UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-Q
———————
ü | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the quarterly period ended: September 30, 2008 | |
or | |
|
|
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the transition period from: _____________ to _____________ | |
———————
GelTech Solutions, Inc.
(Exact name of registrant as specified in its charter)
———————
Delaware | 0-52993 | 56-2600575 |
(State or Other Jurisdiction | (Commission | (I.R.S. Employer |
of Incorporation) | File Number) | Identification No.) |
1460 Park Lane South, Suite 1
Jupiter, Florida 33458
(Address of Principal Executive Office) (Zip Code)
(561) 427-6144
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
———————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the | ||||||||
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ü | Yes |
| No | ||||
| ||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. | ||||||||
|
| |||||||
Large accelerated filer |
|
|
| Accelerated filer |
|
| ||
Non-accelerated filer |
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|
| Smaller reporting company | ü |
| ||
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| |||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). |
| Yes | ü | No | ||||
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| |||||||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. | ||||||||
The number of outstanding shares of the issuer’s common stock as of November 7, 2008 was 13,471,466. | ||||||||
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY | ||||||||
PROCEEDINGS DURING THE PRECEDING FIVE YEARS: | ||||||||
| ||||||||
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by | ||||||||
a court. |
| Yes |
| No | ||||
GELTECH SOLUTIONS, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements.
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of September 30, 2008 |
|
| As of June 30, 2008 |
| |||
| (Unaudited) |
|
|
|
| |||
ASSETS |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 230,982 |
|
| $ | 230,058 |
|
Investment in marketable debt securities |
|
| 100,000 |
|
|
| 750,000 |
|
Accounts receivable, trade |
|
| 94,636 |
|
|
| 85,440 |
|
Inventories |
|
| 241,938 |
|
|
| 172,756 |
|
Prepaid expenses and other current assets |
|
| 47,838 |
|
|
| 15,856 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
| 715,394 |
|
|
| 1,254,110 |
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment, net |
|
| 31,354 |
|
|
| 35,402 |
|
Deposits |
|
| 26,668 |
|
|
| 28,596 |
|
|
| $ | 773,416 |
|
| $ | 1,318,108 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 135,108 |
|
| $ | 101,139 |
|
Accrued expenses |
|
| 98,537 |
|
|
| 93,899 |
|
Insurance premium finance contract |
|
| 5,812 |
|
|
| 8,168 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
| 239,457 |
|
|
| 203,206 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder's equity (deficit) |
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value; 5,000,000 shares authorized; |
|
|
|
|
|
|
|
|
no shares issued and outstanding |
|
| –– |
|
|
| –– |
|
Common stock: $0.001 par value; 50,000,000 shares authorized; |
|
|
|
|
|
|
|
|
13,471,466 and 13,415,422 shares issued and outstanding |
|
| 13,471 |
|
|
| 13,416 |
|
Additional paid in capital |
|
| 4,454,995 |
|
|
| 4,359,504 |
|
Accumulated deficit |
|
| (3,934,507 | ) |
|
| (3,258,018 | ) |
Total stockholders' equity |
|
| 533,959 |
|
|
| 1,114,902 |
|
Total liabilities and stockholders' equity |
| $ | 773,416 |
|
| $ | 1,318,108 |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
1
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| For the Three |
|
| For the Three |
| ||
Sales |
| $ | 70,341 |
|
| $ | 13,990 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
| 19,939 |
|
|
| 7,253 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 50,402 |
|
|
| 6,737 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 722,503 |
|
|
| 415,845 |
|
Research and development |
|
| 16,817 |
|
|
| 25,736 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
| 739,320 |
|
|
| 441,581 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (688,918 | ) |
|
| (434,844 | ) |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest income |
|
| 12,767 |
|
|
| 6,686 |
|
Interest expense |
|
| (338 | ) |
|
| (3,590 | ) |
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
| 12,429 |
|
|
| 3,096 |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (676,489 | ) |
| $ | (431,748 | ) |
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted |
| $ | (0.05 | ) |
| $ | (0.04 | ) |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted |
|
| 13,462,821 |
|
|
| 10,275,500 |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
2
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| For the |
| |||||
|
| 2008 |
|
| 2007 |
| ||
Cash flows from operating activities |
|
|
|
|
|
| ||
Reconciliation of net loss to net cash used in |
|
|
|
|
|
| ||
operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (676,489 | ) |
| $ | (431,748 | ) |
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
| 7,440 |
|
|
| 2,326 |
|
Imputed interest |
|
| –– |
|
|
| 3,590 |
|
Amortization of prepaid expenses |
|
| 12,729 |
|
|
| –– |
|
Stock compensation expense |
|
| 57,046 |
|
|
| 16,141 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (9,196 | ) |
|
| 899 |
|
Inventories |
|
| (69,182 | ) |
|
| 7,253 |
|
Prepaid expenses and other current assets |
|
| (1,614 | ) |
|
| (9,344 | ) |
Deposits and other assets |
|
| 1,928 |
|
|
| (5,000 | ) |
Accounts payable |
|
| 33,969 |
|
|
| (115,989 | ) |
Related party payable |
|
| –– |
|
|
| (21,231 | ) |
Accrued expenses |
|
| 4,638 |
|
|
| 11,874 |
|
Net cash used in operating activities |
|
| (638,731 | ) |
|
| (541,229 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from Investing Activities |
|
|
|
|
|
|
|
|
Sales of short term marketable debt securities |
|
| 650,000 |
|
|
| 650,000 |
|
Purchases of equipment |
|
| (3,392 | ) |
|
| (12,506 | ) |
Net cash used in investing activities |
|
| 646,608 |
|
|
| (12,506 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from Financing Activities |
|
|
|
|
|
|
|
|
Payments on Insurance Finance Contract |
|
| (6,953 | ) |
|
| –– |
|
Repayment of notes payable |
|
| –– |
|
|
| (110,000 | ) |
Repurchase of common stock |
|
| –– |
|
|
| (19,000 | ) |
Proceeds from sale of common stock |
|
| –– |
|
|
| 1,000,000 |
|
Net cash provided by financing activities |
|
| (6,953 | ) |
|
| 871,000 |
|
Net increase in cash and cash equivalents |
|
| 924 |
|
|
| 317,265 |
|
Cash and cash equivalents - beginning |
|
| 230,058 |
|
|
| 186,598 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - ending |
| $ | 230,982 |
|
| $ | 503,863 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 383 |
|
| $ | –– |
|
Cash paid for income taxes |
| $ | –– |
|
| $ | –– |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
3
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
1.
Organization and Basis of Presentation
Organization
GelTech Solutions, Inc. (“GelTech” or the “Company”) is a Delaware corporation. Beginning in July 2008, the Company is no longer in the development stage as defined by Statement of Financial Accounting Standard (“SFAS”) No. 7 "Accounting and Reporting for Development Stage Enterprises." GelTech is now primarily engaged in business activities that include finalizing the development of products in three distinct markets and beginning the marketing and delivery of products in two of those markets: (i) FireIce™, a patented fire suppression product, which is non-toxic and when combined with water becomes a water-based gel product used to suppress fires involving structures, personal property and forest wildfires; (ii) RootGel™, a moisture preservation solution that has many applications useful in the agricultural industry including water and nutrient retention in golf course maintenance, landscaping and forestry and (iii) IceWear™, a line of garments that help cool the core body temperature for individuals who work in extreme conditions (e.g., firefighters, police officers, construction workers, race car drivers). Additionally, GelTech owns a United States patent for a method to modify weather.
The Company will no longer continue to report as a development stage company, since significant revenues have been generated and the company operations have moved beyond the activities of identifying and developing products to the activities of marketing, selling and distributing products. The corporate office is located in Jupiter, Florida.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its two wholly owned subsidiaries: GelTech Innovations and FireIce Gel, Inc. (formerly Weather Tech Innovations). Prior to July 1, 2008, there had been no activity in either subsidiary. Beginning on July 1, 2008, the Company began operating the marketing, sales and distribution of FireIce through FireIce Gel, Inc. These unaudited, condensed 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 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 accruals) considered necessary for a fair presentation have been included. The information included in these unaudited condensed financial statements should be read in conjunction with Management’s Discussion and Analysis and Plan of Operation 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, 2008 filed on September 29, 2008.
Inventories
Inventories as of September 30, 2008 consisted of raw materials and finished goods in the amounts of $194,344 and $47,594, 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 financial statements are reasonable; however, actual results could differ materially from these estimates. Significant estimates in the fiscal 2009 period include the allowance for doubtful accounts, valuation of inventories, valuation of options and warrants granted for services, valuation of common stock granted for services and the deferred tax assets.
4
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
Earnings (Loss) per Share
The Company computes earnings (loss) per share in accordance with SFAS No. 128, “Earnings per Share.” SFAS No. 128 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. At September 30, 2008, there were options to purchase 1,550,000 shares of the Company’s common stock and warrants to purchase 528,303 shares of the Company’s commons stock which may dilute future earnings per share.
Stock-Based Compensation
On July 19, 2006 (inception), the Company adopted SFAS No. 123 (revised 2004, “123R”), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units, and employee stock purchases based on estimated fair values.
Stock-based compensation expense recognized under SFAS 123R for the period July 1, 2008 to September 30, 2008 was $57,046 which consisted of compensation related to employee stock options, and is included in selling, general and administrative expenses on the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At September 30, 2008, the total compensation cost for stock options not yet recognized was approximately $356,522. This cost will be amortized on a straight-line basis over the remaining vesting term of the options.
In September 2008, the Company granted options to purchase 95,000 shares of the Company’s common stock to directors of the Company. The options have an exercise price of $0.88 per share, vest over one year and have a ten year term. The options were valued using the Black-Scholes model using a volatility of 53%, an expected term of five years and a discount rate of 3.05%. The value of the options will be recognized over the vesting term, one year. The Board of Directors approved an amendment to the Company’s 2007 Equity Incentive Plan to increase the number of shares authorized by the plan from 1,500,000 to 3,500,000.
5
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
A summary of stock option transactions for all stock options for June 30, 2008 to September 30, 2008 is as follows:
Employee Options |
| Number of Options |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life |
| Aggregate Intrinsic Value | ||||||||
Balance at June 30, 2007 |
|
| 480,000 |
|
| $ | 0.93 |
|
|
| 4.20 |
|
| $ | –– |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Outstanding at September 30, 2007 |
|
| 480,000 |
|
| $ | 0.93 |
|
|
| 3.90 |
|
| $ | –– |
|
Exercisable at September 30, 2007 |
|
| 116,668 |
|
| $ | 0.93 |
|
|
| 3.90 |
|
| $ | –– |
|
Weighted average fair value of options granted during the |
| $ | 0.46 |
|
|
|
|
|
|
|
|
| ||||
Balance at June 30, 2008 |
|
| 1,175,000 |
|
| $ | 0.82 |
|
|
| 7.53 |
|
|
|
|
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
|
|
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
|
|
|
Expired |
|
| –– |
|
| $ | –– |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
| 1,175,000 |
|
| $ | 0.82 |
|
|
| 7.28 |
|
| $ | 94,000 |
|
Exercisable at September 30, 2008 |
|
| 379,169 |
|
| $ | 0.90 |
|
|
| 5.21 |
|
| $ | –– |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
|
|
|
|
| ||||
A summary of options issued to non-employees under the 2007 Plan and changes during the period from June 30, 2007 to September 30, 2007 and from June 30, 2008 to September 30, 2008 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, 2007 |
|
| 70,000 |
|
| $ | 0.95 |
|
|
|
|
|
| $ | –– |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Outstanding at September 30, 2007 |
|
| 70,000 |
|
| $ | 0.95 |
|
|
| 4.71 |
|
| $ | –– |
|
Exercisable at September 30, 2007 |
|
| 10,000 |
|
| $ | 1.00 |
|
|
| 4.71 |
|
| $ | –– |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
|
|
|
|
| ||||
Balance at June 30, 2008 |
|
| 110,000 |
|
| $ | 0.85 |
|
|
| 5.89 |
|
| $ | –– |
|
Granted |
|
| 95,000 |
|
| $ | 0.88 |
|
|
| 5.00 |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Outstanding at September 30, 2008 |
|
| 205,000 |
|
| $ | 0.86 |
|
|
| 7.82 |
|
| $ | 8,200 |
|
Exercisable at September 30, 2008 |
|
| 39,999 |
|
| $ | 0.92 |
|
|
| 4.45 |
|
| $ | –– |
|
Weighted average fair value of options granted during the |
| $ | 0.43 |
|
|
|
|
|
|
|
|
| ||||
6
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
Non-Employee, Non-Director Options |
| Number of Options |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life |
| Aggregate Intrinsic Value | ||||||||
Balance at June 30, 2007 |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Outstanding at September 30, 2007 |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Exercisable at September 30, 2007 |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
| $ | –– |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
|
|
|
|
| ||||
Balance at June 30, 2008 |
|
| 170,000 |
|
| $ | 1.00 |
|
|
| 5.00 |
|
| $ | –– |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
|
| –– |
|
Outstanding at September 30, 2008 |
|
| 170,000 |
|
| $ | 0.99 |
|
|
| 4.27 |
|
| $ | –– |
|
Exercisable at September 30, 2008 |
|
| 70,623 |
|
| $ | 0.99 |
|
|
| 4.27 |
|
| $ | –– |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
|
|
|
|
| ||||
Determining Fair Value Under SFAS 123R
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The Company’s determination of fair value using an option-pricing model is affected by the stock price as well as assumptions regarding the number of highly subjective variables.
The fair value of stock option grants for the period from July 1, 2008 to September 30, 2008 was estimated using the following weighted- average assumptions:
Risk free interest rate |
|
| 3.05 | % |
Expected term (in years) |
|
| 5 .0 |
|
Dividend yield |
|
| – |
|
Volatility of common stock |
|
| 52.62 | % |
Estimated annual forfeitures |
|
| – |
|
Weighted-average fair value |
|
| $0.43 |
|
2.
Going Concern
These 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, 2008, the Company has incurred losses from operations of $3,934,507 since inception, $676,489 for the three months ended September 30, 2008 and used cash from operations of $638,731 during the three months ended September 30, 2008. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
7
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
3.
Line of Credit Agreements
On August 5, 2008, the Company signed a revolving line of credit agreement which would allow the Company to borrow up to $4,000,000 from its largest shareholder of the Company. Under the line of credit agreement, borrowings may only be used for direct costs associated with acquisition and financing the production of inventory in order to fulfill a contract between a third party and the Company pertaining to the sale of the Company’s products and amounts borrowed will be due 120 days after the date of advancement and will bear interest at an annual rate of 5%. The agreement contains a 15% penalty upon any default. The agreement expires on the earlier of (1) default or (2) eleven months from the date of the agreement, July 5, 2009, and no advances may be made within 120 days of July 5, 2009.
In September 2008, the Company entered into a $1 million line of credit with its largest shareholder to provide for the general working capital needs of the Company. This line of credit bears annual interest of 10%. The agreement contains a 15% penalty upon any default. The agreement expires on the earlier of (1) default or (2) September 15, 2009, and no advances may be made after August 15, 2009.
As of September 30, 2008, no advances have been made under either line of credit.
4.
Stockholders’ Equity
Common Stock for Services
On July 21, 2008, the Company issued 35,000 shares of the Company’s common stock in connection with an agreement to provide investor relations services. The shares had a fair market value of $38,500 based upon a quoted trading price of $1.10 per share which was recorded as a prepaid expense and will be amortized over the term of the consulting agreement, one year.
Common Stock Issued for Cashless Exercise of Warrants
On July 3, 2008, the Company issued 21,044 shares of common stock in connection with the cashless exercise of warrants to purchase 30,000 shares of common stock at an exercise price of $1.25 per share.
8
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
Common Stock Warrants
A summary of outstanding warrants as of September 30, 2008 and changes during the three months ended September 30, 2008 is as follows:
Warrants Issued as Settlements |
| Number of Options |
| Weighted Average Exercise Price |
| Remaining Contractual Life | ||||||
Balance at June 30, 2007 |
|
| 474,058 |
|
| $ | 1.05 |
|
|
| 2.92 |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Outstanding at September 30, 2007 |
|
| 474,058 |
|
| $ | 1.05 |
|
|
| 2.67 |
|
Exercisable at September 30, 2007 |
|
| 474,058 |
|
| $ | 1.05 |
|
|
| 2.67 |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
| ||||
Balance at June 30, 2008 |
|
| 504,058 |
|
| $ | 1.05 |
|
|
| 1.92 |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Exercised |
|
| (30,000 | ) |
| $ | 1.00 |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Outstanding at September 30, 2008 |
|
| 474,058 |
|
| $ | 1.05 |
|
|
| 1.66 |
|
Exercisable at September 30, 2008 |
|
| 474,058 |
|
| $ | 1.05 |
|
|
| 1.66 |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
| ||||
A summary of warrants issued for cash and changes during the periods June 30, 2007 to September 2007 and from June 30, 2008 to September 30, 2008 is as follows:
Warrants issued for cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Options |
| Weighted Average Exercise Price |
| Remaining Contractual Life | ||||||
Balance at June 30, 2007 |
|
| 225,000 |
|
| $ | 1.00 |
|
|
| 2.92 |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Outstanding at September 30, 2007 |
|
| 225,000 |
|
| $ | 1.00 |
|
|
| 2.67 |
|
Exercisable at September 30, 2007 |
|
| –– |
|
| $ | 1.00 |
|
|
| –– |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
| ||||
Balance at June 30, 2008 |
|
| 528,303 |
|
| $ | 1.14 |
|
|
| 2.29 |
|
Granted |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Exercised |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Forfeited |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Expired |
|
| –– |
|
| $ | –– |
|
|
| –– |
|
Outstanding at September 30, 2008 |
|
| 528,303 |
|
| $ | 1.14 |
|
|
| 2.04 |
|
Exercisable at September 30, 2008 |
|
| 528,303 |
|
| $ | 1.14 |
|
|
| 2.04 |
|
Weighted average fair value of options granted during the |
|
| N/A |
|
|
|
|
| ||||
9
GelTech Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Period Ended September 30, 2008
(Unaudited)
5.
Contingencies
The Company was sued on February 4, 2008 as a “successor in interest” to Dyn-O-Mat, Inc. whereby the plaintiff was seeking $77,000 of director’s fees and a consulting fee. The Company has been advised by counsel that the suit is baseless since the Company is not a successor in interest to Dyn-O-Mat and because the plaintiff agreed in writing to accept 35,000 shares of Dyn-O-Mat in satisfaction of $35,000 of the liability. The plaintiff received the Dyn-O-Mat stock in October 2005. The Company was also sued on February 4, 2008 by an additional plaintiff who alleges the Company is liable as a “successor in interest” to Dyn-O-Mat, Inc. and that it owes the plaintiff $30,000 arising from director’s fees. The Company has been advised by counsel that this suit is baseless since it is not a successor in interest to Dyn-O-Mat and because the plaintiff agreed in writing to accept 12,500 shares of Dyn-O-Mat in satisfaction of $12,500 of the liability. The plaintiff was issued Dyn-O-Mat stock in October 2005. As of June 30, 2008, the Company estimated that the probable cost related to the above matters was $70,000, and has accrued a liability for that amount. As of September 30, 2008, no additional accrual has been recorded.
Further, 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 in the Company’s offices. The defendants have filed motions to dismiss and contend that the lawsuit is baseless.
6.
Related Party Transactions
In September 2008, the Company granted options to purchase 95,000 shares of the Company’s common stock to directors of the Company. The options have an exercise price of $0.88 per share, vest over one year and have a ten year term. The Board of Directors approved an amendment to the Company’s 2007 Equity Incentive Plan to increase the number of shares authorized by the plan from 1,500,000 to 3,500,000.
7.
Subsequent Events
In October 2008, the Company received six purchase orders totaling $896,500 for delivery of its patented FireIce™ fire suppression product beginning in December 2008 to a marketing and distribution partner in California.
On November 10, 2008, the Company received a $200,000 advance against its $1 million line of credit agreement, to be used for working capital and preparation to deliver on the purchase orders described above.
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in “Management’s Discussion and Analysis and Plan of Operation” 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
In 2007, we initiated marketing and sales of RootGel™, a product which reduces the use of water and is primarily marketed to golf courses and the agriculture market. In 2008, we initiated marketing FireIce™, a water soluble fire retardant which protects firefighters and is useful in containing fires including wildfires. We also intend later in fiscal 2009 to complete development of IceWear™, a cooling vest which can be worn by firefighters, racecar drivers and others who work in extreme heat. Our financial statements have been prepared on a going concern basis, and we need to become a viable business.
We were incorporated in July 2006 as a Florida corporation and reincorporated in Delaware in November 2006. Our products were initially developed by the GelTech Division of Dyn-O-Mat, Inc., a predecessor entity. Our Chief Technology Officer, Mr. Peter Cordani, invented FireIce and IceWear while at Dyn-O-Mat and developed an earlier version of RootGel™ at Dyn-O-Mat as well. Mr. Cordani developed the current version of RootGel™ on behalf of GelTech. Although we do not intend to begin marketing WeatherTech, our hurricane suppression product, in the foreseeable future. Mr. Cordani also developed that product while at Dyn-O-Mat.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007.
Sales
For the three months ended September 30, 2008, we had sales of $70,341 as compared to sales of $13,990 for the three months ended September 30, 2007, an increase of $56,351 or 402%. Sales consisted of $47,682 for RootGel™ and $22,659 for FireIce™. All of the 2007 sales were from RootGel™.
Cost of Goods Sold
Cost of goods sold was $19,939 for the three months ended September 30, 2008 as compared to $7,253 for the three months ended September 30, 2007. The increase is directly related to the increase in sales.
Sales, General and Administrative Expenses
Sales, general and administrative (“S,G&A”) expenses were $722,503 for the three months ended September 30, 2008 as compared to $415,845 for the three months ended September 30, 2007. The increase in 2008 expenses is due to the expansion of the executive and sales teams leading to higher direct payroll costs of $66,000, the vesting of increased employee stock options added $41,000 of expenses. Additionally, increases marketing emphasis resulted in an increase of $65,000 along with an increase in travel expenses of $34,000. Professional fees and investor relations costs have increased $43,000 as a result of our stock trading on the over the counter market in June 2008. We have added members to our sales and administrative team and expect current S,G&A expenses to be capable of supporting the sales of our products into the marketplace. We expect S,G&A expenses for the remainder of the year will remain fairly constant and be approximately $700,000, excluding commissions, for a full quarter.
Research and Development Expenses
Research and development (“R&D”) expenses were $16,817 for the three months ended September 30, 2008 as compared to $25,736 for the three months ended September 30, 2007. The decrease in fiscal 2009 expenses of $8,919 reflects the shift in operating activities from R&D to marketing and distribution.
11
Loss from Operations
Loss from operations was $688,918 for the three months ended September 30, 2008 as compared to $434,844 for the three months ended September 30, 2007. The increased loss from operations resulted from increases in staffing levels and the higher level of marketing activities.
Interest Income
Interest income was $12,767 for the three months ended September 30, 2008 as compared to $6,686 for the three months ended September 30, 2007 and resulted from our investment of surplus funds.
Interest Expense
Interest expense was $338 for the three months ended September 30, 2008 as compared to $3,590 for the three months ended September 30, 2007. The decline resulted from our repayment of debt in February 2008.
Net Loss
Net loss was $676,489 for the three months ended September 30, 2008 as compared to $431,748 for the three months ended September 30, 2007. The higher net loss resulted from increases in staffing levels and higher level of marketing activities. Net loss per common share was $0.05 for the three months ended September 30, 2008 as compared to $0.04 for the three months ended September 30, 2007. The weighted average number of share outstanding as of September 30, 2008 and 2007 were 13,462,821 and 10,275,500, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used by operating activities for the three month period ended September 30, 2008 were $638,731 in which our net loss of $676,489 was impacted primarily by an increase in accounts payable of $33,969 and non-cash stock compensation expense of $57,046 which were partially offset by an increase in inventory of $69,182. For the three month period ended September 30, 2007, net cash used in operating activities was $541,229, comprised of the net loss for the period totaling $431,748, along with an increase in accounts payable of $115,989 and related party payables of $21,231 and partially offset by non-cash stock compensation expense of $16,141 and an increase in accrued expenses of $11,874.
Cash flows provided by investing activities for the three months ended September 30, 2008 were $646,608 which were related to the sale of short term marketable debt securities of $650,000, partially offset by purchases of equipment of $3,392. For the three month period ended September 30, 2007, net cash used in investing was $12,506 which related to the acquisition of equipment.
Cash flows used by financing activities for the three months ended September 30, 2008 were $$6,953, resulting from the repayment of insurance premium finance contracts. Cash flows provided by financing activities for the three months ended September 20, 2007 were $871,000, resulting from $1,000,000 received from the sale of common stock, reduced by $110,000 from the repayment of a note payable.
As of the date of this report, we have $242,803 in available cash and marketable debt securities. We do not anticipate the need to purchase any material capital assets in order to carry out our business. In July 2008, we entered into a $4,000,000 revolving line of credit agreement with our largest shareholder. This line of credit will assist the Company in financing the purchase of inventory. The line of credit may only be used to finance firm sales orders. As a result, we entered into another secured line of credit agreement with our largest shareholder in September 2008. The new line of credit has no restrictions and permits us to borrow up to $1,000,000 to meet our working capital needs. On November 10, 2008, we received a $200,000 advance against this line of credit. This shareholder/lender has assured us that he will provide any additional support we may require. The Company may be required to issue debt or equity financing in order to meet its future obligations. There is no guarantee that such financing will be available to the Company. If the Company is unable to generate substantial cash flows from sales of our products, or through financings including but not limited to the lines of credit, the Company may not be able to remain operational.
12
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our future S,G&A and our liquidity. Additionally, words such as seek, intend, believe, plan, estimate, expect, anticipate and other similar expressions are forward-looking statements within the meaning of the Act. Some or all of the results anticipated by these forward-looking statements may not occur. Forward-looking statements involve known and unknown risks and uncertainties, both general and specific to the matters discussed in this Report. Factors that could cause or contribute to such differences include, but are not limited to, the condition of the global credit markets and the capital markets and our failure to generate the sales we anticipate. See also the risk factors contained in our Form 10-K for the year ended June 30, 2008, filed with the Securities and Exchange Commission on September 29, 2008.
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Not applicable for smaller reporting companies
Item 4.
Controls and Procedures.
Not applicable for smaller reporting companies
Item 4T.
Controls and Procedures.
We have established disclosure controls and procedures to ensure that material information relating to us is made known to the officers who certify our financial reports, as well as other members of senior management and the Board of Directors, to allow timely decisions regarding required disclosures. As of the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information related to us that is required to be included in our periodic SEC filings.
During the three months ended September 30, 2008, the Company made no changes in the control procedures related to financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
13
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings.
Not applicable
Item 1A.
Risk Factors.
Not applicable for smaller reporting companies
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3.
Defaults Upon Senior Securities.
None
Item 4.
Submission of Matters to a Vote of Security Holders.
None
Item 5.
Other Information.
Not applicable
Item 6.
Exhibits.
EXHIBIT NUMBER |
| DESCRIPTION |
3.1 |
| Certificate of Incorporation (1) |
3.2 |
| Amended and Restated Bylaws (1) |
10.1 |
| Form of Director Stock Option Agreement |
10.2 |
| Michael Reger Revolving Line of Credit Agreement dated August 5, 2008 |
10.3 |
| Michael Reger Revolving Line of Credit Agreement dated September 11, 2008 |
| Second Amendment to the 2007 Equity Incentive Plan | |
| Certification of Chief Executive Officer (Section 302) | |
| Certification of Chief Financial Officer (Section 302) | |
| Certification of Chief Executive Officer (Section 906) | |
| Certification of Chief Financial Officer (Section 906) |
———————
(1) Incorporated by reference from Form SB-2 filed on July 20, 2007.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 13, 2008 | /s/ | MICHAEL R. HULL |
|
| Michael R. Hull |
|
| Chief Financial Officer |
15
EXHIBIT INDEX
EXHIBIT NUMBER |
| DESCRIPTION |
3.1 |
| Certificate of Incorporation (1) |
3.2 |
| Amended and Restated Bylaws (1) |
10.1 |
| Form of Director Stock Option Agreement |
10.2 |
| Michael Reger Revolving Line of Credit Agreement dated August 5, 2008 |
10.3 |
| Michael Reger Revolving Line of Credit Agreement dated September 11, 2008 |
| Second Amendment to the 2007 Equity Incentive Plan | |
| Certification of Chief Executive Officer (Section 302) | |
| Certification of Chief Financial Officer (Section 302) | |
| Certification of Chief Executive Officer (Section 906) | |
| Certification of Chief Financial Officer (Section 906) |
———————
(1) Incorporated by reference from Form SB-2 filed on July 20, 2007.
16