due to the Company’s failure to file a Post-Effective Amendment to its Registration Statement including updated financial statements. As such, from now until the end of December 2013, the investor has the right under Section 5 of the Securities Act of 1933 to file suit against the Company to rescind the purchase and force the Company to repurchase the shares at the price paid by the investor. To date, the investor has not filed suit and because the market price of the Company’s common stock has been significantly higher than $0.36 per share, the Company considers the likelihood that the investor will file suit to be remote. Therefore, in accordance with ASC 450-20 “Loss Contingencies”, the Company has not recorded a liability for the potential rescission.

NOTE 6 - Related Party Transactions

In addition to the Chief Executive Officer (CEO) and the Chief Technology Officer (CTO) the following related parties are employed at GelTech:

The CEO’s wife is a bookkeeper at $1,200 per week,

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

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

The Company has employment arrangements with its executive officers which are described under Note 5.

The Company has entered into a series of credit facilities with its principal stockholder as more fully described in Note 3.

In September 2012 and July 2013, the Company granted options to purchase 70,000 shares and 25,000 shares, respectively, of the Company’s common stock to the father of the Company’s CEO and CTO as more fully described in Note 4.

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

Effective February 8, 2013, the Company’s President and Director resigned from the Company to pursue other opportunities. In connection with his separation, the Company agreed to pay the former President $150,000 plus COBRA payments over 14 months. In addition, the Company agreed to issue the former President ten year fully vested options to purchase 112,500 shares of the Company’s common stock at an exercise price of $0.39 per share, subject to a lockup agreement for the option shares and the other shares he currently owns. In addition, options and stock appreciation rights to purchase 2,125,000 shares of the Company’s common stock at exercise prices from $0.45 to $1.22 per share, previously issued to him, were cancelled. The Company recognized a severance expense of $168,920 upon the signing of the agreement representing the total liability to the Company under the severance agreement. As of September 30, 2013, the remaining liability under the agreement amounted to $59,826.

In September 2013, the father of our principal stockholder was appointed to the board of directors.

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, 2013. As of September 30, 2013, there were no cash equivalent balances held in depository accounts that are not insured.

At September 30, 2013, one customer accounted for 93.2% of accounts receivable.

For the three months ended September 30, 2013 one customer accounted for approximately 85.9% of sales.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Unaudited)

During the three months ended September 30, 2013 all sales resulted from two products, FireIce® and Soil₂O™ which made up 90.3% and 9.7%, respectively, of total sales. Of the FireIce® sales, 90.7% related to the sale of EMFIDS, 6.1% related to the sale of FireIce products, 2.1% related to paid for research and 1.0%% related to sales of the FireIce Home Defense units. Of the Soil₂O™ sales, 0.8%% related to traditional sales of Soil₂O ® and 99.2% related to sales of Soil2O Dust Control.

Three vendors accounted for 20.4% 14.4% and 13.6% of the Company’s approximately $390,000 of EMFIDS parts, raw material and packaging purchases during the three months ended September 30, 2013.

NOTE 8 - Subsequent Events

On October 1, 2013, the Company issued 200,000 shares of common stock plus five year warrants to purchase 100,000 shares of common stock at an exercise price of $1.00 per share to its principal stockholder in exchange for $150,000.

In October 2013, the Company issued 114,712 shares of common stock in exchange for $90,000 in connection with the Purchase Agreement with Lincoln Park Capital.

On October 11, 2013, the Company issued 400,000 shares of common stock and five year warrants to purchase 200,000 shares of common stock at an exercise price of $1.00 per share to a director in exchange for $300,000. The director is the father of our principal stockholder.

In October 2013, the Company issued 240,000 shares of common stock and five year options to purchase 120,000 shares of common stock at an exercise price of $1.00 per share in exchange for $180,000 in a private placement with three accredited investors.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

ITEM 2.

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

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

Overview

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2012.

Sales

For the three months ended September 30, 2013, we had sales of $530,812 as compared to $84,540 for the three months ended September 30, 2012, an increase of $446,272 or 527.8%. Sales of product during the three months ended September 30, 2013 consisted of $51,396 for Soil₂O® and $479,416 for FireIce® and related products. The Soil₂O™ sales consisted of traditional Soil₂O™ applications. FireIce® sales consisted of $425,000 related to the sale of EMFIDS units, $29,423 related to product sales and $4,993 related to sales of HDU units. We expect that our revenues will increase to the extent we are successful in obtaining orders for our new EMFIDS units.

Cost of Goods Sold

Cost of goods sold was $227,733 for the three months ended September 30, 2013 as compared to a cost of goods sold of $36,079 for the three months ended September 30, 2012. The increase was the direct result of the increase in sales. Cost of sales as a percentage of sales was 42.9% for the three months ended September 30, 2013 as compared to 42.62% for the three months ended September 30, 2012. The slightly higher cost of sales percentage in fiscal 2014 relates to the sales mix and an increase in raw material costs. We expect future cost of sales as a percentage of sales will be consistent with the cost of sales percentage for the three months ended September 30, 2013.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses were $2,032,044 for the three months ended September 30, 2013 as compared to $1,549,572 for the three months ended September 30, 2012. The increase in fiscal 2014 expenses resulted primarily from (1) an increase in salaries and employee benefits of $278,133 resulting from the addition of two management personnel and three sales personnel and personnel costs supporting the Con Edison manhole fire program at our facility in Brooklyn; (2) an increase in professional fees of $200,082 relating to the cost of litigations, increased patent attorney fees resulting from the development of the EMFIDS and other R & D projects; (3) an increase in sales and marketing of $53,344 as a result of our participation in trade shows related to the utility market and development and printing of the marketing materials to present to the utility industry and (4) an increase in facility costs of $18,787 related to the rent an related costs of our new facility in Brooklyn. These increases were partially offset by a decrease of $72,337 of non-cash compensation relating to options and stock appreciation rights granted to employees, executive management and directors.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Research and Development Expenses

R&D expenses were $87,168 for the three months ended September 30, 2013 as compared to $17,308 for the three months ended September 30, 2012. The expenses for the three months ended September 30, 2013 related to research of potential product delivery system enhancements for FireIce®, including EMFIDS and testing of new processes for the application of our Soil₂O® "Dust Control" product.

Loss from Operations

Loss from operations was $1,816,133 for the three months ended September 30, 2013 as compared to $1,518,419 for the three months ended September 30, 2012. The increased loss resulted from the higher operating expenses which were only partially offset by the increase in sales.

Cost of Repricing of Warrants to Induce Exercise

The Company recorded a cost of repricing warrants of $70,491for the three months ended September 30, 2012 related to the reduction of the exercise price of warrants to purchase 1,740,000 shares of common stock with exercise prices from $1.25 to $1.75 per share to $0.50 per share.

Interest Expense

Interest expense was $112,372 for the three months ended September 30, 2013 as compared to $216,828 for the three months ended September 30, 2012. The higher expense during the three months ended September 30, 2012 resulted from the amortization of the debt discounts related to the short term convertible notes. Amortization of these discounts was $196,797 for the three months ended September 30, 2012.

Net Loss

Net loss was $1,911,262 for the three months ended September 30, 2013 as compared to $1,805,687 for the three months ended September 30, 2012. The higher net loss resulted from the higher operating expenses which was only partially offset by the higher gross profit resulting from the increase in sales and the lower other expense resulting from the lower interest expense and the absence of the cost of repricing warrants as described above. Net loss per common share was $0.06 for the three months ended September 30, 2013 as compared to $0.07 for the three months ended September 30, 2012. The weighted average number of shares outstanding for the three months ended September 30, 2013 and 2012 were 33,579,683 and 25,896,566, respectively.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended September 30, 2013, the Company used net cash of $1,570,135 in operating activities as compared to net cash used in operating activities of $943,191 for the three months ended September 30, 2012. Net cash used during the three months ended September 30, 2013 resulted primarily from the net loss of $1,911,262, an increase in accounts receivable of $445,369 and inventories of $150,946 and the payments on the accrual for severance agreement for our former president which were partially offset by non-cash stock based compensation of $593,073, non-cash amortization of debt discounts of $49,624, depreciation of $13,425 and increase in accounts payable and accrued expenses of $232,165 and $58,765, respectively. Net cash used during the three months ended September 30, 2012 resulted primarily from the net loss of $1,805,687, a decrease in accounts payable and accrued liabilities of $98,176 and an increase in inventory of $16,744 which were partially offset by non-cash stock based compensation of $665,410, non-cash amortization of debt discounts of $196,797, depreciation of $12,754, a loss on repricing of warrants of $70,491 and a decrease in accounts receivable of $24,537

Cash flows used in investing activities for the three months ended September 30, 2013 amounted to $43,465 and related to purchases of office equipment, computer peripherals and a vehicle to support sales to the utility market.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Cash flows from financing activities for the three months ended September 30, 2013 were $1,580,446 as compared to $1,849,026 for the three months ended September 30, 2012. During the three months ended September 30, 2013, the Company received $1,000,000 from its principal investor in exchange for a note convertible at $0.75 per share and warrants to purchase 500,000 shares at an exercise price of $1.00 per share in a private placement, received $18,200 from the exercise of options to purchase 20,000 shares of common stock at an exercise price of $0.91 per share, $175,000 from our accredited investors in exchange for 172,294 shares of common stock in connection with private placements, $480,000 in exchange for 462,716 shares of common stock in connection with the stock purchase agreement LPC and $100,000 in exchange for the issuance of 117,647 shares of common stock and five year warrants to purchase 29,412 shares of common stock at an exercise price of $1.25 per share in connection with a private placement with an accredited investor and received $25,000 in connection with the exercise of warrants to purchase 20,000 shares of common stock at an exercise price of $1.25 per share. The amounts received were used to make repayments on convertible notes payable to related parties of $85,880, to make payments of $115,822 on convertible notes with third parties and to make payments on insurance premium finance contracts of $16,052. During the three months ended September 30, 2012, the Company received $870,000 from the exercise of options to purchase 1,740,000 shares of common stock at an exercise price of $0.50 per share, $128,000 from two accredited investors in exchange for 156,000 shares of common stock in connection with a private placement, $720,003 in exchange for 1,083,889 shares of common stock in connection with the stock purchase agreement with LPC and $175,000 in exchange for six-month convertible notes with two accredited investors. The amounts received were used to make repayments on notes payable to related parties of $33,339 and to make payments on insurance premium finance contracts of $10,638.

Historical Financings

Since July 1, 2013, GelTech has raised $905,000 from the sale of common stock in connection with private placements with eight accredited investors including Michael Reger, our principal stockholder and Chief Operating Officer, and Neil Reger, a director. In consideration for their investments, GelTech issued 1,129,941 shares of common stock at prices ranging from $0.75 to $1.32 per share and 349,512 warrants with exercise prices ranging from $1.00 to $1.30 per share.

As previously disclosed, in January 2012, the Company signed a $5 million Purchase Agreement with LPC and filed registration statement related to the transaction covering the shares that may be issued to LPC under the Purchase Agreement. Provided that the registration statement is effective, GelTech has the right, in its sole discretion, through July 4, 2014 to sell shares of common stock to Lincoln Park in amounts between $30,000 and $500,000 per sale, depending on certain conditions as set forth in the Purchase Agreement, up to $4.9 million. As of the date of this report, GelTech may sell up to $30,000 per sale. To date, GelTech has issued 2,913,997 shares of common stock in exchange for $1,990,003 under the Purchase Agreement. Since July 1, 2013, GelTech has issued 1,676,766 shares of common stock in exchange for $1,200,002 under the Purchase Agreement and has the ability to sell another $3.0 million under the Purchase Agreement. The price at which we may sell shares to Lincoln Park is subject to a floor of $0.35 per share.

Liquidity and Capital Resource Considerations

As of November 12, 2013, we had $343,000 in available cash. Although we do not anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary for us to purchase additional mobile mixing equipment and support vehicles in the future, depending on demand.

We may be required to pay approximately $90,000 to Lincoln Park in the event that they initiate a successful lawsuit against us for sales under a stale registration statement. To date, no legal filings have been made or threatened by Lincoln Park. In addition, we face a new trial on damages from a former employee and consultant. We cannot predict how much we will be required to pay. In the event that the Plaintiff is awarded a substantial award in the new trial, we may not have the money to secure an appeal bond.

The Company believes the LPC Purchase Agreement will provide the Company with a sufficient amount of working capital for the next 12 months; however the Company believes that it has access to capital from private sources to be able to maintain operations until such time as it can generate sufficient revenues to support operations. Ultimately, if GelTech is unable to generate substantial cash flows from sales of its products, complete financings or sales to LPC, it may not be able to remain operational.

Related Person Transactions

For information on related party transactions and their financial impact, see Note 6 to the Unaudited Condensed Consolidated Financial Statements.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Principal Accounting Estimates

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

Revenue Recognition

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


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

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

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

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

Stock-Based Compensation

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements including our liquidity and anticipated capital asset requirements and expected increase in sales of our products. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the failure to receive material orders from the utility and mining companies, global and domestic economic conditions, budgetary pressures facing state and local governments, our failure to receive or the potential delay of anticipated orders for our products, failure to receive acceptance of FireIce® by State and Local governments and an adverse result in the pending litigation.

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

Further information on our risk factors is contained in our filings with the SEC, including the Prospectus dated November 5, 2013. Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies

ITEM 4.

CONTROLS AND PROCEDURES.

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

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

GELTECH SOLUTIONS, INC. AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal and ordinary course of business. There were no material changes during the period covered by this report to any pending legal proceedings previously reported.

ITEM 1A.

RISK FACTORS.

Not applicable to smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In addition to those unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission, we have sold securities without registration under the Securities Act of 1933, or the Securities Act, as described below.


Name or Class of Investor	Date of Sale	No. of Securities	Reason for Issuance
Investors (1)	July 11, 2013 to August 13, 2013	172,294 shares of common stock	Purchase of shares at prices from $0.85 to $1.32 per share by four investors
Investor (1)	July 5, 2013	117,647 shares of common stock and 29,412 five-year warrants at an exercise price of $1.30 per share	Purchase of shares and warrants by one investor
Note Holder (2)	August 15, 2013	8,880 shares of common stock	Conversion of interest only on a convertible note at $0.50 per share
Note Holder (2)	August 27, 2013	234,663 shares of common stock	Conversion of a convertible note at $0.35 per share
Warrant Holder (1)	August 30, 2013	20,000 shares of common stock	Exercise of warrants at $1.25 per share by one investor

————————

(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.

(2)

Exempt under Section 3(a)(9) under the Securities Act. The Note holder was the Company’s principal shareholder.

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.

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, 2013		/s/ Peter Cordani
		Peter Cordani
		President (Principal Executive Officer)

November 14, 2013		/s/ Michael Hull
		Michael Hull
		Chief Financial Officer (Principal Financial Officer)

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	Amended and Restated Bylaws	Sb-2	7/20/07	3.2
3.3	Amendment No. 1 to the Amended and Restated Bylaws	10-K	9/28/10	3.3
3.4	Amendment No. 2 to the Amended and Restated Bylaws	8-K	9/26/11	3.1
3.5	Amendment No. 3 to the Amended and Restated Bylaws	8-K	9/27/12	3.1
10.1	Amended and Restated 2007 Equity Incentive Plan				Filed
10.2	Form of Subscription Agreement				Filed
10.3	Form of Warrant				Filed
10.4	Form of Executive Option Agreement – July 28, 2013				Filed
10.5	Form of Director Option Agreement – July 1, 2013				Filed
31.1	Certification of Principal Executive Officer (Section 302)				Filed
31.2	Certification of Principal Financial Officer (Section 302)				Filed
32.1	Certification of Principal Executive Officer and Principal Financial Officer (Section 906)				Furnished*
101 INS	XBRL Instance Document				Filed
101 SCH	XBRL Taxonomy Extension Schema				Filed
101 CAL	XBRL Taxonomy Extension Calculation Linkbase				Filed
101 LAB	XBRL Taxonomy Extension Label Linkbase				Filed
101 PRE	XBRL Taxonomy Extension Presentation Linkbase				Filed
101 DEF	XBRL Taxonomy Extension Definition Linkbase				Filed

———————

This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request to GelTech Solutions, Inc., 1460 Park Lane South, Suite 1, Jupiter, Florida 33458, Attention: Darlene Cordani.