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GELTECH SOLUTIONS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[September 29, 2014]

GELTECH SOLUTIONS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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



Overview GelTech Solutions, Inc., or GelTech, generates revenue primarily from marketing the following three products: (1) FireIce®, a water enhancing powder that can be utilized both as a fire suppressant in urban firefighting, including underground utility fires, and in wildland firefighting and as a medium-term fire retardant to protect wildlands, structures and firefighters; (2) Soil2O® "Dust Control", our application which is used for dust mitigation in the aggregate, road construction, mining, as well as, other industries that deal with daily dust control issues and (3) Emergency Manhole FireIce Delivery System, or EMFIDS, an innovative system designed to deliver FireIce® into a manhole in the event of a fire. Other products currently being marketed include (1) FireIce® Home Defense Unit, a system for applying FireIce® to structures to protect them from wildfires; and (2) Soil2O®, a product which reduces the use of water and is primarily marketed to golf courses, commercial landscapers and the agriculture market. During the fourth quarter of fiscal 2014, the Company developed and began marketing two new products, (1) GT-W14, an industrial absorbent powder used to contain and clean up industrial liquid spills; and (2) Soil2O® Soil Cap, a dust suppressant technology designed to stabilize stockpile dust and reduce soil erosion. We have yet to generate significant revenue from these two products and are currently evaluating the potential commercialization of these products. Our financial statements have been prepared on a going concern basis, and we need to generate sufficient material revenues to support the ongoing business of GelTech.

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


Revenue Recognition Under ASC 605-15-25 we recognize sales of our products when each of the following has occurred: - The price of the product sold is fixed or determinable and evidence of an agreement is present.

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

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

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

Stock-Based Compensation We have granted stock options to our officers and directors at exercise prices equal to or greater than the fair value of the shares at the date of grant.

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

15 -------------------------------------------------------------------------------- We estimate the fair value of each stock option and warrant at the grant date using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 7 to the Consolidated Financial Statements contained herein. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our management's opinion, the existing models may not necessarily provide a reliable single measure of the fair value of such stock options.

We use the trading price of our common stock, or alternatively, the price of recent private placement sales of our common stock in making our estimates.

Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein.

For the Fiscal Year Ended June 30, 2014 Compared to the Fiscal Year Ended June 30, 2013.

Revenue For the fiscal year ended June 30, 2014, which we refer to as "Fiscal 2014", we had revenue of $814,587 as compared to revenue of $526,010 for the fiscal year ended June 30, 2013, which we refer to as "Fiscal 2013". Revenue during Fiscal 2014 consisted of sales of EMFIDS, FireIce® and Soil2O® amounting to $425,000, $222,870 and $156,717, respectively. In addition, the Company recognized revenue of $10,000 from paid for research and development in Fiscal 2014. Revenue in Fiscal 2013 consisted of sales of FireIce® and Soil2O® amounting to approximately $204,185 and $228,825, respectively. In addition, the Company recognized revenue of $93,000 from paid for research and development in Fiscal 2013.We anticipate that our revenues from both FireIce® and Soil2O® will increase in fiscal 2015 due to continued sales of FireIce® and the EMFIDS system to the utility industry and due to increased sales of Soil2O® Dust Control in the southwestern United States.

Cost of Goods Sold For Fiscal 2014, our costs of goods sold were $393,102 as compared to $180,427 for Fiscal 2013. The change is consistent with the respective revenue from product sales. We expect that our cost of sales will follow the same trend as our revenues in fiscal 2015.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $6,601,353 for Fiscal 2014 as compared to $6,103,435 for Fiscal 2013. This increase is reflective of increases in the following major expense categories: Salaries and employee benefits - Salaries and employee benefits increased $196,370 as a result of the hiring in July 2013 of a Director of Sales and Operations and in August 2013 of a Director of Utility Markets with combined salaries of $230,000. This increase was partially offset by a reduction in the use of contract staff in our Brooklyn facility of approximately $40,000. It is anticipated that these costs will remain constant or slightly decline in fiscal 2015 as we maintain current staffing levels until significant revenues are generated.

Professional fees - Professional fees increased $217,548 related to an increase in legal expenses of $204,000 related to lawsuits by a former employee and a former distributor, and an increase in patent attorney fees of $18,000 related to the new patent filings.

Facilities expense - Facilities expense increased $56,473 related to an increase a full year's rent and facility related expenses in our Brooklyn facility in Fiscal 2014. We terminated our lease in Brooklyn in August 2014.

16 -------------------------------------------------------------------------------- Non-cash compensation - Non-cash compensation expense related to director, executive and employee stock options increased $185,299 in Fiscal 2014 primarily related additional option, SARs and RSU grants to employees and directors. We would anticipate that these expenses would be lower in future years as a result of the forfeiture of outstanding options and SARs upon the resignation by the Company's former President and the clawback of options and RSUs upon the termination of the Company's former Executive Chairman and a reduction in the number of options granted in Fiscal 2014.

These expense increases were partially offset by a decrease in the following expense category: Sales and marketing - Sales and Marketing costs decreased $166,932 in Fiscal 2014 resulting from a reduction in advertising expense, and a reduction in search engine optimization costs. It is anticipated that these costs will remain lower in fiscal 2015.

Research and Development Costs Research and development costs for Fiscal 2014 were $274,005¸ as compared to $179,158 during the Fiscal 2013. The increase in the Fiscal 2014 amount related to continued research and the second generation EMFIDS system, other FireIce® applications in the utility and other industries and other potential products.

The Company received $10,000 for paid for research in Fiscal 2014 to offset these costs. We expect that these costs will continue at a relatively even level as we continue to explore new products and new applications of our existing products.

Other Income (Expense) Net other expense for Fiscal 2014 amounted $658,072 as compared to net other income for Fiscal 2013 of $715,263. In Fiscal 2014, net other expense primarily consisted of interest expense of $462,760 and a loss on conversion of interest of $201,175. In Fiscal 2013, net other income was primarily impacted by a reduction of the accrual for losses from litigation related to a lawsuit by a former employee. The reduction was recorded to reflect insurance payments made to the plaintiff in settlement of the invasion of privacy and fraudulent misrepresentation awards. In February 2013, the Company received a favorable ruling from the trial judge vacating the civil theft award of $600,000 and reducing the breach of consulting agreement award from $841,000 to $500,000. As a result, the Company has recognized other income of $1,141,000 for Fiscal 2013.

This other income was partially offset by interest expense of $473,605, a loss on extinguishment of debt of $21,311, other expense related to losses on sales of two vehicles and a loss on settlement of a lawsuit with a former distributor of $19,114 and the cost of repricing warrants in order to induce their exercise of $70,491.

Net Loss For Fiscal 2014 our net loss was $7,111,945 as compared to $5,221,747 for Fiscal 2013. The increase in the net loss was the result of the higher total operating expenses and other income as described above which was partially offset by higher gross profit. Net loss per common share was $0.20 for Fiscal 2014 as compared to a net loss per common share of $0.18 for Fiscal 2013. The weighted average number of shares outstanding was 36,410,142 and 29,479,048 for the fiscal years ended June 30, 2014 and 2013, respectively.

Liquidity and Capital Resources A summary of our cash flows is as follows: Fiscal Year Ended June 30, 2014 2013 Net cash used in operating activities $ 5,132,019 $ 4,195,655 Net cash used in investing activities 72,851 28,496 Net cash provided by financing activities 5,180,861 4,230,232 Net increase (decrease) in cash and cash equivalents $ (24,009 ) $ 6,081 17 -------------------------------------------------------------------------------- Net Cash Used in Operating Activities For Fiscal 2014, we used net cash of $5,132,019 in operating activities as compared to $4,195,655 for Fiscal 2013. The increase in cash used from operations was primarily the result of the difference between the prior year reversal of the accrual for losses from litigation due to reduction in the amount of the award and a payment by our insurance provider resulting in a decrease in accrued liabilities of $963,325 as compared to Fiscal 2014 which had no such reversal or payment. Other major factors that impacted the cash used in operations were the amortization of discounts on convertible notes of $223,025, the amortization of the remaining balance of $102,056 of the accrual related to the Termination and Release Agreement with our former President, and the investment in inventory of $266,574.

Cash used from operations in Fiscal 2013 was primarily the result of the difference between the prior year accrual for losses from litigation resulting in an increase in accrued liabilities of $1,625,067 as compared to the current year reversal of those accruals due to a $200,000 payment by the insurance company and the reversal of $941,000 of the accrual as result of rulings by the court. Other major factors that impacted the cash used in operations were the amortization of discounts on convertible notes of $385,650, and the remaining balance of $102,056 of the accrual related to the Termination and Release Agreement with our former President.

Net Cash Used in Investing Activities Cash flows used in investing activities for Fiscal 2014 amounted to $72,851 which consisted of the purchase of a vehicle, mobile mixing equipment and general office equipment.

In Fiscal 2013, cash used in investing activities amounted to $28,496 resulting from the purchase of a new support vehicle for our Brooklyn, New York facility plus minimal purchases of computer equipment, net of the proceeds from the sale of a support vehicle maintained at our California facility.

Net Cash Provided By Financing Activities Cash flows from financing activities for Fiscal 2014 were $5,180,861 as compared to $4,230,232 for Fiscal 2013. During Fiscal 2014, GelTech received $570,000 from the sale of stock to Lincoln Park Capital Fund, LLC, or Lincoln Park, $2,131,527 from the sale of common stock to accredited investors in private placement transactions, $1,705,000 from the sale of common stock and warrants to accredited investors in private placement transactions, $25,000 from the exercise of warrants for cash and $18,200 from the exercise of options for cash and $1,000,000 from convertible notes with related parties. These receipts were used for working capital, capital expenditures for equipment and vehicles to repay third party convertible notes of $115,822, to repay related party convertible notes of $85,880 and to repay $67,164 of insurance financing.

During Fiscal 2013, GelTech received $810,003 from the sale of stock to Lincoln Park Capital Fund, LLC, or Lincoln Park, $1,658,000 from the sale of common stock to accredited investors in private placement transactions, $300,000 from the sale of common stock and warrants to accredited investors in private placement transactions, $910,000 from the exercise of warrants and $6,534 from the exercise of options, $175,000 from convertible notes issued to third parties and $500,000 from convertible notes issued to related parties. These receipts were used for working capital, capital expenditures for equipment and vehicles, to repay related party advances of $84,380 and to repay $44,925 of insurance financing.

Historical Financings As previously disclosed, in January 2012, the Company signed a $5 million Purchase Agreement with Lincoln Park and sold 2,913,997 shares of common stock in exchange for $1,990,003 under the Purchase Agreement. This agreement expired in July 2014.

Since July 1, 2012, GelTech has raised $2,208,000 from the sale of common stock in connection with private placements with 15 accredited investors including Michael Reger, our principal shareholder and Chief Operating Officer, Michael Cordani, our former Chief Executive Officer and Chairman of the Board and Peter Cordani, our Chief Executive Officer. In consideration for their investments, GelTech issued 4,185,323 shares of common stock at prices ranging from $0.35 to $1.08 per share and 341,912 warrants with exercise prices ranging from $1.25 to $1.30 per share.

18 -------------------------------------------------------------------------------- In September and October 2012, GelTech received $910,000 upon the exercise of 1,820,000 warrants (including 1,200,000 warrants held by Mr. Reger) related to an offer by us to reduce the exercise prices of the warrants to $0.50 per share.

Additionally, in September 2012, Mr. Reger converted his $322,996 convertible original issue discount note into 665,992 shares of common stock.

In August 2012, the Company received $175,000 in exchange for six month convertible original issue discount notes in the amount of $179,375 from two accredited investors. The notes are convertible into common stock at $0.50 per share. The notes bear an annual interest rate of 5% and are convertible into GelTech's common stock at $0.50 per share. In February 2013, one note holder converted a $102,500 note and was issued 205,000 shares of GelTech's common stock.

In August 2013 and September 2013, GelTech repaid four convertible original issue discount notes with an aggregate face value of $292,740 in exchange for the payment of $202,923 and the issuance of 243,543 shares of common stock.

These transactions included the payment of $86,049 to our former Executive Chairman in satisfaction of a convertible original issue discount note in the amount of $86,100.

From December 2012 through February 2013, we received $500,000 of loans from Michael Reger. In connection with these loans and prior loans, all of Mr.

Reger's outstanding loans were consolidated into a $1,997,483 note convertible at $0.35 per share due December 31, 2016, and all of his then outstanding notes were cancelled. Additionally, in July 2013, in consideration for a $1,000,000 loan, GelTech issued Mr. Reger a $1,000,000 five-year note convertible at $1.00 per share and 500,000 five-year warrants exercisable at $1.30. Each of the notes described in this paragraph bear an annual interest rate of 7.5%.

Since July 1, 2013, GelTech has raised $4,611,527 from the sale of common stock in connection with private placements with twenty one accredited investors including Michael Reger, and Neil Reger, a director. In consideration for their investments, GelTech issued 7,331,548 shares of common stock at prices ranging from $0.55 to $1.32 per share and 1,938,720 warrants with exercise prices ranging from $1.00 to $2.00 per share.

Liquidity and Capital Resource Considerations As of September 27, 2014, we had approximately $96,000 in available cash. Our operations continue to rely on Mr. Reger's investments. If Mr. Reger were to cease providing us with working capital or we are unable to generate material revenue, we will have to scale back our operations or cease doing business. See the Risk Factor on page 20. Although we do not anticipate the need to purchase any additional material capital assets in order to carry out our business, it may be necessary for us to purchase additional mobile mixing trucks and support vehicles in the future, depending on demand. Additionally, we may be required to pay a substantial award to David Hopkins, a former employee and consultant, as a result of the recent trial. See the Risk Factor on page 23 and Legal Proceedings on page 13. If we do not have the money to secure an appeal bond, or if we are unsuccessful, we will be required to pay the amount of the judgment plus statutory interest.

Ultimately, if GelTech is unable to generate substantial cash flows from sales of its products or complete financings, it may not be able to remain operational.

Related Party Transactions For information on related party transactions and their financial impact, see Note 7 and Note 9 to the consolidated financial statements contained herein.

New Accounting Pronouncements See Note 1 to our consolidated financial statements included herein for discussion of recent accounting pronouncements contained herein.

Cautionary Note Regarding Forward-Looking Statements This report includes forward-looking statements including statements regarding expected results from the litigation described herein, our expectations of future revenues and cost of sales, anticipated capital expenditures, expectations regarding our working capital, and our liquidity.

19 -------------------------------------------------------------------------------- All statements other than statements of historical facts contained herein, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "could," "target," "potential," "is likely," "will," "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors that follow. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors and our other filings with the SEC.

Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding whether to invest in GelTech. If any of the events discussed in the risk factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.

Risk Factors Relating to Our Company Our ability to continue as a going concern is in doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

We incurred net losses of approximately $7.1 million in fiscal 2014 and $5.2 million in fiscal 2013. We anticipate these losses will continue for the foreseeable future. We have not reached a profitable level of operations, which raises substantial doubt about our ability to continue as a going concern.

Since January 2014, we have received $2,025,000 from our principal shareholder in consideration for common stock and warrants. These funds have enabled us to sustain our operations. Our continued existence is dependent upon our achieving sufficient sales levels of our products including FireIce®, EMFIDS and Soil2O® "Dust Control" and obtaining adequate financing.

If we are unable to sell enough of our products, and our principal shareholder discontinues funding our operations, we will need to secure another source of funding in order to satisfy our working capital needs. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences would require us to scale back our operations which would have an adverse effect on your investment.

If we do not raise additional debt or equity capital, we may not be able to remain operational.

We owe approximately $3.0 million in long-term convertible debt held by our principal shareholder, which is due in December 2016. Because we are not currently generating positive cash flow, we need to sell debt or equity securities. Because of the lack of available credit for small-cap companies, difficulties for small-cap companies in raising money and our stock price and trading volume, we may be hampered in our ability to raise the necessary working capital. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we do not raise the necessary working capital and/or increase revenue, we will not be able to remain operational.

Because we have not generated material sales of FireIce® since it was launched over five years ago, there can be no assurances it will be accepted by potential customers.

We launched FireIce® in fiscal 2009 and have not yet achieved a consistent sustainable revenue stream. There are multiple factors, which may prevent us from successfully commercializing FireIce®, our fire suppression gel: ? We need to convince potential customers, including federal and state governments, that FireIce® is superior to and less costly than competitive products.

? We may need additional capital in order to demonstrate to governments that we can rapidly fulfill orders.

20 -------------------------------------------------------------------------------- ? In seeking to sell FireIce®, we face substantial competition and must deal with the natural reluctance of people to change.

? Internationally, we are required to comply with local laws which may require certification of FireIce®, a local partner, local licenses and other matters which are barriers to our selling FireIce®.

Because we have yet to generate material revenue on which to evaluate our potential for future success and to determine if we will be able to execute our business plan, it is difficult to evaluate our future prospects and the risk of success or failure of our business.

While we have conducted development and sales and marketing activities, we have not generated material revenue to date. In fiscal 2014, we generated revenues of approximately $815,000.

You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company. These risks include: ? our ability to effectively and efficiently market and distribute our products, ? our ability to obtain market acceptance of our current products and future products that may be developed by us, and ? our ability to sell our products at competitive prices which exceed our per unit costs.

We may not be able to address these risks and difficulties, which could materially and adversely affect our revenue, operating results and our ability to continue to operate our business.

Although we are encouraged by the potential of EMFIDS and its role as a tool for municipal utility companies to provide a safer working environment for their workers, we cannot assure you that we will successfully commercialize it or, if we do, it will generate sufficient revenues and gross profit to support our operations.

Our senior management, including our Chief Executive Officer, has worked over a long period of time with management at Con Ed in New York City. In Fiscal 2014, we sold $488,758 of EMFIDS and FireIce® to Con Ed. Since March 2014, these EMFIDS have been used by Con Ed in the field. However, we have not received any re-orders from Con Ed or any new orders from other utility companies. We cannot assure you we will generate sufficient revenue and gross profits from the sale of EMFIDS and FireIce® to utility companies.

Because we have not yet generated material revenue to date, it may never result in the generation of material revenue or profitability.

Since our incorporation in 2006, our goal has been to generate revenue from the sale and development of our products including FireIce® and Soil?O®. Our marketing of these products is subject to a number of risks, including: ? In seeking to sell FireIce® to government agencies, we will encounter typical risks such as a reluctance to change, the impact of the recession on local government budgets and competition; ? We have not proven that we have the ability to market and sell our products; ? Although we have a pending U.S. patent application for Soil?O® Topical, we have no patent protection for the granular form and there are many products on the market which are advertised as performing similar functions to Soil2O® Granular; ? If the pending patent application is not granted for Soil?O® Topical , we will face direct competition, which can erode any market share we may achieve and create pricing pressure; and We cannot assure you that our marketing efforts will result in material sales or that if it does result in material sales, that such sales will necessarily translate into profitability.

21 -------------------------------------------------------------------------------- Our growth strategy reflected in our business plan may not be achievable or may not result in profitability.

We may not be able to implement our growth strategy reflected in our business plan rapidly enough for us to achieve profitability. Our growth strategy is dependent on a number of factors, including market acceptance of our fire suppression gel and our moisture preservation product. We cannot assure you that our potential markets will purchase our products or that those parties will purchase our products at the cost and on the terms assumed in our business plan.

Among other things, implementation of our growth strategy would be adversely affected if: ? we are not able to attract sufficient customers to the products we offer in light of the price and other terms required in order for us to attain the level of profitability that will enable us to continue to pursue our growth strategy; ? adequate penetration of new markets at reasonable cost becomes impossible limiting the future demand for our products below the level assumed by our business plan; ? we were forced to significantly adapt our business plan to meet changes in our markets; and ? for any reason, we are not able to attract, hire, retain and motivate qualified personnel.

If we cannot manage our growth effectively, we may not become profitable.

Businesses, which grow rapidly often, have difficulty managing their growth. If we grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

Among other things, implementation of our growth strategy would be adversely affected if we were not able to attract sufficient customers to the products we offer or plan to offer in light of the price and other terms required in order for us to attain the necessary profitability.

We may not be able to maintain and expand our business if we are not able to retain, hire and integrate key management and operating personnel.

Our success depends in large part on the continued services and efforts of key management personnel. Competition for such employees is intense and the process of locating key personnel with the combination of skills and attributes required to execute our business strategies may be lengthy. The loss of key personnel could have a material adverse impact on our ability to execute our business objectives. We do not have any life insurance on the lives of any of our executive officers.

We could face potential difficulties in locating sufficient manufacturing sources if our products gain widespread commercial acceptance.

We have used third parties to manufacture our products on a limited basis. If we are unable to produce our products in sufficient quantities, on a timely basis and at an acceptable cost, we may lose customers and our business could be harmed. Our ability to expand production could also be hindered by the availability of materials used to manufacture our products or the availability of qualified personnel. These difficulties could result in reduced quality of our products or reduced sales, which could damage our industry reputation and hurt our profitability.

Although we began marketing of Soil2O® in 2007, we have not achieved material sales.

We launched Soil2O® in 2007 and have not yet achieved material sales. In Fiscal 2014, we generated revenue of approximately $156,716 from the sale of Soil2O®.

We have to expand our sales and distribution efforts. Additionally, we must recruit distributors for agricultural usage of Soil2O®. If we cannot expand our sales and distribution network, our future sales of Soil2O® will be limited since our sales efforts have been aimed primarily at the agriculture industry in the Southwestern U.S., including California.

22 -------------------------------------------------------------------------------- If we lose a substantial sum in our pending lawsuit, the judgment creditor will be in a position to seize our assets and cause us to cease operations.

In June 2012, a jury awarded Mr. David Hopkins, a former employee, a total of $1,246,000 for invasion of privacy, trespassing, fraudulent misrepresentation, civil theft and breach of a consulting agreement. GelTech's insurance company has paid Mr. Hopkins $200,000 covering the invasion of privacy and fraudulent misrepresentation claims. GelTech filed post-trial motions and the damages were reduced to $500,000. Subsequently, a new trial on damages was granted. See "Item 3. Legal Proceedings." In the event that Mr. Hopkins is awarded a substantial award in the new trial, GelTech may not have the money to secure an appeal bond. In the event that we are unable to post bond, or if an appeal is unsuccessful, we will be required to pay the amount of the judgment plus statutory interest. If we fail to do so, the plaintiff, as a judgment creditor, can take action to seize our assets and we may not be able to remain in business.

Because we do not have a patent on Soil2O® or its uses, if our competitors are able to reverse engineer our product, our ability to compete effectively may be harmed.

Currently, there are numerous companies that advertise moisture preservation products that appear similar to Soil2O®. Because we lack any patent protection on Soil2O® itself and have only a patent pending for the Soil?O® Topical, there is a substantial risk that one of these competitors could determine how to make the granular form of Soil2O® and market it under their own brand name; thereby adversely affecting our ability to compete successfully.

A change in environmental regulations may adversely affect the use of FireIce® and Soil2O® and may hinder our ability to generate revenue from this line of business.

While we believe that FireIce® and Soil2O® (including Soil2O® "Dust Control") are environmentally friendly, we may become subject to changing environmental regulations that could adversely affect the use of it. If we do become subject to environmental regulations, the use of FireIce® and Soil2O® may be limited as compared to other technologies which may be less expensive or more efficient.

FireIce® and Soil2O® face substantial competition in the fire suppression and moisture preservation markets, respectively, and there is no guarantee potential customers will select our products over those of our competitors.

We face multiple competitors in the fire suppression, fire retardation and moisture preservation markets. In the fire suppression and retardation fields, we face substantial competition including with one company that is the principal vendor to the Forest Service. In the moisture preservation areas, we face competition from numerous independently owned businesses that have competing and in some case very similar products. In addition, companies may be developing or may, in the future, engage in the development of products and/or technologies competitive with our products. We expect that technological developments will occur and that competition is likely to intensify as new technologies are employed.

Many of our competitors are capable of developing or have developed and are capable of continuing to develop products based on similar or other technology, which are or may be competitive with our products and technologies. We believe several of our competitors in the fire-fighting business have substantially greater financial and other resources, research and development capabilities and more experience in obtaining regulatory approvals, manufacturing and marketing than we do. Because our competitors in the moisture preservation markets are private companies, we are unable to determine the amount of financial and other resources they have available. However, some of these companies appear to have had much greater marketing experience than we have. Potential customers may prefer the pricing terms or service offered by competitors. Furthermore, competitors may have an advantage as a result of having existing business relationships with potential customers.

Because we are seeking to enter into contracts with federal and state governments, we will be subject to a number of risks, which could adversely affect our business.

We are seeking to sell our products, including FireIce®, to federal and state governments. In selling to the government, we will be subject to a number of significant risks including: ? Increasing state, local and federal budget deficits which can delay and impede our receipt of orders; 23 -------------------------------------------------------------------------------- ? We may not be successful in selling our products to the government, although we will incur material costs as part of our sales efforts; ? Government contracts often contain unfavorable termination provisions; and ? We may be subject to audit and modification of agreements by the government in its sole discretion, which subjects us to additional risks.

The government can unilaterally: ? suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations; ? terminate our existing contracts; ? reduce the scope and value of our existing contracts; ? audit and object to our contract-related costs and fees; and ? change certain terms and conditions in our contracts.

Further, as part of any audit or review, the government may review the adequacy of, and our compliance with, our internal control systems and policies, including those relating to our purchasing, property, compensation and/or management information systems. In addition, if an audit or review uncovers any improper or illegal activity, we may be subject to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the government or any of its agencies. We could also suffer serious harm to our reputation if allegations of impropriety were made against us.

Even if we are able to successfully enter into contracts to supply federal and state governments with our products, there can be no assurances these contracts will result in substantial revenues or be renewed.

The process of obtaining government contracts is lengthy and uncertain, and we must compete for each contract. Similar to large corporations, government employees resist change and taking risks. This can make it more difficult to obtain government contracts. Moreover, the award of one government contract does not necessarily secure the award of future contracts. Governments are subject to budgetary restrictions, which may limit their ability to buy our products. These budgetary restrictions have been magnified by the current recession, which has resulted in material decreases in tax receipts. Even if we are able to enter into a contract with a government, there is no guarantee it will result in substantial revenues or the contract(s) will be renewed.

If we face intellectual property litigation filed by third parties, we will be subject to a number of possible adverse consequences including being required to finance very expensive litigation.

Third parties may assert patent and other intellectual property infringement litigation against us claiming our products infringe on its patents or otherwise violates its intellectual property rights. Any lawsuit, whether or not successful, could: ? divert management's attention; ? result in prohibitive costs; or ? require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all.

24 -------------------------------------------------------------------------------- As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, agreements with third parties may require us to indemnify them for intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not infringed any intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management time.

If we are unable to protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.

Our intellectual property including our patents is our key asset. We currently expect to commercialize five U.S. patents and eight patents pending. We regard the protection of our intellectual property as critical to our success. In addition to pursuing patents, we have taken steps to protect our intellectual property by entering into confidentiality agreements with our employees, licensees, independent contractors and other advisors. These agreements may not be enforceable or may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of an unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our intellectual property rights, and failure to obtain or maintain protection of our intellectual property rights could adversely affect our business and financial results.

Risks Related to Our Common Stock Because the market for our common stock is limited, persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid by them.

Our common stock trades on the OTC Bulletin Board, which we refer to as the "Bulletin Board", which is not a liquid market. With some limited exceptions, there has not been an active public market for our common stock. We cannot assure you that an active public market for our common stock will develop or be sustained in the future. If an active market for our common stock does not develop or is not sustained, the price may decline.

Because we are subject to the "penny stock" rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.

The SEC has adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a "penny stock" according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.

These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.

Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to re-sell shares of penny stocks like GelTech. This may have had and may continue to have a depressive effect upon the common stock price.

Due to factors beyond our control, our stock price may be volatile.

Any of the following factors could affect the market price of our common stock: ? short selling or manipulative conduct by market makers and others, ? our failure to generate recurring sustainable revenue, ? our failure to achieve and maintain profitability, ? the sale of a large amount of common stock by our shareholders including those who invested prior to commencement of trading, 25 -------------------------------------------------------------------------------- ? actual or anticipated variations in our quarterly results of operations, ? announcements by us or our competitors of significant contracts, new products, acquisitions, commercial relationships, joint ventures or capital commitments, ? disclosure of any adverse results in litigation, ? the loss of major customers or product or component suppliers, ? the loss of significant business relationships, ? our failure to meet financial analysts' performance expectations, ? changes in earnings estimates and recommendations by financial analysts, or ? changes in market valuations of similar companies.

In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management's time and attention, which would otherwise be used to benefit our business.

Because the majority of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.

As of the date of this report, we had outstanding approximately 42.3 million shares of common stock, of which our directors and executive officers own approximately 19 million shares, which are subject to the limitations of Rule 144 under the Securities Act of 1933, which we refer to as the "Act". Substantially all of the remaining outstanding shares are freely tradable.

In general, Rule 144 provides that any non-affiliate of GelTech, who has held restricted common stock for at least six-months, is entitled to sell their restricted stock freely, provided that GelTech stays current in its SEC filings.

After one year, a non-affiliate may sell without any restrictions.

An affiliate of GelTech may sell after six months with the following restrictions: (i) GelTech is current in its filings, (ii) certain manner of sale provisions, (iii) filing of Form 144, and (iv) volume limitations limiting the sale of shares within any three-month period to a number of shares that does not exceed 1% of the total number of outstanding shares. A person who has ceased to be an affiliate at least three months immediately preceding the sale and who has owned such shares of common stock for at least one year is entitled to sell the shares under Rule 144 without regard to any of the limitations described above.

An investment in GelTech may be diluted in the future as a result of the issuance of additional securities or the exercise of options or warrants.

In order to raise additional capital to fund our strategic plan, we may issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to any person who purchases our common stock. Because we have a negative net tangible book value, purchasers will suffer substantial dilution. We cannot assure you that we will be successful in raising funds from the sale of common stock or other equity securities.

In the future, we may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price.

Our Board may issue, without a vote of our shareholders, one or more series of preferred stock that have more than one vote per share. This could permit our board of directors to issue preferred stock to investors who support us and our management and permit our management to retain control of our business.

Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock.

26 -------------------------------------------------------------------------------- If our common stock becomes subject to a "chill" or a "freeze" imposed by the Depository Trust Company, or DTC, your ability to sell your shares may be limited.

The DTC acts as a depository or nominee for street name shares or stock that investors deposit with their brokers. Although through DTC our common stock is eligible for electronic settlement rather than delivery of paper certificates, DTC in the last several years has imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose common stock trades on the Bulletin Board. Depending on the type of restriction, it can prevent shareholders from buying or selling our shares and prevent us from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our common stock, if it were your ability to sell your shares would be limited.

Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.

We have not and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time.

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