The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
NOTE 1
Organization and Basis of Presentation
Organization
GelTech Solutions, Inc., or GelTech or the Company, generates revenue primarily from marketing products based around the following four product categories (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in urban firefighting, including fires in underground utility structures, and in wildland firefighting and as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) FireIce Shield®, a line of products used in industry by manufacturers, plumbers, and welders, and by police departments and first responders to protect assets from fire; (3) Soil
₂
O®
“
Dust Control
”
, our application which is used for dust mitigation in the aggregate, road construction and mining Soil
₂
O® Soil Cap, a dust suppressant technology designed to stabilize stockpile dust and reduce soil erosion, and (4) Soil
₂
O®, a product which reduces the use of water and is primarily marketed to golf courses and commercial landscapers and most recently to homeowners via the Soil
₂
O® Home Lawn Kit.
The Company also markets equipment that is used to apply these primary products including (1) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire or explosion, (2) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires and (3) the FireIce Shield CTP System, a mobile spray unit that can be used to protect communication tower electronics during hot work.
Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, and we need to generate sufficient material revenues to support the ongoing business of GelTech.
The corporate office is located in Jupiter, Florida.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its three wholly-owned subsidiaries: FireIce Gel, Inc., GelTech International, Inc. and Weather Tech Innovations, Inc. There has been no activity in FireIce Gel, Inc., Weather Tech Innovations, Inc. and GelTech International, Inc.
These unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by "GAAP" for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The information included in these unaudited consolidated interim financial statements should be read in conjunction with Managements 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 Companys Report on Form 10-K for the year ended December 31, 2016 filed on March 28, 2017.
Inventories
Inventories as of March 31, 2017 consisted of raw materials and finished goods in the amounts of $728,004 and $1,034,287, respectively. As of March 31, 2017, the Company estimated that raw materials in the amount $479,486 would most likely not be consumed in the next twelve months and therefore reclassified that amount to long term inventory in the unaudited consolidated balance sheet.
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 March 31, 2017 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.
5
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(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. The Companys diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. At March 31, 2017, there were options to purchase 11,846,340 shares of the Companys common stock, warrants to purchase 15,327,407 shares of the Companys common stock and 24,221,161 shares of the Companys 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.
The Company accounts for non-employee stock-based compensation in accordance with ASC 505-50-25,
Equity Based Payments to Non-Employees,
which requires the measurement and recognition of compensation expense for all share-based payment awards made to non-employees 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 Companys 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 options and warrants granted during the period from January 1, 2017 to March 31, 2017 were estimated using the following assumptions:
|
|
|
Risk free interest rate
|
|
1.19% - 1.88%
|
Expected term (in years)
|
|
2.0 - 5.0
|
Dividend yield
|
|
|
Volatility of common stock
|
|
97.10% - 99.06%
|
Estimated annual forfeitures
|
|
|
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date for annual reporting periods beginning after December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective). The Company will adopt ASU 2014-09 in the first quarter of 2018 and apply the full retrospective approach. Because the Company's primary source of revenues is sales of products, the Company believes the impact of this new standard will be immaterial to the results of operations and will only impact the Companys disclosure.
6
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
In February 2016, the FASB issued ASU 2016-02,
Leases
. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Because the Company has not entered into any lease transactions, there will be no impact to the Company by this standard.
No Accounting Standards Updates (ASUs) which were not effective until after March 31, 2017 are 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 assumes the Company will continue to realize it assets and discharge its liabilities in the normal course of business. As of March 31, 2017, the Company had an accumulated deficit and stockholders deficit of $48,931,872 and $6,599,709, respectively, and incurred losses from operations and net losses of $761,419 and $973,946, respectively, for the three months ended March 31, 2017 and used cash in operations of $824,577 during the three months ended March 31, 2017. In addition, the Company has not yet generated revenue sufficient to support ongoing operations. Management believes these factors raise substantial doubt regarding the Companys ability to continue as a going concern for a period of twelve months from the issuance date of this report. 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.
During the three months ended March 31, 2017, the Company received $200,000 in advances from its convertible line of credit with its chairman and principal shareholder and $500,000 from private placements with three accredited investors, including $100,000 from its chairman and principal shareholder. The Company also received $123,620 from Lincoln Park Capital Fund LLC in connection with a $10 million stock purchase agreement entered into in August 2015. See Note 4.
Management believes that the Purchase Agreement with Lincoln Park, additional funding from its chairman and principal shareholder and the revenue prospects from the Wildland industry provide the opportunity for the Company to continue as a going concern. Ultimately, the continuation of the Company as a going concern is dependent upon the ability of the Company to generate sufficient revenue to attain profitable operations.
NOTE 3 Convertible Note Agreement
s Related Party
The Company currently has three debt facilities outstanding, all of them held by its chairman and principal shareholder.
One convertible note in the amount of $1,997,483, dated February 1, 2013 was a consolidation of prior debt instruments. The note bore annual interest of 7.5%, was convertible at $0.35 per share and due December 31, 2016. On February 12, 2015, this note was modified by securing the note with all the assets of the Company and by extending the due date of the note from December 31, 2016 to December 31, 2020. The modification was accounted for as a debt extinguishment in accordance with ASC 470. As a result of the modification the Company recorded a loss on extinguishment of debt of $34,586 and all prior related debt discounts were fully amortized. During the three months ended March 31, 2017, the Company recognized interest expense of $36,940. As of March 31, 2017, the principal balance of the note is $1,997,483 and accrued interest amounted to $173,617.
7
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
A second convertible note in the amount of $1,000,000 dated July 11, 2013 related to a new funding on that date. The note bore annual interest of 7.5%, was convertible at $1.00 per share and was due July 10, 2018. In connection with the note, the Company issued fiveyear warrants to purchase 500,000 shares of common stock at an exercise price of $1.30 per share. On February 12, 2015, this note was modified by securing the note with all the assets of the Company, by extending the due date of the note from July 10, 2018 to December 31, 2020 and by reducing the conversion rate of the note from $1.00 to $0.35 per share. The modification was accounted for as a debt extinguishment in accordance with ASC 470. As a result of the modification, the Company recorded a loss on extinguishment of debt of $562,062. Also, in connection with the modification the Company recorded a note discount of $60,390, related to the relative fair value of the warrants attached to the note. For the three months ended March 31, 2017, the Company recorded interest expense of $2,530 related to the amortization of the note discounts related to the warrants. As of March 31, 2017, the balance of the unamortized discount related to the warrants was $38,545. As of March 31, 2017, the principal balance on this note is $1,000,000 and accrued interest amounted to $54,041.
In connection with the February 2015 debt modifications described above, the Company entered into a Secured Revolving Convertible Line of Credit Agreement for up to $4 million with its chairman and principal shareholder. On April 8, 2016, the Company and its chairman and principal shareholder entered into the First Amendment to Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $4 million to $5 million. On September 27, 2016, the Company and its chairman and principal shareholder entered into the Second Amendment to Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $5 million to $6 million. Under the agreements, the Company may, with the prior approval of its chairman and principal shareholder, receive advances under the secured convertible line of credit. Each advance bears an annual interest rate of 7.5%, is due December 31, 2020 and is convertible at the rate equal to the closing price of the Companys common stock on the day prior to the date the parties agree to the advance. In addition, the Company will issue the Companys chairman and principal shareholder two year warrants to purchase shares of common stock at an exercise price of $2.00 per share. The number of warrants issued equals 50% of the number of shares issuable upon the conversion of the related advance.
For the three months ended March 31, 2017, the Company received two advances totaling $200,000 with conversion rates of $0.23 and $0.2785 per share, and issued two year warrants to purchase 396,925 shares of common stock at an exercise price of $2.00 per share. In connection with these advances, the Company has recorded loan discounts related to the warrants and the beneficial conversion features of the advances amounting to $9,661 and $9,661, respectively. During the three months ended March 31, 2017, the Company has recognized interest expense of $46,044 related to the amortization of loan discounts. As of March 31, 2017, the principal balance of the advances was $5,895,000 and the balance of the unamortized discounts related to the warrants and the beneficial conversion feature was $354,302 and $354,302, respectively. Accrued interest on the advances amounted to $417,778 as of March 31, 2017.
The calculated loan discounts for warranties were based on the relative fair value of the warrants which were calculated by the Company based on the Black Scholes option pricing model, using volatilities of between 97.04% and 99.04%, based on the Companys historical stock price, discount rates from 1.19% to 1.22%, and expected terms of 2 years, the term of the warrants.
A summary of notes payable and related discounts as of March 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Debt,
Net of Discount
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
|
|
|
|
|
|
|
Secured Convertible notes payable
|
|
$
|
2,997,483
|
|
|
$
|
(38,546
|
)
|
|
$
|
2,958,937
|
|
Secured Convertible Line of Credit
|
|
|
5,895,000
|
|
|
|
(708,604
|
)
|
|
|
5,186,396
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible notes payable and line of credit, net of current portion
|
|
$
|
8,892,483
|
|
|
$
|
(747,150
|
)
|
|
$
|
8,145,333
|
|
8
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
NOTE 4 Stockholders Deficit
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, par value $0.001 per share with such rights, preferences and limitation as may be set from time to time by resolution of the board of directors and the filing of a certificate of designation as required by Delaware General Corporation Law.
Common Stock
On August 12, 2015, GelTech signed a $10 million Purchase Agreement with Lincoln Park. The Company also entered into a Registration Rights Agreement with Lincoln Park whereby we agreed to file a registration statement related to the transaction with the SEC covering the shares that may be issued to Lincoln Park under the Purchase Agreement.
Under the terms and subject to the conditions of the Purchase Agreement, GelTech has the right to sell, and Lincoln Park is obligated to purchase, up to $10 million in shares of the Companys common stock, subject to certain limitations, from time to time, over the 30-month period commencing on October 16, 2015.
During the three months ended March 31, 2017, the Company issued 504,843 shares of common stock in exchange for $123,620 in connection with the Lincoln Park Purchase Agreement.
During the three months ended March 31, 2017, the Company issued 2,081,637 shares of common stock to three accredited investors in exchange for $500,000, including the issuance of 384,616 shares of commons stock to the Companys chairman and principal shareholder in exchange for $100,000.
Stock-Based Compensation
Stock-based compensation expense recognized under ASC 718-10 for the period January 1, 2017 to March 31, 2017, was $63,254 for stock options granted to employees and directors. This expense is included in selling, general and administrative expenses in the unaudited consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At March 31, 2017, the total compensation cost for stock options not yet recognized was approximately $135,019. This cost will be recognized over the remaining vesting term of the options of approximately two years.
Stock-based awards granted to non-employees, in the form of warrants to purchase the Companys common stock, are valued at fair value in accordance with the measurement and recognition criteria of ASC 505-50 "Equity Based payments to Non-Employees. Stock based compensation to non-employees recognized for the three months ended March 31, 2017 was $684.
During the three months ended March 31, 2017 the Company granted five year options to purchase 150,000 shares of common stock at an exercise price of $0.275 per share in exchange for legal services. The options were valued with the Black-Scholes option pricing model using a volatility of 99.06% based upon the historical price of the companys stock, a term of five years, the term of the warrants and a risk-free rate of 1.88%. The calculated fair value, $30,703 was recorded as prepaid expense and will be amortized over twelve months. For the three months ended March 31, 2017, $5,118 was amortized to expense.
Warrants to Purchase Common Stock
Warrants Issued as Settlements
During the three months ended March 31, 2017, there were no warrants granted for settlements.
Warrants Issued for Cash or Services
During the three months ended March 31, 2017, the Company issued two year warrants to purchase 396,925 shares of common stock at an exercise price of $2.00 per share in connection with advances of $200,000 from its chairman and principal shareholder related to the convertible line of credit agreement.
9
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(Unaudited)
During the three months ended March 31, 2017, the Company issued two year warrants to purchase 1,040,818 shares of common stock at an exercise price of $2.00 per share in connection with private placements with 3 accredited investors including warrants to purchase 192,308 to the Companys chairman and principal shareholder
NOTE 5 Related Party Transactions
During the three months ended March 31, 2017, the Company issued stock and warrants to its chairman and principal shareholder in exchange for cash as more fully described in Notes 3 and 4.
NOTE 6 Concentrations
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2017. As of March 31, 2017, there were no cash balances held in depository accounts that are not insured.
At March 31, 2017, two customers accounted for 47.4% and 22.5% of accounts receivable.
For the three months ended March 31, 2017, two customers accounted for 47.9% and 10.5% of sales.
Approximately 57.4% of revenue was generated from customers outside the United States during the three months ended March 31, 2017.
During the three months ended March 31, 2017, sales primarily resulted from three products, FireIce®, Soil
2
O® and FireIce Shield® which made up 76.3%, 10.0% and 13.6%, respectively, of total sales. Of the FireIce® sales, 87.1% related to the sale of FireIce® products and 12.9% related to sales of the FireIce extinguishers and eductor equipment. Of the Soil
2
O® sales, 28.9% related to traditional sales of Soil
2
O® and 71.1% related to sales of Soil
2
O® Dust Control. Of the FireIce Shield® sales, 7.4% consisted sales of asset protection canisters and refills, 38.0% related to FireIce Shield® CTP units and products, and 46.2% consisted of sale of spray bottles for use by welders and plumbers.
One vendor accounted for 53.4% of the Companys approximately $193,000 in purchases of raw material, finished goods and packaging during the three months ended March 31, 2017.
During the three months ended March 31, 2017, our chairman and principal shareholder provided 100% of the Companys debt financing.
NOTE 7
Subsequent Events
Since April 1, 2017, the Company has issued 353,407 shares of common stock to Lincoln Park in exchange for $86,935 in connection with the Purchase Agreement.
In April 2017, the Company issued 444,616 shares of common and two year warrants to purchase 222,308 shares of common stock for $2.00 per share to two accredited investors in exchange for $115,000.
10
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
ITEM 2.