PART I
ITEM 1. BUSINESS
GelTech Solutions, Inc. (GelTech or the Company) is a Delaware corporation organized in 2006. Our current business model is focused on the following environmentally friendly products:
·
FireIce® products a line of fire suppression and fire retardant products and the equipment used for their varied applications, including the Emergency Manhole FireIce Delivery System (EMFIDS),
·
FireIce Shield®, a line of asset protection products including welding blankets used during hot work by plumbers and welders and the FireIce Shield® CTP unit used to protect communication towers during welding and cutting,
·
Soil
₂
O® Dust Control products
–
including Soil
₂
O®
“
Dust Control
”
which is effective at controlling airborne particulate matter while substantially reducing water usage on traffic areas, and Soil
₂
O® Soil Cap, a product which is effective at controlling dust and erosion of non-traffic and storage areas, and
·
Soil
₂
O®
–
a line of moisture retention products, including Soil
₂
O® Topical and Soil
₂
O® Granular used in specialty agriculture, home and commercial landscaping and golf course maintenance to sustain plant growth while reducing the amount of water needed for irrigation.
FireIce®
Product Overview
We market FireIce® and the related equipment to deploy FireIce® to the following industry sectors:
·
State and Federal agencies responsible for protecting property and natural resources from wildfires.
·
Municipal fire departments and firefighting agencies responsible for responding to fires primarily in urban areas.
·
Utility companies responsible for protecting above ground and underground infrastructure and improving safety for workers and the public.
·
Other industrial and agricultural companies and organizations to protect assets and crop stockpiles.
Characteristics of our FireIce® Product
FireIce® is the registered trade name of our line of fire suppression products. The FireIce® products consist of dry powders that when added to water in very low concentrations, rapidly absorb water to produce a gel whose viscosity depends on the selected concentration. The dry powder can be easily mixed with water. Within seconds of being mixed with water, FireIce® products are ready to use, almost instantaneously becoming a fire preventing, heat absorbing and fire suppressing gel. In many applications the gel forms a cohesive layer which acts as a vapor barrier prolonging the effectiveness of the water. Due to the gel layer created by FireIce® products on burning and adjacent objects, FireIce® products also have the ability to suffocate a fire.
FireIce® products have the following properties. They are:
·
non-toxic,
·
environmentally safe,
·
less corrosive to metals,
·
mix easily with water,
·
reduce the threat of a fire rekindling,
·
have superior vertical adhesion ability for structure / exposure protection,
1
·
extinguish fires more rapidly than traditional methods, and
·
are lighter when mixed with water than competing products thus reducing airframe stress in aerial applications.
Industry Segments
Wildland Agencies
The United States Forest Service (the Forest Service) operating under the Department of Agriculture and the Department of the Interior are responsible for protecting most federal lands from wildland fires. For their fiscal year ending September 30, 2018, approximately $4.9 billion has been appropriated to the Forest Service and the Department of the Interior for the purpose of protecting federal lands from wildland fires, which includes approximately $1.1 billion to be used in the suppression of wildland fires.
FireIce® is used to combat wildland fires in several ways. Our product is dropped from airplanes either directly on wildland fires to extinguish them or it is dropped in the path of an advancing wildland fire to create a firebreak or to protect property. Aerial applications utilize FireIce® which is offered in several colored variations, designed to be visible from the air. Two of the colorants, a Fugitive Orange (Sunset Orange) and a Fugitive Blue (Cool Blue) were approved by the Forest Service Qualified Product List (QPL) in 2014. The colored products are designed specifically for wildland applications, and compete with existing long term retardant products that are on the market. In addition, wildland firefighters can use our non-colored FireIce®561 product to fight wildland fires on the ground.
Recognizing the potential for FireIce® and the tremendous marketplace for aerial firefighting in conjunction with the Federal and State forestry agencies, GelTech applied and has been listed on the QPL List since March 2012. Inclusion on the QPL List qualifies our product for use to fight brush and wildland fires on Federal lands, including the Department of Agriculture and Department of Interior. Under the terms of our approval by the Forest Service, FireIce® may be deployed for use on wildland fires except in fixed-tank helicopters and multi-engine planes.
In addition, since 2014, FireIce® has been used by state agencies to suppress wildland fires in 14 states, and was used by provincial agencies in two provinces in Canada. During 2017, sales to wildland agencies accounted for approximately 23.2% of our revenues.
In October 2016, the Company received a letter from the United States Department of Agriculture, which oversees the Forest Service regarding the clarification of the ingredients used in our FireIce product as well as a request by the Forest Service to provide an alternative name to be listed on the QPL which distinguishes the product from the Companys brand of FireIce. The Company submitted a name change request from FireIce to FireIce 561 which was approved by the USFS.
The FireIce HVO-F product currently being used by state and provincial agencies is a formulation that includes the product, FireIce 561 that is listed on the QPL, plus additional compounds to improve the visibility and performance of the product. The FireIce HVO-F product produced by the Company is its next generation line of product which is superior to FireIce 561, its QPL listed product formulation. The Company anticipates it will be applying for Forest Service approval with respect to its next generation line of products, including FireIce HVO-F or a third-generation version of HVO-F.
Municipal Agencies
Municipal Agencies use FireIce® in multiple ways. FireIce® is educted (mixed on the fly), using our patented FireIce® eductor, directly into firelines utilizing pumper trucks or fire hydrants to either be sprayed directly on structural fires to suppress them or sprayed on adjacent structures to protect them. In addition, FireIce® is also deployed from FireIce® Class A UL Rated fire extinguishers to combat fires in close quarters.
In September 2015, the Company entered into an exclusive distribution agreement with FireIce Solutions, LLC (FireIce Solutions) to sell FireIce® and its related equipment to municipal fire departments and first responders in the United States. This distributor has already made inroads in the northeast United States with numerous municipal departments in Massachusetts, New Hampshire and Maine. GelTech waived the minimum purchase requirements for year one and two in order for FireIce Solutions to maintain its exclusivity. During 2017, sales of FireIce® and FireIce Shield® to this distributor represented 14.1% of our revenues.
2
Power Utilities
According to a Harris Williams & Co. 2010 White Paper, power companies will invest between $1.5 and $2.0 billion in transmission and distribution infrastructure through 2030 to meet the growing demand for electrical power. The low voltage electricity transmission infrastructure includes approximately 64 million utility poles spanning 2.1 million overhead transmission miles and 1.1 million manholes servicing 66,000 underground transmission miles according to a February 2013 article in PowerGrid International magazine. FireIce® can be instrumental in protecting this infrastructure investment and in the process provide a safer work environment for utility workers. FireIce® is used by utility companies to protect wooden utility poles and surrounding property either by coating the poles during routine right-of-way controlled burn maintenance or by extinguishing poles that have ignited. To date these utilities have accomplished these tasks using FireIce® UL rated fire extinguishers which are rated for use on Class A combustibles such as wood, paper, plastic, cloth and the products derived from these materials.
We have performed research and development in conjunction with two Northeastern utility companies (Northeast Utilities), to develop a preferred solution to combat or prevent fires in underground utility structures (manholes). This led to the development of the EMFIDS which is an innovative system designed to deliver a mixture of FireIce® and water into a manhole. This stream of FireIce® and water is intended to coat the ladder and the utility worker in the event of an incident involving an explosion or fire in the manhole while utility workers are performing routine repairs or maintenance. The unit has been designed by GelTech to be quickly set up and disassembled by utility crews. EMFIDS delivers FireIce® from custom designed strategically located spray nozzles. The FireIce® and water mixture is contained in a pressurized tank which is mounted to the utility companys maintenance vehicle and is connected to the unit by one hose; that connects to the spray device which is deployed inside the manhole. EMFIDS can be activated either manually by pressing an activation button on the control panel located in the maintenance vehicle, automatically by either a heat sensor located near the opening to the manhole or an arc sensor positioned inside the manhole. Once activated, the system is designed to deliver FireIce® continuously for at least one minute. The main purpose of EMFIDS is to maintain the integrity of the ladder in the manhole and to coat the utility worker with FireIce®, providing the worker the opportunity to escape the manhole thereby improving the workers chance for survival.
In September 2013, we delivered an initial order of EMFIDS units to Con Ed resulting in revenue of $425,000. Since that order, we have not sold any additional EMFIDS units. Development of EMFIDS II, a more effective and easier-to-deploy version, has recently been completed. We sold one of these units in 2015, have begun marketing these EMFIDS II units to other utility companies. In the 4
th
quarter, the Company received an order from one of the Northeast Utilities. Revenues from the utilities industry amounted to 6.3% of revenues during 2017.
Other Industries
Due to its environmentally friendly and nontoxic characteristics, FireIce® is uniquely suited to suppress and retard fires related to biomass and agricultural stockpiles that routinely spontaneously combust and easily spread. FireIce® can be sprayed directly on these fires to extinguish them and can be used to protect adjacent stockpiles. As this is a new market for our products, we are encouraged by the initial response from customers. Sales to these entities made up 6.5% of revenues during 2017.
In March 2017, our Wildland team coordinated rapid delivery of FireIce, airtanker support and ground personnel to assist the Bahamian government with a landfill fire which had been burning for five years, causing the evacuation of nearby neighborhoods and was affecting the tourist business on the island. Once airtankers began dropping FireIce over the fire, the fire was brought under control. We see landfill fires as a potential new source of revenue as many countries throughout the world have difficulty managing these facilities. Revenue from this event made up 16.2% of revenues during 2017. We have shipped additional product to the Bahamas in early 2018.
In addition, to the biomass, agricultural market, the Company began in-house trials of FireIce in several manufacturing companies that employ processes that either use or create a great deal of heat, resulting in numerous fire events per day. Using FireIce®, these entities are able to easily suppress any fire activity and in several instances are able to reduce the number of fire events. These in-house trials in 2016 were limited to single manufacturing plants, however the companies have begun to adopt the use of FireIce in other plants and we have begun discussions with these companies to adopt the use of FireIce® in all of their manufacturing facilities.
3
FireIce Shield®
In 2015, we began selling an asset protection product under the name FireIce Shield®. The initial product offering under this line is being marketed to plumbers and welders who use the product to protect areas in close proximity to welding or soldering. In 2016, we began selling our FireIce Shield spray bottles in an 80 store plumbing supply chain in the Northeast through FireIce Solutions. Sales of this product in 2017 represented 7.4% of total revenues.
Communication Towers
Companies that own communication towers are constantly performing structural maintenance, equipment upgrades and additions to improve the towers and increase revenues. This work involves cutting and welding on the tower structures which creates a high risk of setting fire to the extensive cabling within the tower, as well as, surrounding vegetation and property. These fires can result in significant property damage and loss of revenue to the tower owners. In 2015, we began working with Crown Castle, a company that owns approximately 40,000 cell phone towers, to develop a portable system to be used to spray FireIce Shield® CTP on communication towers and surrounding vegetation to protect the tower cabling and vegetation during cutting and welding. FireIce Shield® CTP is a special formulation designed to improve visibility and product adhesion.
In September 2017, the largest contractor for communication tower maintenance, Sabre Industries, began requiring the use of FireIce Shield CTP beginning December 1, 2017. During the year ended December 31, 2017, revenue from sales of FireIce Shield CTP units and product represented 4.5% of revenue.
First Responders
In 2015, we began selling FireIce Shield® in two liter pressurized canisters for use by police departments and other first responders to protect property and people from fire until fire department personnel can arrive on scene. These units and refills for these units, which have primarily been sold through FireIce Solutions, represented 2.6% of our revenues during 2017.
Industrial Manufacturing Applications
In 2016, we began working with several industrial companies that manufacture products that are either flammable during the manufacturing process or that utilize manufacturing processes that create a high probability of fire during production. These companies have shown an interest in the use of FireIce® for the suppression and FireIce Shield® to prevent fires in areas prone to frequent fires. Sales to industrial customers represented 3.7% of revenues in 2017.
Sales and Marketing
We market and sell FireIce® and FireIce Shield® through FireIce Solutions, our exclusive municipal distributor, through other fire equipment distributors, online and direct marketing, wildland fire industry conferences and through our sales staff members who call on potential customers and respond to inquiries. In addition, we added a new distributor in California that has already made inroads and sales to the California Parks department.
In July 2017, the Company hired a sales executive with 30 years of experience in the utility industry to focus on sales to both the utility industry and the communication tower industry.
Although not a significant focus of our marketing efforts, we recognize the opportunities that international markets provide and added a new distributor in Chile during 2017, added a new distributor in Israel in early 2018 and continue to pursue credible inquiries to sell FireIce® to certain markets overseas.
Raw Materials and Suppliers
The raw materials for FireIce® are in abundant supply. The base ingredients of FireIce® are manufactured by a third party and packaging is performed for us by other third parties. There are several other companies that are able to manufacture the base ingredients and there are numerous sources for the parts needed to manufacture the EMFIDS II and FireIce Shield CTP units.
4
Competition
The fire suppression market is highly competitive. However, we believe we will be able to compete effectively because:
·
FireIce® is more effective than other fire suppressants.
·
The price per mixed gallon of FireIce® is significantly less than our competitors products.
·
The effectiveness of FireIce® to rapidly extinguish and deter rekindling, allows fire departments to put out fires faster which saves manpower and overtime costs associated with spending extra time on a fire scene.
·
Once a fire has been extinguished, any dispensing system used to apply FireIce® can be easily cleaned with water.
·
FireIce® is the only water enhancing gel that can be easily mixed and applied to fires as a suppressant.
·
When mixed with water, FireIce® weighs less than other fire retardants/suppressants currently being used thus reducing stress on aircraft airframes and improving pilot safety.
In the wildland firefighting industry, the market is made up of the numerous state and federal agencies responsible for protecting state and federal wildlands and parks. The market leader in the wildland chemicals industry is Phoschek. Because of the strong relationships Phoschek has with these agencies, many dating back to the 1960s, and the natural resistance to change, which can be even greater in the government sector, we have encountered significant resistance as we attempt to gain market share. Nonetheless, we believe that FireIce® has distinct advantages over Phoscheks products in aerial attack and ground operations. FireIce® is significantly less expensive to purchase and operate, more effective at suppressing fires, is non-corrosive to aircraft parts, is lighter than current Phoschek products thus reducing airframe stress and maximum load issues while increasing pilot safety, is not harmful to plant, fish or wildlife and has superior drop characteristics. Phoschek is classified by the Forest Service as a long-term retardant, but current tactics include using it in direct attack. FireIce® is classified by the Forest Service as a water enhancer and has been effectively used by multiple agencies in direct attack and as medium-term retardant used in indirect attack. Direct attack is when the product is dropped directly on the edge of a fire. Indirect attack is when the product is used to create a fire break in front of the fire. Some long-term retardant gels take time to dry and cure in order to create a fire break. FireIce® is ready immediately to be used on fires. Based on these factors and our successes with the state and federal agencies that have used FireIce®, we believe we will eventually overcome the competitive barriers.
Another significant competitor is Tyco Fire & Security, a major business segment of publicly-traded Tyco International Ltd. (NYSE: TYC). Tyco Fire & Security produces
ANSUL®, a premium brand of special hazard fire protection products including fire extinguishers and hand line units, pre-engineered restaurant, vehicle, and industrial systems; sophisticated fire detection/suppression systems and a complete line of dry chemical, foam, and gaseous extinguishing agents. Tyco Fire & Security is a well-funded company and has significantly more financial, marketing and sales resources than us. Ansuls main sales thrust is the installation of in building fire suppression systems, but they manufacture a wide variety of products. They also have an extensive distributor list and have a significant share of the market that we are attempting to enter.
National Foam, part of the Kidde Fire Fighting organization, is a manufacturer of foam concentrate, foam proportioning systems, fixed and portable foam firefighting equipment, monitors, nozzles and specialized big flow pumping solutions. National Foam has historically been at the forefront of foam firefighting and fire control technology and is the acknowledged world leader in providing foam based solutions. National Foam has significant financial resources and is part of a large firefighting company conglomerate. Thus, it has significantly more financial, marketing and sales resources than we do.
5
Thermo-Gel® provides the firefighting industry with a product that can be used for structure protection, exposure protection, defensible perimeters and wet lines. This product consists of superabsorbent polymers-polyacrylamide and sodium polyacrylate, mineral oil, and surfactants, and is supplied as a liquid concentrate which is mixed in an eductor. It requires expensive specialized equipment to use. Thermo-Gel is used in fighting active fires, wildland fires, prescribed burns, aviation applications, and in the protection of all types of structures from homes to commercial and industrial investments. This product has been approved by the Forest Service. In addition to the expense of the equipment needed to use the product, ThermoGel also requires frequent agitation to remain usable, has poor drop characteristics, requires a 30 minute hydration time and is difficult to clean off of aircraft, mixing equipment and airport tarmacs.
There are no systems comparable to EMFIDS that are readily available in the market. There are other safety products for utility workers, but none are capable of delivering fire suppression and structure protection immediately following an underground event.
Seasonality
There is no real seasonality to structural fires. These occur throughout the year. In wildland fires, FireIce® use will be more likely during the warmer, drier summer months when forest and other wildland fires are more prevalent. This seasonality may be minimized if we are able to expand our distribution internationally to countries in the Southern hemisphere.
Utility workers perform maintenance on underground systems year round. As such, demand for EMFIDS II should be year round, however there may be some seasonality based upon utility capital budgeting cycles. The occurrence rate for manhole fires is highest in the summer and winter months.
Dust Control
Industry Overview
Dust control is vital to several industries including agriculture, construction, mining and transportation. In response to the level of dust emissions from agricultural, mining and other industries, the Environmental Protection Agency, or the EPA, issued proposed rules titled National Ambient Air Quality Standards for Particulate Matter which were published in the Federal Register on June 29, 2012. These proposed rules reduce the amount of allowable dust released in the air by one-half. According to the EPAs website, dust accounts for over 25% of particle matter smaller than 2.5 micrometers in diameter, which are the major cause of reduced visibility or haze in parts of the U.S., and it accounts for over 78% of particle matter smaller than 10 micrometers in diameter, which causes respiratory related health issues. Dust also causes environmental damage such as acid rain, increased acidity in lakes and streams, depletion of nutrients in the soil and damage to sensitive forests and farm crops. In terms of agriculture, the U.S. Department of Agriculture (USDA) estimates the total annual cost of soil erosion from agriculture in the U.S. is about $44 billion per year. According to the Global Education Project, nearly one-third of the worlds cropland has been abandoned because of soil erosion and degradation over the past 40 years.
The Product
s
GelTech currently sells two products for dust control, Soil
₂
O®
“
Dust Control
”
and Soil
₂
O® Soil Cap.
Soil
₂
O®
“
Dust Control
”
GelTech launched Soil
₂
O®
“
Dust Control
”
in 2011. Soil
₂
O®
“
Dust Control
”
is highly effective in a variety of commercial and industrial markets with dust control and moisture retention problems including road construction sites, rock pits, unpaved roadways, landfills and coal piles. In contrast to the standard product used on gravel roads and rock pits and other dust causing surfaces, Soil
₂
O®
“
Dust Control
”
is environmentally friendly and requires significantly less water. Water is commonly transported to sites in large trucks. Thus, Dust Control reduces a companys carbon footprint by reducing the number of vehicle trips. In addition, fewer trips reduces labor, water and fuel costs and reduces the wear and tear on vehicles and equipment.
Soil
₂
O® Soil Cap
GelTech launched Soil
₂
O® Soil Cap in July 2014. Soil
₂
O® Soil Cap is a dust control solution designed to stabilize stockpile erosion caused by wind and rain. Soil
₂
O® Soil Cap is an easy to use, non-corrosive, environmentally safe solution used by mining operations and quarries on non-traffic areas of construction sites. The product leaves no residue and is non-flammable and non-volatile, unlike many competing products.
6
Uses
Soil
₂
O®
“
Dust Control
”
may be used in a variety of ways to control dust in multiple industries, including the following:
·
Soil
₂
O®
“
Dust Control
”
may be sprayed on mining, rock quarry or landfill haul roads to eliminate dust from traffic areas, and
·
Soil
₂
O®
“
Dust Control
”
can be sprayed on quarry conveyor belts to reduce airborne dust, and
·
Soil
₂
O®
“
Dust Control
”
can be sprayed on horse tracks and corrals to reduce airborne dust, and
·
Soil
₂
O®
“
Dust Control
”
can be used to maintain unpaved raceways and parking lots at rural dirt tracks and other venues used for auto racing.
Soil
₂
O® Soil Cap may be used in a variety of ways to control dust in multiple industries, including the following:
·
Soil
₂
O® Soil Cap may be sprayed on mining or rock quarry stockpiles to reduce erosion and dust, and
·
Soil
₂
O® Soil Cap can be sprayed on non-traffic areas of construction sites.
Benefits
Soil
₂
O®
“
Dust Control
”
is beneficial because it will reduce the number of times companies will need to spray haul roads, thus reducing water usage, fuel, vehicle maintenance and labor costs. In addition, the product is non-toxic and environmentally friendly and can be integrated into the reclamation process for mining companies.
Soil
₂
O® Soil Cap is beneficial because it very easy to mix and apply, is environmentally friendly and reduces erosion of product stockpiles while also reducing airborne dust on mining and construction sites.
Sales and Marketing
We began sales of Soil
₂
O®
“
Dust Control
”
in Southern California in March 2011 and currently have one full-time employee responsible for selling the product, focusing on dust control for rural unpaved roads, construction sites, agricultural applications and most recently solar farms.
In January 2014, we entered into a national vendor agreement with White Cap HD Supply, the leading distributor of specialty hardware, tools and materials for large and medium-sized contractors. Under the agreement, White Cap is currently stocking
Soil
₂
O®
“
Dust Control
”
, Soil
₂
O® Soil Cap and related equipment in the southwestern United States, primarily in the southern California market. In 2017, we added a distributor in Southern California who is focusing on Soil2O products including Soil
₂
O®
“
Dust Control
”
and Soil
₂
O® Soil Cap.
Sales of dust control products accounted for 9.8% of revenues during 2017.
Competition
Competition in the dust control industry runs the gamut from regional providers of product, trucks and equipment to multinational chemical companies providing chemical solutions and application equipment on a global basis. Generally speaking, the industry consists of products made up of chemical compounds that are in some form or fashion petroleum based, are much more expensive per application and are not environmentally friendly. A large number of companies have chosen to use water alone to mitigate airborne particulate matter. For these companies, our product can be most helpful by reducing the number of watering trips necessary to control dust thus reducing the overall cost of dust control and reducing the cost of any remediation which may be required by current EPA guidelines.
There are a few niche dust control products in the marketplace. The main and most widely used product is Magnesium Chloride (MagChloride). MagChloride has a hygroscopic quality which has the ability to absorb moisture from the air, controlling the number of small particles which become airborne. MagChloride still needs many laps with a water truck to keep it hydrated and working. After just a few applications our
“
Dust Control
”
product helps to limit the times a water truck is needed, saving fuel, labor costs, and thousands of gallons of water per day.
7
Soil
₂
O®- Agricultural Application
Industry Overview
According to the USDA, although less than 15% of U.S. cropland is irrigated, agriculture accounts for 80 percent of the nations consumptive water use. According to the World Bank, agricultural water management is a vital practice in ensuring food security, poverty reduction, and environmental protection. However, irrigation in all forms costs billions of dollars a year. Specifically, irrigation for golf courses can be costly as well. According to the United States Golf Association, it is not uncommon for irrigation systems to cost more than $1 million per golf course. Effective irrigation and water management practices can help maintain profitability for farmers and golf course managers in an era of increasingly limited and more costly water supplies.
The Product
We market two distinct versions of Soil
₂
O®: a unique, topically applied version, called Soil
₂
O® Topical, and a long term version called Soil
₂
O® Granular, that is applied prior to planting. Soil
₂
O® Topical is a fine particle blend that is mixed with water and is for use on existing grass and landscaping and can be applied using any type of spray rig or backpack sprayer. Soil
₂
O® Granular has been formulated to be tilled into the top four to six inches of the soil to assist in replacing and replanting of grass, including sodding and seeding, and is also recommended to be used during the planting of trees, shrubs, and annuals. Soil
₂
O® Granular is appropriate for planting situations in which the grass is not already established. We are now selling both versions to our distributors which are marketing the products to the agricultural and other markets.
Soil
₂
O® Granular
’
s main ingredient is polyacrilamide cross-linked polymer. Versions of this product have been used in the agricultural industry for many years. Soil
₂
O® can absorb hundreds of times its weight in water. Water is rapidly drawn into a polymer network where it is stored. As the soil dries out, the polymer releases up to 95% of the water it has absorbed back into the soil. Therefore, the water becomes available when the plants need it most.
Both Soil
₂
O® Topical and Granular naturally degrade over time in soil. Sunlight and salinity exposure make it break down faster. Soil
₂
O® Topical is used as a top dressing and sprayed onto already established turf and grasses. Our formulation provides a specifically formulated particle size which, with irrigation, gets down to the roots to supply turf and grasses with water and nutrients. Since the Soil
₂
O® Topical particle size is very small and not as protected from the ultraviolet light given off by the sun as the granular form, it is broken down much more rapidly than the granular. Soil
₂
O® Granular is tilled directly into the soil and will last for three to five years without having to be reapplied. The market for the granular product includes newly-designed golf courses, courses doing replanting as part of their continual golf course maintenance or any new landscaping project. Although granular form re-orders for large scale use may be limited due to its long duration in soil, we expect it to be used in both industrial and retail markets for the planting of landscaping which always has constant turnover due to landscaping re-design, re-planting and young tree mortality rates. We are marketing both versions of Soil
₂
O® to the agricultural market.
Uses
Soil
₂
O® has multiple potential uses in the agricultural market:
·
Soil
₂
O® products are specially designed for use as a soil conditioner for water and nutrient retention, interior and exterior farming including growers, turf farms and greenhouses, landscaping, forestry, horticulture and golf course maintenance. Each products goal is to increase the water holding capacity of soils and potting mixes, thereby reducing the frequency of irrigation, as well as reducing leaching of valuable nutrients.
·
Soil
₂
O® can also be beneficial for lawns and sod by improving germination and promoting regular even growth of lawns. This is especially useful for turf farms, golf courses and grass in parks and gardens.
·
Soil
₂
O® can be effective in agriculture, particularly in commercial farming. By storing water for later release as the soil becomes drier, Soil
₂
O® delays wilting and makes it possible for certain plants to become better established while waiting for rain or irrigation to begin.
·
By absorbing fertilizer, Soil
₂
O® reduces the amount that runs out of the soil and makes it available to the plants for a longer period of time.
·
Soil
₂
O® can be used in the planting of trees, bushes and saplings by enhancing root development and reducing mortality rates due to transplant shock.
·
Soil
₂
O® can keep plants, trees and cut flowers hydrated and thereby facilitate their transportation over long distances.
8
We believe that the water scarcity in the U.S. has created an opportunity to demonstrate to governments that Soil
₂
O® can provide a solution for the agricultural market in areas where farmers use irrigation to water crops. In addition, the agriculture market has a substantial problem in related to fertilizer and nutrient leaching. Soil
₂
O® has been shown to be successful in retaining fertilizer and nutrients at the root level, thus reducing leaching.
Sales and Marketing
GelTech has focused its marketing efforts for Soil
₂
O® Topical and Granular to applications for agriculture, golf courses and commercial landscapers. Golf course superintendents find the product works well on berms and around sand traps where water run-off is an issue. Commercial landscapers use our granular product to improve growth and reduce plant mortality for new plantings.
During 2017, Soil
₂
O® accounted for 2.1% of our revenue.
Raw Materials and Suppliers
Our Soil
₂
O® base ingredients are manufactured for us by a third party. There are several other companies that are also capable of manufacturing the main ingredients.
Competition
Polymers have been marketed on and off for over 20 years as additions to soil to increase water retention and reduce irrigation. Numerous companies appear to have products that are very similar to Soil
₂
O®. Some of these companies are:
·
Horticultural Alliance, Inc.
·
Turbo Technologies, Inc.
·
American Soil Technologies, Inc.
Each of these companies are private companies and it is unclear what financial, marketing and sales resources they have compared to us.
Seasonality
We anticipate that sales of Soil
₂
O® will be higher during the spring and summer quarters. However, we do not expect as much seasonality in the Southeastern areas that generally experience year round growing cycles, with the sale of the agricultural products preceding the growing cycle of various crops. We also believe a demand for Soil
₂
O® may be higher in areas where drought conditions persist.
Intellectual Property
The following are patents and patents pending for products we currently market or expect to market:
·
U.S. patent, Patent No. 8,555,991 Process and Device for Fire Prevention and Extinguishing;
·
U.S. patent, Patent No. 7,992,647 Process and Device for Fire Prevention and Extinguishing;
·
U.S. patent, Patent No. D649,294 Firehose Eductor;
·
U.S. patent application, Serial No. 62/064,011 Battery Storage Device and Method of Manufacture;
·
U.S. patent application, Serial No. 14/314,538 Method and Device for Suppressing Electrical Fires in Underground Conduits;
·
U.S. patent application, Serial No. 61/754,068 Device for Treating Manhole Electrical Fires;
·
U.S. patent application, Serial No. 61/755,237 Device for Suppressing Electrical Conduit Fires;
·
U.S. patent, Patent No. 9,072,922 Fluid Dispensing ladder;
9
·
U.S. patent, Patent No. 9,421,403 Amphibious Aircraft Fire-fighting Enhancement;
·
U.S. patent, Patent No. 8,757,280 Method of Extinguisher Underground Electrical Fires;
·
U.S. patent, Patent No. D637,357 Fire Extinguisher Dispensing Hose;
·
U.S. patent, Patent No. D684,662 Firehose Handheld Eductor Nozzle;
·
U.S. patent, Patent No. 9,511,246 Method and Apparatus for Treating Underground Conduits;
·
U.S. patent, Patent No. 8,833,476 Method and Apparatus for Extinguishing Fires;
·
U.S. patent, Patent No. 9,649,518 Wind Turbine Fire Suppression System;
·
U.S. patent application, Serial No. 62/406,638 Method of Treating Silica Fabric;
·
U.S. patent application, Serial No. 62/008,525 Colorized Fire Extinguishing Compounds
·
U.S. patent application, Serial No. 15/427,915 Cellular Telephone Fire Suppression Packet;
·
U.S. patent application, Serial No. 14/309,229 Device for Distribution of Fire Suppressant;
·
U.S. patent application, Serial No. 14/682,542 Fire Suppression Packaging;
·
U.S. patent application, Serial No. 15/243,367 Amphibious Aircraft Fire Fighting Enhancement.
We continue to develop potential new products. We recently filed new patent applications, some of which are to improve our existing technologies and others are for new products.
We claim trademark rights to the following marks. Federal trademark applications are on file with the United States Trademark Office:
·
GelTech Solutions®
·
FireIce®
·
Soil
₂
O®
·
FireIce Shield®
·
ChargeSafe®
Employees
As of March 26, 2018, we had 19 full-time employees and one part-time employee. We hire independent contractors on an as needed basis only. None of our employees are subject to collective bargaining agreements. We believe that our employee relationships are satisfactory.
Research and Development
During 2017 and 2016, GelTech spent $48,301 and $233,939, respectively, on research and development expenses.
ITEM 1A. RISK FACTORS
Not applicable to smaller reporting companies. However, our principal risk factors are described under Managements Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
10
ITEM 2. PROPERTIES
Our corporate office is located in Jupiter, Florida. We lease our office on a month-to-month basis at a monthly rental fee of $9,545. If we were required to move, we believe that there is a large supply of commercial property available in the general area which we could lease at comparable prices.
Beginning March 1, 2018, the Company leases office space in Niwot, Colorado under a two-year lease with a monthly rental fee of $2,250.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable
11
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
1.
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
GelTech Solutions, Inc., or GelTech or the Company, generates revenue primarily from marketing products based around the following four product categories (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in 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.
On January 25, 2016, our Board of Directors approved a change in our fiscal year-end from June 30 to December 31, with the change to the calendar year reporting cycle beginning January 1, 2016.
Our consolidated financial statements have been prepared on a going concern basis, and we need to generate sufficient material revenues to support the ongoing business of GelTech. (See Note 2)
The corporate office is located in Jupiter, Florida.
Principles of Consolidation
The accompanying 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 the subsidiaries during the years ended December 31, 2017 and 2016. All intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms. Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
Inventories
Inventories are stated at the lower of cost and net realizable value, with cost being determined using the first-in, first-out method.
F-9
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Property and Equipment and Depreciation
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of 3 to 7 years. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the improvements. Expenditures for maintenance and repairs are expensed as incurred.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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 and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The carrying amount of our convertible and other debt approximates the fair value because the interest rate on those debts do not vary materially from the market rate for similar debt instruments.
We follow accounting guidance for fair value measurements of financial and non-financial assets and liabilities. The 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 December 31, 2017 or 2016.
Revenue Recognition
Revenue from sales of products is recognized when persuasive evidence of an arrangement exists, products have been shipped to the customer, economic risk of loss has passed to the customer, the price is fixed or determinable, collection is reasonably assured, and any future obligations of the Company are insignificant. Revenue is shown net of returns and allowances. The Company provides certain customers with the right of return for unsold product. Sales to these customers are recorded as the customer sells the product, thus removing the right of return.
Products shipped from either our third-party fulfillment companies or our Jupiter, Florida location are shipped FOB shipping point. Normal payment terms are net 30 days depending on the arrangement we have with the customer. As such, revenue is recognized when product has been shipped from either the third-party fulfillment company or from the Jupiter, Florida location.
F-10
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
The Company follows the guidance of ASC 605-50-25, Revenue Recognition, Customer Payments. Accordingly, any incentives received from vendors are recognized as a reduction of the cost of products. Promotional products or samples given to customers or potential customers are recognized as a cost of goods sold. However, products we utilize to perform demonstrations for potential customers are recorded as a marketing expense in operations.
In June 2016, the Company entered into two agreements with a state forestry agency whereby the Company agreed to pay for and build two fixed airport mixing facilities in order to support the state agencys aerial wildland firefighting operations. In connection with the agreement, the state agency has the use of the equipment in exchange for paying a premium price per bucket for our HVO-F aerial FireIce product and also making an initial minimum purchase of 200 buckets per year. As such, the Company deferred the premium portion of the bucket price for the minimum purchase amount and recognized revenue of $9,333 and $6,667 during 2016 and 2017, respectively, related to the minimum purchase amounts.
In June 2017, the entered into an agreement with a state forestry agency whereby the Company agreed to supply the equipment for two fixed airport mixing facilities in order to support the state agencys aerial wildland firefighting operations. The Company leased the equipment to the state agency for $33,000, which was recognized as revenue over the four-month period the equipment was set up on the airbases.
Shipping and Handling Costs
Amounts invoiced to customers for shipping and handling are included in revenues. Shipping and handling costs related to sales of products are included in cost of sales in the amount of $56,389 and $27,754 for the years ended December 31, 2017 and 2016, respectively.
Research and Development
In accordance with ASC 730-10 expenditures for research and development of the Company's products are expensed when incurred, and are included in operating expenses. The Company recognized research and development costs of $48,301 and $233,939 during the years ended December 31 2017 and 2016, respectively.
Advertising
The Company conducts advertising for the promotion of its products and services. In accordance with ASC 720-35, advertising costs are charged to operations when incurred; such amounts aggregated $1,673 and $11,192, respectively, during the years ended December 31, 2017 and 2016.
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 consolidated 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 during the years ended December 31, 2017 and 2016 include the allowance for doubtful accounts, depreciation and amortization, valuation and classification of inventories, valuation of the beneficial conversion features associated with convertible notes, valuation of options and warrants granted for services or settlements, valuation of common stock granted for services or for debt conversion, accruals for litigation losses and the valuation of deferred tax assets.
F-11
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Net Earnings (Loss) per Share
The Company computes net earnings (loss) per share in accordance with ASC 260-10. ASC 260-10 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. For the years ended December 31, 2017 and 2016, there was no separate computation of dilutive net loss per share since the common stock equivalents outstanding were anti-dilutive due to the net losses. At December 31, 2017, there were options to purchase 13,322,340 shares and warrants to purchase 14,291,342 shares of common stock outstanding which may dilute future earnings per share. In addition, there are 18,514,067 shares issuable upon conversion of convertible note agreements.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718-10 Compensation Stock Compensation 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 stock appreciation rights are based on estimated fair values. Stock option compensation expense recognized under ASC 718-10 for the years ended December 31, 2017 and 2016 was $322,019 and $416,586, respectively, related to employee, director and advisory board stock options, and is included in selling, general and administrative expenses in the consolidated statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. At December 31, 2017, the total compensation cost for stock options not yet recognized was $106,724. This cost will be recognized over the remaining vesting period of the options, approximately three years.
The Company accounts for non-employee stock-based awards 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 years ended December 31, 2017 and 2016 was $1,915 and $18,101, respectively.
Equity Incentive Plans
In January 2007, the Company established the 2007 Equity Incentive Plan which provides for the issuance of stock options, stock appreciation rights, restricted stock or restricted stock units to our directors, employees and consultants. As of December 31, 2017 and 2016, the number of shares authorized by the plan was 15,000,000.
On August 4, 2017, the Board adopted the 2017 Equity Incentive Plan (the Equity Incentive Plan). Employees, directors and consultants of the Company are eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan is administered by the Compensation Committee of the Board or the full Board during such times as no committee is appointed by the Board or during such times as the Board is acting in lieu of the committee (in either case, the Committee). The Equity Incentive Plan provides for the grant of equity-based compensation in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance cash and other share-based awards.
Under the Equity Incentive Plan, all directors who are not employees or own 10% or more of the Companys outstanding stock at the time of grant shall automatically receive a grant of stock options as follows:
Initial Grants
A Chairman of the Board
- 50,000 options
B Director
- 30,000 options
C Chair of a Committee
- 10,000 options
D Member of a Committee
- 5,000 options
F-12
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Annual Grants
A Chairman of the Board
- 70,000 options
B Director
- 100,000 options
C Chair of a Committee
- 20,000 options
D Member of a Committee
- 10,000 options
All initial grants of options to new non-employee directors and committee members vest annually over a three-year period on the anniversary date of the grant, subject to continuing service as a director, Committee member, Chairman of the Board or Chairman of a Committee on the applicable vesting date. Options automatically granted annually under the 2017 Equity Incentive Plan vest the following June 30th, subject to continuing service as a director. The exercise price of options or stock appreciation rights granted under the 2017 Equity Incentive Plan shall not be less than the fair market value of the underlying common stock at the time of grant. In the case of incentive stock options, the exercise price may not be less than 110% of the fair market value in the case of 10% shareholders. Options and stock appreciation rights granted under the 2017 Equity Incentive Plan shall expire no later than ten years after the date of grant. The option price may be paid in United States dollars by check or wire transfer or, at the discretion of the Board of Directors or Compensation Committee, by delivery of shares of our common stock having fair market value equal as of the date of exercise to the cash exercise price, or a combination thereof.
The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, are determined by the Board of Directors or the Compensation Committee, in their sole discretion. The purchase price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a recapitalization, reorganization, merger, consolidation, exchange of shares, stock dividend, stock split, reverse stock split, or other subdivision or consolidation of shares.
The Board of Directors or the Compensation Committee may from time to time alter, amend, suspend, or discontinue the Equity Incentive Plan with respect to any shares as to which awards of stock rights have not been granted. However, no rights granted with respect to any awards under this Equity Incentive Plan before the amendment or alteration shall be impaired by any such amendment, except with the written consent of the grantee. Under the terms of the Equity Incentive Plan, the Board of Directors or the Compensation Committee may also grant awards which will be subject to vesting under certain conditions. The vesting may be time-based or based upon meeting performance standards, or both.
All of our Stock Option Agreements provide for clawback provisions, which enable our Board of Directors to cancel stock awards and recover past profits if the person is dismissed for cause or commits certain acts which harm us.
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.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of ASC 740-10, "Accounting for Income Taxes," which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
F-13
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
The Company follows the provisions of the ASC 740 -10 related to,
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
Effective July 1, 2007, the Company adopted ASC 740-10-25
Definition of Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of December 31, 2017, the fiscal tax years ended June 30, 2013, the stub period from July 1, 2015 through December 31, 2015 and the year ended December 31, 2016 are still subject to audit.
On December 22, 2017, the Tax Act was signed into law and significantly reformed the Internal Revenue Code of 1986, as amended. The Tax Act will significantly impact the Company by reducing the federal corporate tax rate from 35% to 21%, effective January 1, 2018.
Legal Costs and Contingencies
In the normal course of business, the Company incurs costs to hire and retain external legal counsel to advise it on regulatory, litigation and other matters. The Company expenses these costs as the related services are received.
If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. If the Company has the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss, if recovery is also deemed probable.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an update ("ASU 2014-09") establishing Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with Customers
(ASC 606). ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. In August 2015, the FASB issued an update (ASU 2015-14) to ASC 606,
Deferral of the Effective Date
, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (ASU 2016-08) to ASC 606,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an update (ASU 2016-10) to ASC 606
, Identifying Performance Obligations and Licensing,
which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued an update (ASU 2016-12) to ASC 606,
Narrow-Scope Improvements and Practical Expedients,
which amends certain aspects of the new revenue recognition standard pursuant to ASU 2014-09. We are permitted to use either the retrospective or the modified retrospective method when adopting these standards. The Company does not believe this accounting standard will have a material impact on the Companys financial statements.
F-14
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
In February 2016, the FASB issued (ASU 2016-02)
Leases
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The effective date for adoption of this standard is for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718).
The objective of this release was to provide further guidance as to when changes to the terms and conditions of share-based payments require an entity to apply modification accounting. The ASU provides that modification accounting shall be used unless three specific criteria are met. Because the Company has always used modification accounting for changes in the terms and condition of equity-based payments, there will be no impact to the Company by this standard.
No other Accounting Standards Updates (ASUs) which were not effective until after December 31, 2017 are expected to have a significant effect on the Company's consolidated financial position or results of operations.
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. The Company has a net loss and net cash used in operating activities of $4,161,765 and $3,082,347, respectively, for the year ended December 31, 2017 and has an accumulated deficit and stockholders deficit of $52,119,691 and $4,758,809, respectively, at December 31, 2017. In addition, the Company has not yet generated revenue sufficient to support ongoing operations. 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. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. These 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 year ended December 31, 2017, the Company received $200,000 in advances from its convertible line of credit with its president, chairman and principal shareholder. In addition, the Company received $2,671,000 from private placements, including $1,090,000 from its president, chairman and principal shareholder. The Company also received $210,555 from Lincoln Park Capital Fund LLC in connection with a $10 million stock purchase agreement entered into in August 2015. See Note 7.
In August 2017,
Company and Warren Mosler (the Investor) entered into a Stock Purchase Agreement whereby the Investor committed to purchase up to $1,800,000 shares of the Companys common stock until August 1, 2018, subject to the Companys president and chairman, continuing to serve as an officer of the Company.
Management believes that the Stock Purchase Agreement, additional fundings from its president, 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.
F-15
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
3.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2017 and 2016 was as follows:
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
88,816
|
|
|
$
|
108,659
|
|
Allowance for doubtful accounts
|
|
(11,116
|
)
|
|
|
|
|
|
$
|
77,700
|
|
|
$
|
108,659
|
|
Bad debt expense on trade accounts receivable for the years ended December 31, 2017 and 2016 was $11,116 and $-0-, respectively. During the year ended December 31, 2016, the company recognized a bad debt recovery amounting to $21,875.
4.
INVENTORIES
Inventories consisted of the following at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
Finished goods
|
$
|
916,611
|
|
|
$
|
741,588
|
|
Raw materials
|
|
997,286
|
|
|
|
920,841
|
|
|
|
1,913,897
|
|
|
|
1,662,429
|
|
Less: Inventory not expected to be realized within one year
|
|
(479,486
|
)
|
|
|
|
|
Total current inventory
|
$
|
1,434,411
|
|
|
$
|
1,662,429
|
|
As of December 31, 2017, the Company had approximately $5,490 of consignment inventory consisting of FireIce 561 and FireIce HVOF with a customer. As of December 31, 2016, the Company had approximately $3,100 of consignment inventory consisting of FireIce 561 with a certain customer. As of December 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 non-current inventory in the consolidated balance sheet.
5.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and
equipment consisted of the following as of December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31,
|
|
|
Useful Life
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Wildland equipment
|
3 - 5 years
|
|
$
|
167,457
|
|
|
$
|
155,659
|
|
Wildland vehicles
|
5 - 7 years
|
|
|
204,117
|
|
|
|
204,117
|
|
Equipment
|
3 - 5 years
|
|
|
137,100
|
|
|
|
125,530
|
|
Storage facilities
|
3 years
|
|
|
38,986
|
|
|
|
38,986
|
|
Other vehicles
|
5 years
|
|
|
63,545
|
|
|
|
63,545
|
|
Furniture and fixtures
|
5 years
|
|
|
20,420
|
|
|
|
20,420
|
|
|
|
|
|
631,625
|
|
|
|
608,256
|
|
Accumulated depreciation
|
|
|
|
(446,192
|
)
|
|
|
(354,962
|
)
|
|
|
|
$
|
185,433
|
|
|
$
|
253,294
|
|
Depreciation expense was $91,230 and $83,445, respectively, for the years ended December 31, 2017 and 2016.
F-16
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
6.
SECURED CONVERTIBLE NOTE AGREEMENTS
The Company currently has three debt facilities outstanding, all of them held by its president and principal shareholder.
One convertible note in the amount of $1,997,483, dated February 1, 2013 was a consolidation of prior debt instruments. The note bore annual interest of 7.5%, was convertible at $0.35 per share and due December 31, 2016. On February 12, 2015, this note was modified by securing the note with all the assets of the Company and by extending the due date of the note from December 31, 2016 to December 31, 2020. During the year ended December 31, 2017, the Company recognized interest expense of $92,760. In September 2017, the Companys chairman and principal shareholder elected to convert the note principal into shares of the Companys common stock. As such, in accordance with the terms of the note, the Company issued 5,707,095 shares. As of December 31, 2017, the principal balance of the note is $ -0- and accrued interest amounted to $137,088.
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. 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. This discount is being amortized over the remaining term of the note. For the year ended December 31, 2017 and 2016, the Company recorded interest expense of $10,261 and $10,290, respectively, related to the amortization of the discounts related to the warrants. As of December 31, 2017 and 2016, the balance of the unamortized discount related to the warrants was $30,814 and $41,075, respectively. As of December 31, 2017, the principal balance on this note is $1,000,000 and accrued interest amounted to $110,041.
In connection with the debt modifications described above, the Company entered into a secured convertible line of credit agreement for up to $4 million with its president and principal shareholder. On April 8, 2016, the Company and its president and principal shareholder entered into the First Amendment to Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $4 million to $5 million. On September 27, 2016, the Company and its president and principal shareholder entered into the Second Amendment to Secured Revolving Convertible Promissory Note Agreement increasing the credit facility from $5 million to $6 million. Under the agreements, the Company may, with the prior approval of its president 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 president and principal shareholder two year warrants to purchase shares of common stock at an exercise price of $2.00 per share. The number of warrants issued equals 50% of the number of shares issuable upon the conversion of the related advance.
During 2016, the Company received 16 advances totaling $2,430,000 with conversion rates between $0.2108 and $0.55 per share, and issued two year warrants to purchase 3,795,498 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 $180,172 and $180,172, respectively. During the year ended December 31, 2016, the Company has recognized interest expense of $143,681 related to the amortization of these loan discounts. As of December 31, 2016, the principal balance of the advances is $5,695,000 and the balance of the unamortized discounts related to the warrants and the beneficial conversion feature was $367,663 and $367,663, respectively. In addition, accrued interest due on these advances amounted to $310,122 at December 31, 2016.
During 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 396,926 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 year ended December 31, 2017, the Company has recognized interest expense of $188,178 related to the amortization of these loan discounts. As of December 31, 2017, the principal balance of the advances is $5,895,000 and the balance of the unamortized discounts related to the warrants and the beneficial conversion feature was $235,235 and $235,235, respectively. In addition, accrued interest due on these advances amounted to $344,992 at December 31, 2017.
F-17
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
The calculated loan discounts were based on the relative fair value of the warrants which was calculated by the Company using the Black Scholes option pricing model loan discount, using volatilities of 97.04% and 99.04%, based on the Companys historical stock price, discount rates of 1.19% and 1.22%, and expected terms of 2 years, the term of the warrants.
A summary of notes payable and related discounts as of December 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Debt,
Net of Discount
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
|
|
|
|
|
|
|
Secured Convertible notes payable
|
|
$
|
1,000,000
|
|
|
$
|
(30,814
|
)
|
|
$
|
969,186
|
|
Secured Convertible Line of Credit
|
|
|
5,895,000
|
|
|
|
(566,470
|
)
|
|
|
5,328,530
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible notes payable and line of credit, net of current portion
|
|
$
|
6,895,000
|
|
|
$
|
(597,284
|
)
|
|
$
|
6,297,716
|
|
A summary of notes payable and related discounts as of December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Debt,
Net of Discount
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
|
|
|
|
|
|
|
Secured Convertible notes payable
|
|
$
|
2,997,483
|
|
|
$
|
(41,076
|
)
|
|
$
|
2,956,407
|
|
Secured Convertible Line of Credit
|
|
|
5,695,000
|
|
|
|
(735,326
|
)
|
|
|
4,959,674
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured convertible notes payable and line of credit, net of current portion
|
|
$
|
8,692,483
|
|
|
$
|
(776,402
|
)
|
|
$
|
7,916,081
|
|
7.
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 limitations 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
Common Stock Issued for Cash
On August 12, 2015, the Company signed a $10 million Purchase Agreement with Lincoln Park and 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 the date that a registration statement, which the Company agreed to file with the SEC pursuant to the Registration Rights Agreement, is declared effective by the SEC. The Company filed the registration statement with the SEC on October 5, 2015 and it was declared effective by the SEC on October 16, 2015.
F-18
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
During the year ended December 31, 2016, the Company issued 2,078,008 shares of common stock, including 28,008 commitment shares, to Lincoln Park in exchange for $715,075.
During the year ended December 31, 2017, the Company issued 858,520 shares of common stock, including 8,250 commitment shares, to Lincoln Park in exchange for $210,555.
Private Placements
During the year ended December 31, 2017, the Company issued 25,000 shares of common stock in exchange for $6,000 in a private placement with an accredited investor.
Issuances of Common Stock and Warrants for Cash
During the year ended December 31, 2016 the Company issued 1,591,700 shares of common stock and two-year warrants to purchase 795,850 shares of common stock at an exercise price of $2.00 per share in exchange for $500,000 in connection with private placements with three accredited investors, including issuances of 428,572 shares and two-year warrants to purchase 214,286 shares of common stock to a director and his wife in exchange for $150,000.
During the year ended December 31, 2017, the Company issued 12,982,662 shares of common stock and two-year warrants to purchase 6,491,334 shares of common stock at an exercise price of $2.00 per share in exchange for $2,665,000 in connection with private placements with four accredited investors, including issuances of 4,568,182 shares and two-year warrants to purchase 2,284,093 shares of common stock to its president, chairman and principal shareholder in exchange for $975,000.
C
ommon Stock Issued for Interest
In February 2016, the Company issued 428,032 shares of common stock to its president and principal shareholder as payment for annual accrued interest of $149, 811 related to convertible note agreement dated February 1, 2013. In accordance with the convertible note, the conversion rate for the accrued interest was $0.35 per share. The fair market value of the Companys common stock was $0.52, or $222,577, on the date of conversion. As such the Company recorded other expense of $72,765 for the year ended December 31, 2016 in connection with the interest conversion.
In April 2016, the Company issued 296,371 shares of common stock valued at $148,365 to its president and principal shareholder in payment of accrued interest on the secured convertible line of credit as of February 13, 2016 of $148,365.
In July 2016, the Company issued 208,333 shares of common stock valued at $75,000 to its president, chairman and principal shareholder in payment of accrued interest of $75,000 on a $1 million convertible note.
In May 2017, the Company issued 428,032 shares of common stock to its chairman and principal shareholder in payment of accrued interest of $149,811. The shares were valued at $107,008 based on the quoted trading price at the conversion agreement date. The gain of $42,803 was recorded to paid in capital on the conversion as the conversion was by a related party.
In May 2017, the Company issued 1,275,277 shares of common stock to its chairman and principal shareholder in payment of accrued interest of $357,064 related to the advances under the Secured Revolving Convertible Promissory Note Agreement. The shares were valued at $320,095 based on the quoted trading price at the conversion agreement date. The gain of $36,969 was recorded to paid in capital on the conversion as the conversion was by a related party.
Other Issuances of Common Stock
During the year ended December 31, 2016, the Company issued 12,126 shares of common stock, valued at $5,067, to a consultant in exchange for services.
During the year ended December 31, 2016 the Company issued 18,114 shares of common stock valued at between $0.36 and $0.52 per share in exchange for investor relations services valued at $8,000.
F-19
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
During the year ended December 31, 2017, the Company issued 11,570 shares of common stock, valued at $0.20 and $0.25 per share based on the average closing price of the stock for the service period or $2,700 to a consultant in exchange for services.
During the year ended December 31, 2017 the Company issued 21,637 shares of common stock valued at between $0.18 and $0.19 per share in exchange for investor relations services valued at $4,000.
Options and Warrants to Purchase Common Stock
The fair value of stock option grants for the year ended December 31, 2017 and 2016 were estimated using the following weighted- average assumptions:
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
2017
|
|
2016
|
Risk free interest rate
|
|
1.29% 2.120%
|
|
0.58% 1.90%
|
Expected term in years
|
|
2.0 5.5
|
|
2.0 10.0
|
Dividend yield
|
|
|
|
|
Volatility of common stock
|
|
72.11% 99.06%
|
|
99.01% 105.08%
|
Estimated annual forfeitures
|
|
|
|
|
The Black-Scholes option-pricing model was developed for use in estimating the fair value of non-traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. During the years ended December 31, 2017 and 2016, the Company used the Companys trading prices in calculating the stock price volatility and based its volatility on historical volatility. The expected term was estimated using the simplified method for employee stock options since the Company does not have adequate historical exercise data to estimate the expected term.
On August 4, 2017, the Board adopted the 2017 Equity Incentive Plan (the Equity Incentive Plan). Employees, directors and consultants of the Company are eligible to participate in the Equity Incentive Plan. The Equity Incentive Plan is administered by the Compensation Committee of the Board or the full Board during such times as no committee is appointed by the Board or during such times as the Board is acting in lieu of the committee (in either case, the Committee). The Equity Incentive Plan provides for the grant of equity-based compensation in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance cash and other share-based awards. In accordance with the adoption of the Plan, the non-employee directors were granted options identical to the automatic option grants that were previously issued each year for Board service under the Old Plan.
F-20
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Options to Purchase Common Stock
A summary of stock option transactions issued to employees under the 2017 and 2007 Plans for the years ended December 31, 2017 and 2016 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 December 31, 2015
|
|
|
8,152,007
|
|
|
$
|
0.85
|
|
|
|
5.44
|
|
|
|
|
Granted
|
|
|
301,000
|
|
|
$
|
0.22
|
|
|
|
5.0
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(257,500
|
)
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
8,195,507
|
|
|
$
|
0.82
|
|
|
|
4.71
|
|
|
$
|
|
|
Exercisable at December 31, 2016
|
|
|
5,107,679
|
|
|
$
|
0.92
|
|
|
|
4.65
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2016
|
|
|
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
8,195,507
|
|
|
$
|
0.85
|
|
|
|
5.36
|
|
|
|
|
|
Granted
|
|
|
1,076,000
|
|
|
$
|
0.20
|
|
|
|
7.9
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(335,000
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
8,936,507
|
|
|
$
|
0.75
|
|
|
|
4.25
|
|
|
$
|
9,197
|
|
Exercisable at December 31, 2017
|
|
|
5,795,224
|
|
|
$
|
0.84
|
|
|
|
3.30
|
|
|
$
|
6,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2017
|
|
|
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
In November 2016, the Company issued five-year options to purchase 25,000 shares of common stock at an exercise price of $0.26 per share to a new employee. The options vest ratably over a one-year period. The options were valued using the Black-Scholes model using a volatility of 102.8%, derived using the historical market price for the Companys common stock, an expected term of 3.0 years (using the simplified method) and a discount rate of 1.27%. The value of these options, $4,119, will be recognized as expense over the vesting period.
In December 2016, the Company issued five-year options to purchase 25,000 shares of common stock at an exercise price of $0.23 per share to a new employee. The options vest ratably over a one-year period. The options were valued using the Black-Scholes model using a volatility of 99.28%, derived using the historical market price for the Companys common stock, an expected term of 3.0 years (using the simplified method) and a discount rate of 1.44%. The value of these options, $3,556, will be recognized as expense over the vesting period.
In December 2016, the Company issued five-year options to purchase 251,000 shares of common stock at an exercise price of $0.22 per share to employees. The options vest 25% immediately with 25% vesting annually over three years from the date of the grant, subject to continued employment. The options were valued using the Black-Scholes model using a volatility of 99.29%, derived using the historical market price for the Companys common stock, an expected term of 4.0 years (using the simplified method) and a discount rate of 1.67%. The value of these options, $38,092, will be recognized as expense over the three year vesting period.
F-21
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
In June 2017, the Company granted five-year options to purchase 150,000 shares of the Companys common stock at an exercise price of $0.25 per share to an employee in connection with the employees appointment as an officer of the Company. The options vested 25% immediately, with the remainder vesting annually over a three year period, subject to continued employment with the Company. The options were valued with the Black-Scholes option pricing model using an expected volatility of 79.39% based upon the historical price of the companys stock, a term of four years, calculated using the simplified method and a risk-free rate of 1.63%. The calculated fair value, $21,996 will be amortized ratably over the vesting period.
On August 7, 2017, the Company granted ten-year options to purchase 500,000 shares of common stock at an exercise price of $0.2039 per share to its chief executive and chief technology officer. The options were valued with the Black-Scholes option pricing model using an expected volatility of 80.03% based upon the historical price of the companys stock, an expected term of five years using the simplified method and a risk-free rate of 1.82%. The calculated fair value, $65,833 was recorded as expense during the nine months ended September 30, 2017.
On August 16, 2017, the Company granted ten-year options to purchase 125,000 shares of common stock at an exercise price of $0.185 per share to its chief financial officer in connection with the signing of new employment agreement. (See Note 6.) The options were valued with the Black-Scholes option pricing model using an expected volatility of 79.98% based upon the historical price of the companys stock, an expected term of five years using the simplified method, and a risk-free rate of 1.77%. The calculated fair value, $14,907 was recorded as expense during the nine months ended September 30, 2017.
On August 28, 2017, the Company granted five-year options to purchase 25,000 shares of common stock at an exercise price of $0.20 per share to a new employee in connection with his employment. The options were valued with the Black-Scholes option pricing model using an expected volatility of 79.68% based upon the historical price of the companys stock, an expected term of 2.5 years using the simplified method, and a risk-free rate of 1.29%. The calculated fair value, $2,399 was recorded as expense during the year ended December 31, 2017.
On October 2, 2017, the Company granted five-year options to purchase 25,000 shares of common stock at an exercise price of $0.20 per share to a new employee in connection with his employment. The options were valued with the Black-Scholes option pricing model using an expected volatility of 79.68% based upon the historical price of the companys stock, an expected term of 2.5 years, the term of the options and a risk-free rate of 1.56%. The calculated fair value, $2,385 was recorded as expense during the three months ended December 31, 2017.
On December 13, 2017, the Company granted five-year options to purchase 251,000 shares of common stock at an exercise price of $0.1798 per share to employees. The options were valued with the Black-Scholes option pricing model using an expected volatility of 72.11% based upon the historical price of the companys stock, an expected term of 2.5 years, the term of the options and a risk-free rate of 1.85%. The calculated fair value, $20,155 was recorded as expense during the three months ended December 31, 2017.
F-22
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
A summary of options issued to directors under the 2017 and 2007 Plans and changes for the year ended December 31, 2016 and for the years ended December 31, 2016 and 2015 is as follows:
Options Issued to Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
|
2,765,833
|
|
|
$
|
0.98
|
|
|
|
7.28
|
|
|
|
|
Granted
|
|
|
715,000
|
|
|
$
|
0.79
|
|
|
|
10.00
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
3,480,833
|
|
|
$
|
0.86
|
|
|
|
6.93
|
|
|
$
|
|
|
Exercisable at December 31, 2016
|
|
|
2,812,500
|
|
|
$
|
0.98
|
|
|
|
6.31
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2016
|
|
|
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
3,480,833
|
|
|
$
|
0.86
|
|
|
|
6.93
|
|
|
|
|
|
Granted
|
|
|
690,000
|
|
|
$
|
0.211
|
|
|
|
10.00
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
4,170,833
|
|
|
$
|
0.75
|
|
|
|
6.54
|
|
|
$
|
|
|
Exercisable at December 31, 2017
|
|
|
3,517,166
|
|
|
$
|
0.86
|
|
|
|
5.95
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2017
|
|
|
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
In April 2016, the Company issued ten-year options to purchase 30,000 shares of common stock at an exercise price of $0.39 per share to a new director. The options vest annually over three years, subject to the continued service on the board. The options were valued using the Black-Scholes option pricing model using a volatility of 103.79% based upon the historical price of the companys stock, a term of 6.5 years, using the simplified method and a risk-free rate of 1.52%. The calculated fair value, $9,631 will be recognized over the requisite service period.
As prescribed by the Company's 2007 Equity Incentive Plan, on July 1, 2016, the Company issued options to purchase 680,000 shares of common stock to directors. The options have an exercise price of $0.37 per share, vest on June 30, 2017¸ 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 104.37%, derived using the historical market price for the Companys common stock, an expected term of 5.5 years (using the simplified method) and a discount rate of 1.49%. The value of these options, $198,236, will be recognized as expense over the one year vesting period.
On October 24, 2016, the Company issued ten-year options to purchase 5,000 shares of the Companys common stock at an exercise price of $0.27 per share to a director in connection with his appointment to the compensation committee. The options vest annually over a three year period on the anniversary of the grant, subject to continued service as the audit committee chairman. The Company valued the options at $1,117 using the Black-Scholes option pricing model using a volatility of 105.08 %, based upon the historical price of the Companys common stock, an estimated term of 6.5 years, using the Simplified Method, and a discount rate of 1.42%. The fair value will be recognized in expense over the vesting period of the options.
F-23
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Upon the adoption of the Companys 2017 Equity Incentive Plan on August 4, 2017 and as prescribed by the Plan, the Company issued ten-year options to purchase 690,000 shares of common stock to non-employee directors at an exercise price of $0.211 per share. The options vest on June 30, 2018, subject to continued service as a director. The options were valued with the Black-Scholes option pricing model using an expected volatility of 80.03% based upon the historical price of the companys stock, an expected term of 5.5 years using the simplified method, and a risk-free rate of 1.88%. The calculated fair value, $100,918 will be recorded as expense over the vesting period.
Non-Employee, Non-Director Options
A summary of options issued to non-employees, non-directors under the 2017 and 2007 Plans and changes during the years ended December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
|
20,000
|
|
|
$
|
1.18
|
|
|
|
2.75
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31. 2016
|
|
|
20,000
|
|
|
$
|
1.18
|
|
|
|
1.75
|
|
|
$
|
|
|
Exercisable at December 31, 2016
|
|
|
20,000
|
|
|
$
|
1.18
|
|
|
|
1.75
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2016
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
20,000
|
|
|
$
|
1.18
|
|
|
|
1.75
|
|
|
|
|
|
Granted
|
|
|
195,000
|
|
|
$
|
0.25
|
|
|
|
5.0
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
215,000
|
|
|
$
|
0.34
|
|
|
|
3.98
|
|
|
$
|
1,359
|
|
Exercisable at December 31, 2017
|
|
|
215,000
|
|
|
$
|
034
|
|
|
|
3.98
|
|
|
$
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year ended December 31, 2017
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
No options were issued to non-employees, non-directors during the year ended December 31, 2016.
During the year ended December 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 to the Companys corporate lawyer in exchange for legal services. The options were valued with the Black-Scholes option pricing model using an expected volatility of 99.06% based upon the historical price of the companys stock, an expected 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 is being amortized over a twelve month period.
On December 13, 2017, the Company granted five-year options to purchase 45,000 shares of common stock at an exercise price of $0.1798 per share to consultants. The options were valued with the Black-Scholes option pricing model using an expected volatility of 72.11% based upon the historical price of the companys stock, an expected term of 5 years, the term of the options and a risk-free rate of 2.125%. The calculated fair value, $4,847 was recorded as expense during the year ended December 31, 2017.
F-24
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Warrants Issued for Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
|
|
Balance at December 31, 2015
|
|
|
350,000
|
|
|
$
|
0.63
|
|
|
|
1.7
|
|
Granted
|
|
|
250,000
|
|
|
$
|
0.37
|
|
|
|
5.0
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
600,000
|
|
|
$
|
0.52
|
|
|
|
2.3
|
|
Exercisable at December 31, 2016
|
|
|
600,000
|
|
|
$
|
052
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of warrants granted during the year ended December 31, 2016
|
|
|
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
600,000
|
|
|
$
|
0.52
|
|
|
|
2.3
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
(350,000
|
)
|
|
$
|
0.63
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
250,000
|
|
|
$
|
0.37
|
|
|
|
3.5
|
|
Exercisable at December 31, 2017
|
|
|
250,000
|
|
|
$
|
0.37
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of warrants granted during the year ended December 31, 2017
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
In July 2016, the Company issued five-year warrants to purchase 250,000 shares of common stock at an exercise price of $0.37 per share as part of a settlement. The warrants were valued using the Black-Scholes option pricing model using a volatility of 104.54% based upon the historical price of the companys stock, a term of five years, the term of the warrants and a risk-free rate of 1.01%, resulting in a fair value of $70,631 which was included in loss on settlement for the year ended December 31, 2016.
The Company did not issue any warrants as settlement during the year ended December 31, 2017.
F-25
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Warrants issued for cash or services
A summary of warrants issued for cash or services and changes during the years ended December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
|
|
Balance at December 31, 2015
|
|
|
10,342,304
|
|
|
$
|
1.73
|
|
|
|
1.68
|
|
Granted
|
|
|
4,791,260
|
|
|
$
|
1.93
|
|
|
|
2.5
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
15,133,564
|
|
|
$
|
1.77
|
|
|
|
1.27
|
|
Exercisable at December 31, 2016
|
|
|
15,066,898
|
|
|
$
|
1.78
|
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of warrants granted during the year ended December 31, 2016
|
|
|
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
15,133,564
|
|
|
$
|
1.73
|
|
|
|
1.68
|
|
Granted
|
|
|
6,888,170
|
|
|
$
|
2.00
|
|
|
|
2.0
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
(7,980,392
|
)
|
|
$
|
1.96
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
14,041,342
|
|
|
$
|
1.78
|
|
|
|
1.33
|
|
Exercisable at December 31, 2017
|
|
|
13,829,034
|
|
|
$
|
1.78
|
|
|
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of warrants granted during the year ended December 31, 2016
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
During the year ended December 31, 2016, the Company issued two-year warrants to purchase 795,850 shares of common stock at an exercise price of $2.00 per share in connection with private placements with three accredited investors including warrants to purchase 214,286 shares of common stock to a director and his wife.
During the year ended December 31, 2016, the Company issued two-year warrants to purchase 3,795,409 shares of common stock at an exercise price at $2.00 per share in connection with advances from its president and principal shareholder pursuant to a secured convertible line of credit agreement.
In January 2016, the Company issued five-year warrants to purchase 150,000 shares of common stock at an exercise price of $0.39 per share in exchange for legal services. The warrants were valued with the Black-Scholes option pricing model using a volatility of 103.14% based upon the historical price of the companys stock, a term of five years, the term of the warrants and a risk free rate of 1.49%. The calculated fair value, $44,477 was recorded as legal expense for the year ended December 31, 2016.
In December 2016, the Company issued five year warrants to purchase 50,000 shares of common stock at an exercise price of $0.22 per share to four consultants. The warrants vest 25% immediately, with the remainder vesting annually over a three year period, subject to continued employment. The warrants were valued with the Black-Scholes option pricing model using a volatility of 99.29% 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 1.90%. The calculated fair value, $8,200 will be recorded as expense over the vesting period.
F-26
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
During the year ended December 31, 2017, the Company issued two-year warrants to purchase 6,491,344 shares of common stock at an exercise price at $2.00 per share in connection with private placements with four accredited investors, including the issuance of two-year warrants to purchase 2,284,093 shares of common stock to its president, chairman and principal shareholder.
In addition, during the year ended December 31, 2017, the Company issued two-year warrants to purchase 396,926 shares of common stock at an exercise price of $2.00 per share in connection with advances from its president, chairman and principal shareholder pursuant to a secured convertible line of credit agreement.
8.
INCOME TAXES
Due to the net losses incurred, there was no income tax provision for the years ended December 31, 2017 and 2016. Deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
10,852,456
|
|
|
$
|
14,625,674
|
|
Allowance for bad debt
|
|
|
55,224
|
|
|
|
60,567
|
|
Stock-based compensation
|
|
|
1,802,249
|
|
|
|
2,223,337
|
|
Depreciation
|
|
|
(9,903
|
)
|
|
|
19,373
|
|
Gross deferred tax asset
|
|
|
12,700,026
|
|
|
|
16,928,951
|
|
Less: deferred tax asset valuation allowance
|
|
|
(12,700,026
|
)
|
|
|
(16,928,951
|
)
|
Total deferred tax asset
|
|
|
|
|
|
|
|
|
Less: Deferred tax liability depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
|
|
|
$
|
|
|
The Company had available at December 31, 2017, net operating loss carryforwards for federal and state tax purposes of approximately $42,810,000 that could be applied against taxable income in subsequent years through December 31, 2036. The amount of net operating loss carryforward that can offset future taxable income may be limited in accordance with IRC Section 382 following certain ownership changes.
Based on the weight of available evidence, both positive and negative, a valuation allowance to fully provide for the net deferred tax assets has been recorded since it is more likely than not that the deferred tax assets will not be realized.
On December 22, 2017, the Tax Act was signed into law and significantly reformed the Internal Revenue Code of 1986, as amended. The Tax Act will significantly impact the Company by reducing the federal corporate tax rate from 35% to 21%, effective January 1, 2018. As a result of the new federal corporate tax rate, the Company reduced the value of its net deferred tax assets and the related valuation allowance by $4,228,925 during the year ended December 31, 2017. The valuation allowance increased by $1,629,443 during the year ended December 31, 2016.
Reconciliation of the differences between income tax benefit computed at the federal statutory tax rate of 34% and the provision for income tax benefit for the years ended December 31, 2017 and 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. statutory rate
|
|
$
|
(1,415,000
|
)
|
|
|
-34.00
|
%
|
|
$
|
(1,588,495
|
)
|
|
|
-34.00
|
%
|
State taxes, net of federal benefit
|
|
|
(150,648
|
)
|
|
|
-3.62
|
%
|
|
|
(168,053
|
)
|
|
|
-3.60
|
%
|
Other
|
|
|
(357,550
|
)
|
|
|
-8.59
|
%
|
|
|
127,105
|
|
|
|
2.72
|
%
|
Change in Federal tax rate
|
|
|
(2,305,727
|
)
|
|
|
-55.4
|
%
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
4,228,925
|
|
|
|
101.61
|
%
|
|
|
1,629,443
|
|
|
|
34.88
|
%
|
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
F-27
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
9.
RELATED PARTY TRANSACTIONS
In addition to the acting Chief Executive Officer (CEO) and the Chief Technology Officer (CTO) the following related parties are employed at GelTech:
|
|
|
|
·
|
The CEO
’
s sister
–
in-law is our Controller and her compensation is $1,269 per week,
|
|
|
|
|
·
|
The CEO
’
s mother is a receptionist and her compensation is $600 per week.
|
The Company has employment arrangements with its executive officers which are described in Note 10.
The Company has entered into a series of credit facilities with its president and principal stockholder as more fully described in Notes 6 and 7.
During the years ended December 31, 2017 and 2016, the Company issued common stock and warrants to its president, chairman and principal shareholder in exchange for cash as more fully described in Note 7.
On January 23, 2015, the Company approved an amendment to the Employment Agreement of Mr. Peter Cordani, the Company's Founder, acting Chief Executive Officer and Chief Technology Officer. In addition to his salary, Mr. Cordani received 5% of the first $2 million of revenue generated by the Company in 2017 and 2016.
In August 2017,
Company and Warren Mosler (the Investor) entered into a Stock Purchase Agreement whereby the Investor committed to purchase up to $1,800,000 shares of the Companys common stock until August 1, 2018, subject to the Companys president and chairman, continuing to serve as an officer of the Company. The Investor and our president and chairman were partners in a prior business. The Company will have the right to direct the investor to purchase up to $150,000 of shares in any calendar month (although the parties can mutually agree to increase it in any calendar month). The price paid for the shares will be the closing price of the Companys common stock on the trading day immediately before the Company delivers its notice to the investor. The investor will not be obligated to make purchases under the Agreement if the price is above $0.50 per share.
During the year ended December 31, 2017, the Company issued 7,954,480 shares of common stock and two-year warrants to purchase 3,977,241 shares of common stock at an exercise price of $2.00 per share to the Investor in exchange for $1,575,000 in connection with private placements.
10.
COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space, on a month to month basis located in Jupiter, Florida. Rent expense for the years ended December 31, 2017 and 2016 was $114,720 and $118,392, respectively.
On November 14, 2012, the Compensation Committee approved new employment agreements for the Companys then 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 Companys then 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. On September 30, 2016, the employment agreement for the Companys Chief Financial Officer expired.
F-28
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
In January 2015, GelTech approved an amendment to the Employment Agreement of our Chief Technology Officer. In addition to his base salary, he will receive 5% of the first $2 million of revenue generated by GelTech. The Company paid the Chief Technology Officer $52,797 and $62,056, respectively, in 2017 and 2016 under this provision. The amendment was effective as of January 1, 2015. Additionally, in May 2015, GelTech approved an amendment to the Chief Technology Officers Employment Agreement to extend the term of the Agreement an additional four years (now expiring October 1, 2020).
The Company was sued by a former employee on June 23, 2008, alleging breach of a consulting agreement and an employment agreement entered into in May and June 2007, respectively. In addition, the plaintiff sought to recover certain of his personal property, which was used or stored in the Companys offices and alleges the Company invaded his privacy by looking at his personal computer (which was used in the Companys business) in the Companys offices. On October 14, 2015, the Court issued an order on Defendant GelTechs Motion for Attorneys Fees and Costs granting GelTech attorney fees and costs in excess of the amount of its litigation accrual for the case. As such, the Company reversed the litigation accrual resulting in other income of $56,956 which was included in the Companys statement of operations for the nine months ended December 31, 2015. In November 2015, the Court issued a Final Judgement against the plaintiff in the amount of $510,499. The plaintiff filed appeals which were pending. In July 2016, the Company entered into a settlement agreement with the plaintiff whereby the Company agreed to pay the plaintiff $250,000 and issue the plaintiff five-year warrants to purchase 250,000 shares of common stock at an exercise price of $0.37 per share, in exchange for the dismissal of all claims against the Company. The warrants were valued using the Black-Scholes option pricing model using a volatility of 104.54% based upon the historical price of the companys stock, a term of five years, the term of the warrants and a risk-free rate of 1.01%, resulting in a fair value of $70,631. As such, the Company recorded a loss on settlement of $320,631 for the year ended December 31, 2016.
In June 2016, the Company entered into a settlement agreement with its employment practices insurance company related to the Companys suit against the insurance company for failure to cover post trial legal costs related to the suit described above in this Note 10. Under the settlement agreement, the insurance company agreed to pay the Company $300,000, which payment was received in July 2016. As such the Company recorded a gain on settlement of $300,000 for the year ended December 31, 2016.
On August 16, 2017, the Company entered into a new three-year Employment Agreement with the Companys chief financial officer. The Employment Agreement provides for a base salary of $150,000 per year and a car allowance of $600 per month. The Companys Compensation Committee will also have the discretion to award a discretionary bonus. In consideration for entering into the Employment Agreement, the Company granted 125,000 fully vested 10-year stock options exercisable at $0.1849 per share.
11.
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 December 31, 2017. As of December 31, 2017, the Company had no cash equivalent balances that were not insured.
At December 31, 2017, four customers accounted for 38.8%, 19.5%, 18.9% and 11.1% of accounts receivable.
For the year ended December 31, 2017, two customers accounted for 16.2% and 14.1% of sales.
During the year ended December 31, 2017, sales primarily resulted from three sources, sales of FireIce®, Soil
₂
O® and FireIce Shield® which made up 73.7%, 12.0% and 14.0%, respectively. Of the FireIce® sales, 66.3% related to the sale of FireIce® products and 27.3% related to sales of the FireIce Eductors, EMFIDS and extinguishers. Of the Soil
₂
O® sales, 14.6% related to traditional sales of Soil
₂
O® and 78.8% related to sales of Soil
₂
O® Dust Control, including 27.2% of our new Soil2O Soil Cap product. Of the FireIce Shield® sales, 39.9% consisted of sales of spray bottles, 18.5% were sales of canisters and refills and 32.5% related to sales of FireIce Shield CTP for cell towers.
One vendor accounted for 50.6% of the Companys approximately $612,000 in purchases of raw material and packaging during the year ended December 31, 2017.
F-29
GELTECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Approximately 24.3% of revenue was generated from customers outside the United States during the year ended December 31, 2017.
During the year ended December 31, 2017, our chairman and principal shareholder provided 100% of our debt financing.
12.
SUBSEQUENT EVENTS
Since January 1, 2018, the Company has issued 5,299,164 shares of common stock and two year warrants to purchase 2,612,083 shares of common stock at $2.00 per share in exchange for $759,000 in connection with private placements with three accredited investors, including the issuance of 2,071,478 shares and 1,035,714 warrants to its chairman and principal shareholder in exchange for $300,000.
In January 2018, the Company issued 16,767 shares of common stock to consultants in exchange for consulting services valued at $2,900, based upon the market price of our common shares.
On January 29, 2018, the Company granted ten-year options to purchase 150,000 shares of the Companys common stock to the Companys corporate lawyer in exchange for legal services. The options vest immediately and are exercisable at $0.14 per share. The Company valued the options at $15,572 using the Black-Scholes option pricing model using a volatility of 65.97%, based upon the historical price of the Companys common stock, an estimated term of 10 years, the term of the options, and a discount rate of 2.70%. The fair value will be recorded as prepaid expense and recognized ratably over the year ending December 31, 2018.
On January 29, 2018, the Company granted ten-year options to purchase 150,000 shares of the Companys common stock to a new sales executive. The options vest immediately and are exercisable at $0.14 per share. The Company valued the options at $11,918 using the Black-Scholes option pricing model using a volatility of 65.97%, based upon the historical price of the Companys common stock, an estimated term of 5 years, using the simplified method, and a discount rate of 2.49%. The fair value will be recorded as expense during the three months ending March 31, 2018.
F-30