10-Q 1 beamz10q093013.htm BEAMZ INTERACTIVE beamz10q093013.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
 
 EXCHANGE ACT OF 1934

For the quarterly period ended:  September 30, 2013

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission file number
000-54662

Beamz Interactive, Inc.
(Name of registrant as specified in its charter)

Delaware
94-3399024
(State or other jurisdiction of incorporation)
(IRS employer identification no.)
 
15354 N. 83rd Way, Suite 101
 Scottsdale, Arizona 85260
 
(480) 424-2053
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
Shares issued and outstanding of the registrant’s $.001 par value common stock as of November 8, 2013: 24,971,790.
 

 
 

 
 
PART I – FINANCIAL INFORMATION
 
   
Item 1:  Financial Statements
 
   
       Condensed Balance Sheets as of September 30, 2013 (unaudited) and June 30, 2013
3
       
 
       Unaudited Condensed Statements of Operations for the three months ended September 30, 2013 and 2012
4
      
 
       Unaudited Condensed Statements of Cash Flows for the three months ended September 30, 2013 and 2012
5
       
 
Notes to Unaudited Condensed Financial Statements
6
   
Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
   
Item 3: Quantitative and Qualitative Disclosures about Market Risk
23
   
Item 4:  Controls and Procedures
24
   
PART II – OTHER INFORMATION
 
   
Item 1:   Legal Proceedings
24
   
Item 1A: Risk Factors
24
   
Item 2:    Unregistered Sales of Equity Securities and Use of Proceeds
24
   
Item 3:    Defaults upon Senior Securities
24
   
Item 4:    Mine Safety Disclosures
24
   
Item 5:   Other Information
25
   
Item 6:   Exhibits
25
   
Signatures
26

 

 
2

 
 
PART I – FINANCIAL INFORMATION
BEAMZ INTERACTIVE, INC.
CONDENSED BALANCE SHEETS
September 30, 2013 and June 30, 2013


ASSETS
 
   
September 30,
   
June 30,
 
   
2013
   
2013
 
   
(Unaudited)
       
Current Assets:
           
Cash and cash equivalents
  $ 12,052     $ 152,124  
Accounts receivable, net
    26,383       33,549  
Inventory, net
    269,831       -  
Prepaid expenses
    846,133       632,050  
Total Current Assets
    1,154,399       817,723  
                 
Prepaid expenses - long term portion
    396,114       126,750  
Property and equipment, net
    87,047       -  
Deposits
    11,370       10,496  
                 
   Total Assets
  $ 1,648,930     $ 954,969  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
                 
Current Liabilities:
               
Accounts payable
  $ 645,886     $ 343,895  
Accrued liabilities
    249,557       130,060  
Advances from related party
    333,454       -  
Notes payable, net of discount
    36,597       34,886  
Total Current Liabilities
    1,265,494       508,841  
                 
Long-Term Liabilities
               
Notes payable, net of discount
    149,572       147,473  
Notes payable - related parties, net of discount
    2,292,441       1,810,533  
                 
Total Liabilities
    3,707,507       2,466,847  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders' Equity (Deficit):
               
Preferred Stock 10,000,000 shares authorized $.001 par value:
               
Series D Convertible Preferred; 1,300,000 authorized;
               
  811,038 shares issued and outstanding
    811       811  
Common Stock, $.001 par value, 40,000,000 shares
               
  authorized; 24,971,790 and 22,668,039 shares issued and
               
  outstanding
    24,972       22,668  
Additional paid-in capital
    17,686,922       16,131,654  
Accumulated deficit
    (19,771,282 )     (17,667,011 )
                 
Total Stockholders' Equity (Deficit)
    (2,058,577 )     (1,511,878 )
                 
Total Liabilities and Stockholders' Equity (Deficit)
  $ 1,648,930     $ 954,969  
                 


The Accompanying Notes are an Integral Part
of the Condensed Financial Statements
 
 
 
3

 
 
BEAMZ INTERACTIVE, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2013 and 2012
(Unaudited)

   
2013
   
2012
 
             
Sales, net
  $ 9,523     $ 103,124  
                 
Cost of goods sold
    16,588       35,872  
                 
Gross profit (loss)
    (7,065 )     67,252  
                 
Depreciation and amortization
    7,913       150  
Research and development expenses
    317,438       113,648  
Sales and marketing expenses
    639,937       129,522  
General and administrative expenses
    1,011,373       314,119  
                 
Loss from Operations
    (1,983,726 )     (490,187 )
                 
Other Income (Expense):
               
Interest expense
    (120,545 )     (61,920 )
                 
Net Loss
  $ (2,104,271 )   $ (552,107 )
                 
                 
Loss per share
               
Basic and diluted loss per common share
  $ (0.09 )   $ (0.04 )
Weighted average common shares outstanding - basic
               
and diluted
    24,690,160       14,349,886  










The Accompanying Notes are an Integral Part
of the Condensed Financial Statements
 
 
 
4

 
 
BEAMZ INTERACTIVE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 2013 and 2012
(Unaudited)
 
   
2013
   
2012
 
   
(Unaudited)
   
(Unaudited)
 
Reconciliation of Net Loss to Net Cash
           
Provided (Used) by Operating Activities
           
Net Loss
  $ (2,104,271 )   $ (552,107 )
                 
Cash flows from operating activities:
               
Depreciation and amortization
    7,913       150  
Equity issued for services and liabilities
    1,386,000       280,000  
Allowance for doubtful accounts
    8,062       7,393  
Amortization of debt discount
    56,690       49,737  
Payment of services by related parties
    333,454       148,254  
                 
Changes in Operating Assets and Liabilities
               
Accounts receivable
    (896 )     (81,347 )
Inventory
    (269,831 )     17,563  
Prepaid expenses and other assets
    (484,321 )     (84,219 )
Accounts payable
    301,991       138,037  
Accrued liabilities
    119,497       (14,790 )
Net cash used by operating activities
    (645,712 )     (91,329 )
                 
Cash flows from investing activities:
               
Purchase of equipment
    (94,960 )     -  
Net cash used by investing activities
    (94,960 )     -  
                 
Cash flows from financing activities:
               
Proceeds from related party bridge loans
    600,000       100,000  
Proceeds from exercise of warrants
    600       500  
Net cash provided by financing activities
    600,600       100,500  
                 
Increase (decrease) in cash and cash equivalents
    (140,072 )     9,171  
Cash and cash equivalents, beginning of period
    152,124       13,293  
Cash and cash equivalents, end of period
  $ 12,052     $ 22,464  
                 
Non-cash investing and financing activities:
               
Related party payments of accounts payable
  $ 333,454     $ 148,254  
Warrants issued with bridge loans
  $ 170,972     $ 40,336  
Issuance of bridge loan for payment of services
  $ -     $ 22,655  
Equity issued for payment of services and liabilities
  $ 1,386,000     $ 280,000  
Cash paid for:
               
Income taxes
  $ -     $ -  
Interest
  $ 785     $ 1,997  


The Accompanying Notes are an Integral Part
of the Condensed Financial Statements
 
 
 
5

 
 
BEAMZ INTERACTIVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Summary of Significant Accounting Policies and Use of Estimates

Presentation of Interim Information

The condensed financial statements included herein have been prepared by Beamz Interactive, Inc. (“we”, “us”, “our” or “Company”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements as of June 30, 2013 and 2012. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures, which are made, are adequate to make the information presented not misleading. Further, the condensed financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2013, and the results of our operations and cash flows for the periods presented. The June 30, 2013 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim results may be subject to seasonal variations and the results of operations for the three months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.

Significant Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to establish accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. These financial statements include estimates and assumptions that are based on informed judgments and the experience of management. Significant estimates include, but are not limited to, collectability of accounts receivable, the allowance for obsolete inventory, and valuation of stock issuances, stock-based compensation and warrants.  We evaluate our policies and estimates on an on-going basis and discuss the development, selection and disclosure of critical accounting policies with the Company's Audit Committee. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Our financial statements may differ materially based upon different estimates and assumptions.

We discuss our significant accounting policies to our financial statements below. Our significant accounting policies are subject to judgments and uncertainties that affect the application of such policies. We believe these financial statements include the most likely outcomes with regard to amounts that are based on our judgment and estimates. Our financial position and results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from the actual amounts, adjustments are made in subsequent periods to reflect more current information. We believe the following accounting policies are critical to the preparation of our financial statements due to the estimation process and business judgment involved in their application.

Fair Value of Financial Instruments
 
In determining the fair value of its financial instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing as of each balance sheet date. The Company’s financial instruments include cash and cash equivalents, deposits, and debt and approximate fair value based on their short maturities or the effective interest rate. All methods of measuring fair value are based on Level 3 inputs, and result in a general approximation of value since valuations are inherently not precise.
 
Stock-Based Compensation and Warrants

We use the Black-Scholes pricing model as a method for determining the estimated fair value for all stock options and warrants awarded to employees, officers, directors, investors, and consultants. We apply judgment in estimating key assumptions that are important elements in the model and in expensing stock options and warrants, such as the expected stock-price volatility, expected term, stock value on the date of grant, and expected forfeiture rates. Our estimates of these important assumptions are based on historical data and judgment regarding market trends and factors. If actual results are not consistent with our assumptions and judgments used in estimating these factors, we may be required to record additional stock-based compensation expense, which could be material to our results of operations.  We have not historically issued any dividends and we do not expect to in the future.  We use the graded vesting attribution method to recognize compensation costs over the requisite service period for grants to employees and directors.
 
 
 
6

 
 
Cash and Cash Equivalents
 
Cash equivalents are considered to be all highly liquid investments purchased with a maturity, at time of purchase, of three (3) months or less.

Accounts Receivable, Net
 
Accounts receivable represents amounts earned but not collected in connection with the Company's sales. Trade receivables are carried at their estimated collectible amounts and are generally unsecured. Trade credit is generally extended on a short-term basis, thus trade receivables do not bear interest.

The Company provides an allowance for doubtful accounts based upon an individual review of the accounts outstanding, as well as the prior history of bad debts.  Accounts are considered past due or delinquent based on contractual terms, recent payment activity, and our judgment of collectability. The Company charges off uncollectible receivables when all reasonable collection efforts have been exhausted.  As of September 30, 2013 and June 30, 2013, an allowance has been provided for potentially uncollectible accounts receivable and product returns in the amounts of $12,318 and $4,256, respectively.  Bad debt expense for the three months ended September 30, 2013 and 2012 was $8,062 and $2,964, respectively.

Prepaid Expenses

Prepaid expenses represent payments for consulting, development, royalty and director fees and are generally being amortized to expense on a straight-line basis over the related contract periods, as applicable.

Inventory, Net

Inventory consists primarily of finished products and materials and supplies.  Inventory is stated at the lower of cost or market.  Cost is determined by using the first-in, first-out method.  The Company periodically reviews its inventory and makes provisions for damaged or obsolete inventory.

At September 30, 2013 and June 30, 2013 inventory is comprised of the following:

   
September 30, 2013
   
June 30, 2013
 
   
(Unaudited)
       
             
Finished goods
  $ 249,347     $ -  
Components
    20,484       -  
      269,831       -  
Less: allowance for obsolescence
    -       -  
                 
Net inventory
  $ 269,831     $ -  
 
Advertising Costs

Advertising costs are expensed as incurred and are included in sales and marketing expenses on the accompanying statements of operations. Advertising expense totaled $259,121 and $60,385 for the three months ended September 30, 2013 and 2012, respectively.
 
 
 
7

 


Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. Such expenditures amounted to $317,438 and $113,648 for the three months ended September 30, 2013 and 2012, respectively.

Software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the Company’s software has been available for general release to customers and, accordingly, no development costs have been capitalized.
 
Software development costs incurred and included in research and development expense noted above totaled $134,622 and $2,430 for the three months ended September 30, 2013 and 2012, respectively.

Revenue Recognition

Revenues are recognized when a contract has been entered into or an order placed, the price is fixed, shipment of the products to the customer has occurred, or the transfer of title, if later, and collection is reasonably assured.  Amounts billed to a customer related to shipping or handling charges are included in revenues. 

Provisions for sales discounts and rebates to customers are recorded, based upon the terms of sales contracts, in the same period the related sales are recorded, as a reduction to the sale. Sales discounts and rebates are offered to certain customers to promote customer loyalty and encourage greater product sales.  The Company also provides an allowance for product returns, which is estimated based upon prior experience.  As of September 30, 2013 and June 30, 2013, the allowance was $36 and $46, respectively.

Property and Equipment
 
Property and equipment are stated at cost. Depreciation is provided for on the straight-line method over the following estimated useful lives:
 
     
September 30, 2013
   
June 30, 2013
 
     
(Unaudited)
       
               
Computers and office equipment
3 years
  $ 10,485     $ 10,485  
Tooling
3 years
    94,960       -  
        105,445       10,485  
Accumulated depreciation
      (18,398 )     (10,485 )
                   
      $ 87,047     $ -  
 
Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred.  Betterments or renewals are capitalized when incurred.  For the three months ended September 30, 2013 and 2012 depreciation expense was $7,913 and $150, respectively.

Concentration of Credit Risk

Management maintains the Company’s cash and cash equivalents in bank accounts, which at times may exceed federally insured limits.  The Company has not experienced any losses in such accounts, and Management believes the Company is not exposed to any significant credit risk on cash and cash equivalents. As of September 30, 2013 there are no balances that exceeded federally insured limits.

During the three months ended September 30, 2013 the Company had two customers that represented approximately 52% of net sales.  The Company had approximately $4,900 in accounts receivable at September 30, 2013 from these customers.  During the three months ended September 30, 2012, the Company had one customer representing approximately 82% of net sales.
 
 
 
8

 
 
During the three months ended September 30, 2013 and 2012, the Company purchased substantially all of its inventory from one manufacturer and its inventory was held and processed at the same fulfillment center.

Per Share Data

Net loss per share (EPS) of common stock is computed based upon the weighted-average number of common shares outstanding during the period. Net loss equates to loss available to common stockholders as there is no dividend accrued for preferred stock.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  The calculation of basic and diluted EPS were the same for the three months ended September 30, 2013 and 2012, as the Company had losses from operations during all periods and therefore the effect of all potential common stock equivalents is anti-dilutive (reduces loss per share).  Stock options and warrants representing 962,297 and 1,754,337 shares of Common Stock were outstanding at September 30, 2013 and 2012, respectively, with exercise prices ranging from $.02 to $1.00 per share. Additionally, there were 811,038 and 827,940 shares of Series D preferred stock outstanding at September 30, 2013 and 2012, respectively, that were convertible into common stock on a 1 for 10 basis.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended September 30, 2013, that are of significance, or potential significance, to us.
 
Income Taxes

Deferred tax assets and liabilities arise from temporary timing differences between the book and tax basis of accounting for assets, liabilities, and income as well as from timing in the recognition of net operating losses. Deferred income tax assets primarily arise from net operating loss carryforwards and deferred income tax liabilities are based on the different depreciation and amortization methods used for tax reporting and financial accounting purposes. The Company assesses its ability to realize deferred tax assets based on the current earnings performance and on projections of future taxable income in the relevant tax jurisdictions.  These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation.  The Company’s estimates of future taxable income are reviewed annually.  All tax positions are first analyzed to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained under audit, including resolution of any related appeals or litigation processes.  After the initial analysis, the tax benefit is measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement.  Our income tax returns are subject to adjustment under audit for approximately the last four years.
 
If the Company is required to pay interest on the underpayment of income taxes, the Company recognizes interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.
 
If the Company is subject to payment of penalties, the Company recognizes an expense for the amount of the statutory penalty in the period when the position is taken on the income tax return.  If the penalty was not recognized in the period when the position was initially taken, the expense is recognized in the period when the Company changes its judgment about meeting minimum statutory thresholds related to the initial position taken.
 
Reclassifications

Certain accounts and financial statement captions in the prior period have been reclassified to conform to the current period financial statements. Reclassifications have no effect on previously reported net losses and included the reclassification of $126,405 from Registration Costs to General and Administrative expenses during the three months ended September 30, 2012.

 

 
9

 
 
Liquidity

The accompanying unaudited condensed financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs, which raises doubts about the ability of the Company to continue as a going concern. In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its obligations. Management of the Company has developed a strategy, which it believes will accomplish this objective through additional equity funding and long term financing, which will enable the Company to operate for the coming year, though there can be no assurance that the Company’s efforts will be successful. The Company's independent registered public accounting firm has included an explanatory paragraph regarding the uncertainty about the Company's ability to continue as a going concern in their audit report attached to our financial statements for the years ended June 30, 2013 and 2012.
 
The condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Note 2 - Notes Payable

As of September  30, 2013 and June 30, 2013, notes payable consists of the following:
 
   
September 30, 2013
   
June 30, 2013
 
   
(Unaudited)
       
             
10% Bridge Loan to an entity due April 2014
  $ 40,000     $ 40,000  
                 
10% Convertible Secured Subordinated Debt due December 2014
    160,000       160,000  
                 
 
    200,000       200,000  
Less: current portion
    (40,000 )     (40,000 )
Notes payable - long-term portion
  $ 160,000     $ 160,000  
                 
Notes payable are presented net of unamortized discounts as follows:
         
                 
Notes payable - current portion
  $ 40,000     $ 40,000  
Less: unamortized discount
    (3,403 )     (5,114 )
 
  $ 36,597     $ 34,886  
                 
Notes payable - long  term portion
  $ 160,000     $ 160,000  
Less: unamortized discount
    (10,428 )     (12,527 )
    $ 149,572     $ 147,473  

During the years ended June 30, 2013 and 2012, the Company issued Bridge Loans (“2012 Bridge Loans”) to related parties and several unrelated parties.    In April 2013 the Company issued a Bridge Loan in the amount of $40,000 with a maturity date of April 2014.

As of September 30, 2013 an aggregate of $1,981,045 in 2012 Bridge Loans has been issued (out of the available $2.5 million authorized),  all but $40,000 of which had been converted into Common Stock under a Conversion Option as of June 30, 2013.
 
 
 
10

 

During the year ended June 30, 2013 and the three months ended September 30, 2013, the Company issued Convertible Secured Subordinated Debt (“2013 Convertible Debt”) to related parties (Note 3) and two unrelated parties.  The 2013 Convertible Debt provides for the issuance of warrants to purchase one share of common stock of the Company for each two dollars of principal investment that are exercisable at $.02 per share (Note 5).  A discount, related to the relative fair value of the warrants at the date of grant, was recorded and is being amortized to interest expense over the term of the loans under the effective interest method. The 2013 Convertible Debt provides that each noteholder can convert all of the principal balance and accrued, but unpaid, interest on such noteholders’ 2013 Convertible Debt into Common Stock at a price of $.40 per share.  In addition, the 2013 Convertible Debt provides that each note holder must convert all of the principal balance of, and accrued, but unpaid interest on such noteholders’ 2013 Convertible Debt into securities offered in an equity financing of the Company of $2,000,000 or more consummated after May 1, 2013.  The closing of such financing has not occurred as of the date of the financial statements and no principal or interest has been paid on the 2013 Convertible Debt.  The 2013 Convertible Debt also included a commitment by the Company’s Chief Executive Officer, along with other existing investors,  to purchase at least $2.5 million of the $5 million offering by September 30, 2013.  The debt is secured by all assets of the Company and is subordinated to all senior indebtedness.  As of September 30, 2013 there was $2,794,855 in 2013 Convertible Debt issued and outstanding of the available $5 million authorized of which $2,634,855 are from related parties (Note 3).  The 2013 Convertible Debt matures on December 31, 2014.  As of September 2013, the aforementioned $2.5 million commitment has been fulfilled.

Note 3 - Related Party Transactions

Notes payable to related parties consisted of the following at September 30, 2013 and June 30, 2013:
 
   
September 30, 2013
   
June 30, 2013
 
   
(Unaudited)
       
10% Convertible Secured Subordinated Debt to various
individuals or entities due December 31, 2014
  $ 2,634,855     $ 2,034,855  
                 
                 
      2,634,855       2,034,855  
Less: current portion
    -       -  
Notes payable - long term portion
    2,634,855       2,034,855  
Less: unamortized discount
    (342,414 )     (224,322 )
    $ 2,292,441     $ 1,810,533  

At September 30, 2013 the Company had a payable to an entity controlled by the chief executive officer in the amount of $333,454 for Company expenses paid by the entity.  The payable is non-interest bearing, uncollateralized, and due on demand.

The Company has entered into a consulting agreement for business development and project management with an entity owned by an officer of the Company.  The agreement provides for a monthly fee of $10,000 and is cancellable by either party by giving a 60 day notice. All payments are current as of September 30, 2013.

The Company has entered into an agreement with an individual for services as Vice President of Finance.  The contract term is 22 months and a 2012 Bridge Loan, in the amount of $280,000, was issued as full payment of the contract.

On September 1, 2013, the Company entered into a consulting agreement for finance and operations management with an entity owned by an officer of the Company.  The agreement provides for a monthly fee of $11,000 and is cancellable by either party by giving a 60 day notice. All payments are current as of September 30, 2013.  In addition, 1,600,000 shares of common stock were issued to the entity for services to be performed through August 2015.

During the three months ended September 30, 2013 the Company received $600,000 for issuance of Convertible Secured Subordinated Debt  to entities controlled by the chief executive officer of the Company.  The entities received 300,000 warrants to purchase common stock at $.02 per share, expiring in September 2016.

During the three months ended September 30, 2013 the Company issued, 25,000 shares of common stock to the audit committee chair for services to be performed through July, 2014.

At September 30, 2013 and June 30, 2013 the Company has prepaid expenses to related parties for services in the aggregate amounts of $895,833 and $357,333, respectively. In addition, as of September 30, 2013 and June 30, 2012, the Company had $90,000 and $60,000, respectively, of accrued expenses due to the chief executive officer for services in that capacity.
 
 
 
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Note 4 - Commitments

Pursuant to the July 2012  Bridge Loan Stock Purchase and Security Agreement, each cash Lender under the Loan Document, simultaneously with the consummation of a Sale Event, shall be entitled to a fee in an amount equal to two hundred percent (200%) of the original principal amount loaned by such Lender to the Company, regardless of whether such Lender's Note is outstanding at that time, and such fee shall be paid to the Lenders in preference above any amounts owed by the Company to its other stockholders.  The aggregate amount of such preference payments equals $2,815,850 as of September 30, 2013 and June 30, 2013.

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has had limited operations and no pending litigation or potential claims. As a result of these items, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of September 30, 2013 and June 30, 2013.

The Company is a party to various licensing agreements with regards to music and video content and the use and sale of same with its product and through its website.  The agreements have varying terms and include royalties based on the sales or use of the aforementioned licenses.  The terms range from a royalty equal to 17.5% to 25% of the net revenues or a floor rate of $.091 to $.30 per record in each electronic transmission record.  For the three month periods ended September 30, 2013 and 2012, royalty fees under these licenses were approximately $300 and $900, respectively, and are included in cost of sales on the statement of operations.

During May, 2011 the Company formed a partnership (the “Beamz Cypher Partnership, LLC”) with Cypher Entertainment, Inc. (“Cypher”).  On August 30, 2012 the Company restructured its licensing arrangement with Cypher by terminating its joint venture in favor of entering into a license agreement directly with Cypher (the “Cypher License Agreement”) and the release, by both parties, of any past financial obligations.  Pursuant to the Cypher License Agreement, we granted Cypher a worldwide, exclusive right and license to develop and manufacture a specific version of the Beamz, the Smart Phone Beamz Player, and market it to online and in-store mass retail channels. This license was subsequently amended on April 4, 2013. Pursuant to the license agreement and the amendment to the license agreement, Beamz has retained the right to market the new Smart Phone Beamz Player product to a range of other channels, including the professional, DJ, retirement, education, special needs and select internet consumer markets and to make any other Beamz Products that are powered by smart phones or any other devices. The Cypher License Agreement provides for payments to Beamz for the use of the original content included on the Smart Phone Beamz Player (the “Beamz Content”) equal to $1.50/Unit plus 100% of the out-of-pocket third-party royalties associated with such Beamz Content.  In addition, for each Unit sold by Cypher, Cypher will pay Beamz a royalty equal to thirteen (13%) of the manufacturer contract purchase price for such product. Similarly, we will purchase Smart Phone Beamz Players from Cypher at cost plus thirteen percent (13%) of manufactured cost for Beamz sales of such new product. Beamz has retained the right to develop, manufacture or license any other products or versions of the Beamz Products as it may desire other than the Smart Phone Beamz Player product family. Pursuant to the April 4, 2013 amendment, Beamz will pay Cypher a royalty equal to 5% of its contract manufacturer cost on any new product it develops that is powered by, and used with a smart phone.

In August 2012 the Company entered into a non-exclusive distribution agreement with a third party to distribute the Beamz products.  The agreement has a term of three years and provides for the distributor to share in the profits on the sales.  During November 2011 the Company entered into a five year consulting agreement with the aforementioned third party to provide business development, sales and marketing. The contract provides for the consultant to share in the profits on certain sales.  As of September 30, 2013, there have been no sales pursuant to this agreement.

In January, 2013 the Company entered into a three year contract with a consulting firm to provide marketing services.  The marketing program is to include direct response marketing, branding and advertising. The consulting firm received 125,000 shares of Common Stock at the commencement of the contract.  The contract provides for a royalty fee of 3% of all product net revenue received as a direct result of the marketing of the Company’s consumer products in the United States and additional stock compensation for achieving certain sales goals.
 
 
 
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During March, 2013 the Company entered into a three year contract with a third party to manufacture the next generation Beamz product.  The contract provides for the manufacturer to prepare the tooling and molds for the next generation product as well as manufacture, source raw materials, test and ship the products.  In addition to the obligation for the payment for the tooling and molds in the approximate amount of $119,000, the Company committed to purchase $231,140 from the manufacturer. As of September 30, 2013, the Company has capitalized $94,960 in relation to the tooling and molds and all purchase commitments have been fully satisfied.

On April 5, 2013, the Company entered into endorsement and licensing agreements with musical artist Flo Rida, together with Strong Arm Productions, Inc. and Global Merchandising and Promotions, LLC.  Pursuant to these agreements, which provide the Company a license to use a range of Flo Rida’s music content, the Company has created a “Beamz by Flo” product offering, including: (a) a Flo Rida version of the Beamz interactive music player, which includes Flo Rida’s signature and logo and (b) Flo Rida content bundles which can be purchased in various Beamz software applications, featuring a range of Flo Rida’s music in Beamz interactive format. Under the agreements, Flo Rida has also filmed both commercials and videos with Beamz and has agreed to promote the Beamz interactive music player in a variety of arenas, potentially including social media, concerts and special events.  The agreements provide for the issuances of 300,000 shares of Common Stock, all of which had been issued as of June 30, 2013, and minimum annual royalties of $100,000, among other provisions.  In addition, pursuant to a subsequent agreement, the above parties agreed to produce the “Laser Light Show” song and music video, for which payment of $15,000 cash and $110,000 in the form of the 2013 Convertible Debt was made during the year ended June 30, 2013.

In April, 2013 the Company entered into a licensing agreement with a software developer to provide Beamz with a cross-platform interactive music engine for its exclusive use in Beamz markets.  The licensing agreement provides for the issuance of 100,000 shares of Common Stock to be issued monthly over a three year period, a payment, in the amount of $40,000 to be made in the form of a bridge loan, and a royalty fee of $.10 per royalty product sold.  The licensing agreement will continue unless terminated by mutual agreement. The bridge loan is due April, 2014 and is outstanding as of September 30, 2013.

In May, 2013 the Company entered into a consulting agreement to manage operations outside of the United States expiring on December 31, 2014.  The agreement provides for monthly payments of approximately $13,000 and the issuance of 120,000 shares of Common Stock, beginning June 2013 and vesting monthly over a two year period. The shares were issued in June 2013 and the value of unvested shares is included in prepaid expenses as of the balance sheet date.

During April 2013, the Company entered into a one year agreement for marketing services including web development, micro site programming, and online marketing.  The Company paid $10,000 for the development of the micro site and the agreement provides for  commissions up to 35% of certain net revenues, among other provisions.  The agreement may be cancelled by either party upon 60 days notice.

During June 2013 the Company entered into a 24-month lease agreement for office space.  The lease provided for rents of $1,500 for June 2013, $4,500 for July through September 2013, $5,000 for October through December 2013 and $5,500 from January 2014 through May 2015.  The lease was amended effective November 1, 2013 to reduce the leased space from 5,791 to 4,391 square feet, with a corresponding reduction in rent from $5,000 per month to $3,791 per month, which will increase to $4,170 per month beginning January 2014.  For the three months ended September 30, 2013 and 2012 the Company incurred rent expense of $15,979 and nil, respectively.  Future minimum lease payments for the next two years are $48,900 and $33,400.




 
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Note 5 - Equity

Common Stock

As of September 30, 2013, the Company has 50,000,000 shares of stock authorized, 40,000,000 of which have been designated as common stock, $.001 par value. There were 24,971,790 shares of common stock issued and outstanding at September 30, 2013.

During the three months ended September 30, 2013, the Company issued 2,273,751 shares of common stock to various contractors and officers and directors for services that were valued at approximately $1,386,000.    In addition, 30,000 shares of common stock were issued for proceeds of $600, pursuant to the exercise of 30,000 warrants.

Preferred Stock

As of September 30, 2013 the Company has 10,000,000 shares of preferred stock, $.001 par value, authorized of which 1,300,000 shares are designated as Series D Convertible Preferred Stock (“Series D”). There are 811,038 shares of Series D issued and outstanding at September 30, 2013.  Each Series D share is convertible into 10 shares of common stock and has a liquidation preference of $10 per share.

Warrants and Options

Pursuant to the Convertible Secured Subordinated Debt, as additional consideration for each of the Loans, the Company granted the Lenders warrants with the right to purchase a number of shares of the Company's common stock equal to fifty percent (50%) of the principal amount of the Lender's Notes. During the three months ended September 30, 2013, 300,000 warrants were issued pursuant to the Convertible Secured Subordinated Debt.  The warrants are exercisable at $.02 per share and expire through September 2016. As the warrants were issued with the convertible debt, the relative fair value of these warrants, in the amount of $170,972 for the three months ended September 30, 2013, was allocated between the debt proceeds and the warrants. The warrant relative value is reflected as a discount on the debt, which is being amortized over the term of the debt.

2004 Incentive Compensation Plan

The Company has adopted the 2004 Incentive Compensation Plan (the “2004 Plan”).  The 2004 Plan provides for the issuance of incentive and non-incentive stock options or shares.  The Company has reserved 750,000 shares of Common Stock for issuance underlying the grants under the Plan. As of September 30, 2013, options for the purchase of 29,825 shares of Common Stock are outstanding under the Plan. Options and warrants generally become exercisable over vesting periods of up to four years and expire ten years from the date of grant.  As of September 30, 2013 there are 7,175 shares of common stock available for issuance pursuant to grants under the Plan.

2009 Incentive Compensation Plan

In January 2009, the Company adopted the 2009 Incentive Compensation Plan (the "2009 Plan") that permits the issuance of options or shares to selected employees and directors of, and consultants to, the Company.  The Plan was amended in January 2012 to reserve 1,150,000 shares of Series C Convertible Preferred Stock for issuance underlying the grants of stock, stock options and warrants and to provide Common Stock awards rather than Series C Convertible Preferred shares.  The Company has issued 765,906 shares of Series C Convertible Preferred Stock pursuant to the Plan, all of which were converted to Common Stock as of June 30, 2011.  Options generally become exercisable over vesting periods of up to four years and expire ten years from the date of grant.  There are 384,094 shares available for grant as of September 30, 2013.



 
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A summary of the options and warrants for the three months ended September 30, 2013 are presented in the table below:

   
Weighted
Average
Exercise
Price
   
Number of
Options and
Warrants
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Fair Value
 
                         
Outstanding at June 30, 2013
  $ 0.06       692,297       2.68     $ 273,615  
                                 
Granted
    0.02       300,000       2.89       195,926  
Exercised
    0.02       (30,000 )     2.67       (5,700 )
Outstanding at September 30, 2013
                               
   (unaudited)
  $ 0.04       962,297       2.42     $ 463,841  
 
For purposes of determining the fair values of warrants issued during the three months ended September 30, 2013 using the Black-Scholes option pricing model, the Company used the following assumptions; expected volatility 150%, risk-free interest rate 1%, warrant life of 3 years, and expected dividend rate of 0%.

Included in the table above are 29,825 options outstanding at September 30, 2013 and June 30, 2013.  The options are subject to various vesting periods up to thirty-three months and all were fully vested as of March 2013.   The options expire on various dates between January, 2014 and October, 2018. Additionally, the options and warrants had an intrinsic value of $546,919 as of September 30, 2013.  Intrinsic value arises when the exercise price is lower than the market value, which was estimated to be $.60 per share at September 30, 2013.
 
The options outstanding at September 30, 2013 had no unrecognized compensation costs.

Note 6 - Subsequent Events

Subsequent to September 30, 2013, the Company entered into a consulting agreement with a third party for the development of several micro sites in addition to promotional services.  The contract provides for an initial payment of $12,500 and three monthly maintenance payments of $2,500.

In October 2013 the Company entered into an Endorsement and Licensing Agreement with an artist for the endorsement of the BeamzDJ Product.   The contract provides for the issuance of 75,000 shares of common stock of which 25,000 vest at the inception of the contract and 50,000 shares vest over 24 months.

In November 2013 the Company entered into a consulting agreement with a third party to provide strategic planning services.  The contract has a term of six months and provides for the monthly issuance of 25,000 shares of restricted common stock.



 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2013 and with the unaudited financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
 
Forward-Looking Statements

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other “forward-looking” information. The words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “project,” “goal” and similar expressions identify such a statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to the risks discussed in this and our other SEC filings. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

The following discussion and analysis should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended June 30, 2013.

Business Overview
 
General
 
We were incorporated in Delaware in 2001 under the name HumanBeams, Inc.  On December 18, 2007, we changed our name to Beamz Interactive, Inc. Our principal executive office is located at 15354 North 83rd Way, Suite 101, Scottsdale, Arizona 85260, and our telephone number is 480-424-2053. Our principal operations are located in Scottsdale, Arizona. Our website address is www.thebeamz.com.
 
Products
 
We have developed an interactive laser controller technology that can be implemented in a wide variety of music, game, therapy, education, senior care, lighting and consumer applications. Our consumer and professional products (previously “Beamz Player” and “Beamz Pro”, now “Beamz by Flo”, “Beamz Education”, and “Beamz DJ” product families and collectively the “Beamz” or “Beamz Products”) can bring music to everyone in a manner that has previously not been possible. By connecting the Beamz to a PC or MAC computer, iPad, or iPhone, depending upon the model, and installing the associated software, the user can “play” a wide range of digitized musical instruments by simply interrupting one or more laser beams with their hands. This allows them to create great music in conjunction with a background rhythm track of original, popular, and children’s songs across numerous music genres (e.g., jazz, blues, hip hop, rock, classical or Latin).  In each song the user can select up to twelve different instruments, music clips and sound effects that are harmoniously paired with a background rhythm track, resulting in hundreds of instruments to choose from across all songs in the Beamz music library.  These are often actual recordings of artists playing such instruments, and thus sound just like a high quality digital recording of the instrument. The Beamz software makes it easy to make great sounding music in minutes by following the diagram on the screen of the attached device, which allows the user to identify which laser beam controls different instruments.  Beamz songs are harmonious regardless of how they are played and the music samples assigned to a laser beam offer additional complexity, often with several notes, chords and/or series of music samples controlled by touching one of the laser beams.  Because the music is harmonious no matter which laser beam is interrupted, the Beamz Products allow people that have no previous musical background or training to play and enjoy music within minutes, yet have the depth to enable accomplished DJs, artists and musicians to perform, compose and create sophisticated interactive music.
 
 
 
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We have commercialized several products that use the Beamz interactive laser controller technology for music making and music-controller related products.  These products are “interactive music systems” that combine unique laser controller hardware and various versions of interactive music software, including mapping software applications that enable the Beamz laser controller hardware to be used with software applications offered by other companies relating to mixing/DJ, lighting controls and music creation/production applications. “Interactive” refers to the fact the consumer is interacting with the song by choosing to bring different instruments or sound effects into the mix at their discretion, as opposed to passively listening to a song recording.
 
The Beamz laser controller hardware is a combination of buttons, rocker switches and class 2 laser beams that function as controls and switches for triggering commands in software applications.  In the combination of the Beamz laser controller with the Beamz interactive music software application, the laser controller is the trigger and playback method for single music notes, chords, sound effects, vocals and music files.  Playback varies depending on how each Beamz song is constructed, how a user decides to use the buttons and rocker switches, and how they interrupt the laser beams (e.g. by putting their hands or any other object through the path of the laser beams).
 
In the consumer market, the Beamz is promoted as a music making and music entertainment product that anyone can play.  The pre-programmed Beamz songs provided with the consumer product, and the additional Beamz songs available on the Beamz web site or for purchase in an application store, provide consumers the ability to initiate the playback of hundreds of different instruments and sound effects.  Each Beamz song is unique and set up with varying playback settings and options by Beamz composers so that consumers have the experience of controlling and playing back harmonious music.  In some cases, a laser beam is set up to play just a single note or a single music file.  But laser beams can also be set up to play back complex sequences of music files, with the timing of the laser beam interruption contributing to how the music is played back.  Depending on the complexity of the pre-programmed music files within a Beamz song, a user may experience the sensation of “playing the instrument” represented by the laser beams as they move their fingers in and out of the laser beams.
 
The Beamz interactive music software also provides amateur and professional musicians opportunities to create original compositions.  Using the Beamz Studio interactive music editing software application, musicians may create new songs by combining music samples made by music production software applications (e.g. ProTools) and defining in the Beamz Studio software how those samples are to be played back into a defined rhythm track.   Musicians may also record their “performances” with the interactive Beamz songs and, depending on how they choose to playback the pre-programmed samples, may yield significant variations of songs.
 
For the performing musician and/or DJ, the Beamz laser controller may be used in a MIDI (Musical Instrument Digital Interface) mode, or it may be used with Beamz MAC and PC compatible mapping software that sends MIDI and/or keystroke commands to initiate controls for other software applications (e.g. Ableton Live 8, Virtual DJ, Serato).  Beamz DJ also includes a special version of the Virtual DJ software for DJs. Musicians may use the Beamz Studio software application to configure songs to be controlled by using the Beamz laser controller for their specific performance needs.
 
As of September 2013, our hardware product offering consists of three major product lines: the Beamz By Flo consumer product family; the Beamz DJ amateur and professional DJ product family; and the Beamz Education, Special Needs, and Health Care product family. The basic technology for these products has been in full production since late 2010. We produced and distributed to customers approximately 12,500 units of our first and second generation Beamz Player and Beamz Pro products.  The first units of our Beamz by Flo product began shipping on September 17, 2013.  The Beamz DJ and Beamz Education product families began shipping in October 2013.
 
Future Products
 
We are in the process of expanding our device compatibility to include a range of Android tablet and phone devices, as well as Windows 8 tablet devices.  We expect to continue to develop new Beamz form factors in the future to address additional market opportunities such as the toy or gaming markets.

Marketing
 
We believe we are positioned to take advantage of the growth in electronic music and entertainment. Key target markets include the mass consumer market, the DJ market, and the education, special needs, senior care, and health care markets.
 
To pursue these markets and build the Beamz brand, we entered into licensing and endorsement agreements with Flo Rida, a leading hip hop and pop artist.  Flo Rida was recently named a Billboard Top 100 Artist for 2013 and is the best-selling digital hip hop artist in the world, with more than 75 million combined singles sold worldwide.
 
 
 
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Current marketing plans include leveraging our relationships with Flo Rida in the mass consumer market.  A direct response TV and internet campaign, selected public relations efforts with various magazines, bloggers, and television shows and/or interviews, and an extensive social media campaign are in process with Flo Rida, the implementation of which includes a series of videos and commercials featuring Flo Rida we have prepared which will be distributed and used beginning in the fourth quarter of 2013.  This will be supplemented with participation at major trade shows (including CES, NAMM, DJ Expo, and many others), a variety of contests with the Beamz, and other related marketing activities.  
 
Sales and Distribution Strategy
 
Our historical sales and distribution strategy included marketing products on the Beamz web site, on Amazon, with various affiliates and online retailers, in certain retail musical instrument stores, in selected consumer retailers and with select international distributors.

Our planned sales and distribution strategy is as follows:
 
Leverage Endorsing Artist Fan Bases. Beamz will reach out to Flo Rida and other supporting artist fan bases via social media and other channels of communication, including providing them with special promotional programs such as launch specials and holiday specials.

License/OEM/Partner Beamz Hardware and Software Technologies. We intend to expand the market for our hardware and software products through licensing, partnership and OEM relationships with different complementary entities in selected target markets, potentially including but not limited to education, special needs, physical rehabilitation, senior care, toy companies, gaming companies, music companies and DJ companies.
 
Implement a Strong Direct to Consumer Marketing Strategy. A main component of our near term sales and marketing strategy is to maintain a comprehensive family of web sites, coupled with the creation and distribution of video content demonstrating the use of the Beamz Products across all markets and customers. This includes search engine optimization, digital advertising, video distribution, national cable TV commercial advertising, and other internet and direct response marketing programs, as well as regular contests.
 
Implement a Strong Social Media Strategy. We intend to augment our sales and marketing efforts with a strong social media effort, including Facebook, YouTube and Twitter, as well as the social media efforts of various artists that support the Beamz.
 
Research and Development
 
We believe continued innovation through research and development is critical to our future success. Through September 30, 2013, our research and development was conducted by a number of outside hardware and software contractors that are under contract with us to develop new products that can be integrated with our current product lines. We spent $317,438 on research and development during the three months ended September 30, 2013 and $113,648 during the three months ended September 30, 2012.  We believe that our current research and development effort is sufficient for our current needs; however, we may increase our research and development expenditures depending on the progress of our ongoing efforts, closure of additional customers, OEM and licensing relationships, and the availability of funding.
 
Manufacturing and Assembly
 
Assembly of our new primary products occurs at Chen-Source, Inc., a Taiwanese company (“Chen-Source”).  We believe Chen-Source has the capability to manufacture the product in high volumes at reasonable costs.  Currently, Chen-Source is our only Beamz Product hardware vendor.  If their facility experiences a disruption, we would have no other means of assembling those components until we are able to develop the same capability at an alternative facility. A vendor selection process will be used to choose the manufacturer for our future products.
 
 
 
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Intellectual Property
 
We believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain the proprietary aspects of our technologies. We rely on a combination of patent, copyright, trademark and other intellectual property rights and measures to protect our intellectual property.
 
Our patent portfolio includes rights to patents and patent applications that we own. We seek patent protection in the United States and internationally for our products and technologies where and when we believe it is appropriate. United States patents are granted generally for a term of twenty years from the earliest effective priority date of the patent application. The actual protection afforded by a foreign patent, which can vary from country to country, depends on the type of patent, the scope of its claims and the availability of legal remedies in the country.
 
We also rely on other forms of intellectual property rights and measures, including nondisclosure and confidentiality agreements, to maintain and protect proprietary aspects of our products and technologies. We require our consultants to execute confidentiality agreements in connection with their consulting relationships with us. We also require our consultants to disclose and assign to us all inventions conceived during the term of their engagement while using our property or which relate to our business.

Patents and Patent Applications
 
Our strategy is to aggressively file, secure, and maintain a broad range of patents and other intellectual property to protect our current and future business. Currently, we have five U.S. Utility Patents and two U.S. Design Patents.  We also have four pending U.S. Utility Patent Applications, three pending International Utility Patent Applications and two pending International Patent Cooperation Treaty  (“PCT”) Patents Applications. 
 
We have four U.S. Registered Trademarks: the Beamz name, the Beamz logo, the name “iBeamz” and the phrase “Play the Light.”   We have a U.S. Registered Copyright on our core Beamz software. We have filed, or will file, copyrights on our key music and software.

License Arrangements
 
On August 30, 2012 we restructured our licensing arrangement with Cypher Entertainment Group, LLC (“Cypher”) by terminating our joint venture in favor of entering into a license agreement directly with Cypher (the “Cypher License Agreement”). Pursuant to the Cypher License Agreement, we granted Cypher a worldwide, exclusive right and license to develop and manufacture a specific version of the Beamz, the Smart Phone Beamz Player, and market it to online and in-store mass retail channels. This license was subsequently amended on April 4, 2013.  Pursuant to the license agreement and the amendment to the license agreement, Beamz has retained the right to market the new Smart Phone Beamz Player product to a range of other channels, including the professional, DJ, retirement, education, special needs and select internet consumer markets and to make any other Beamz Products that are powered by smart phones or any other devices. The Cypher License Agreement provides for payments to Beamz for the use of the original content included on the Smart Phone Beamz Player (the “Beamz Content”) equal to $1.50/Unit plus 100% of the out-of-pocket third-party royalties associated with such Beamz Content.  In addition, for each Unit sold by Cypher, Cypher will pay Beamz a royalty equal to thirteen (13%) of the of the manufacturer contract purchase price for such product. Similarly, we will purchase Smart Phone Beamz Players from Cypher at cost plus thirteen percent (13%) of manufactured cost for Beamz sales of such new product. Beamz has retained the right to develop, manufacture or license any other products or versions of the Beamz Products as it may desire, other than the Smart Phone Beamz Player product family. Pursuant to the April 4, 2013 amendment, Beamz will pay Cypher a royalty equal to 5% of Beamz’ contract manufacturer cost on any new product developed by Beamz that is powered by, and used with, a smart phone.

On April 17, 2013 we entered into a licensing agreement with Mindsight, LLC.  Pursuant to the agreement, Mindsight is developing an interactive music audit engine that allows Beamz to operate on a variety of operating systems including Mac, Windows, iOS, and Android.  Beamz has the exclusive right to use this technology in Beamz’ markets.
 
We have agreements with a number of music labels and/or licensing agencies—EMI Music Services, Walt Disney Records, Blind Pig Records, Sony Records, Harry Fox Agency, Inc., Rhino Entertainment, Warner Music Inc., and others—whereby we license the right to use a broad range of songs and videos for use on the Beamz. We believe this adds an exciting multi-media video dimension, enabling the user to display the music video on a television or large monitor while playing the Beamz along with the song. We currently offer a library of over 300 interactive songs for sale on our web site, which we intend to continue to grow via both internal development and third-party artist relationships. These agreements fall into three primary categories:
 
 
 
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Original Music Licenses
 
Beamz licenses original music from various labels, publishers and recording artists. These agreements are all different depending upon the nature of the relationship, the music involved, and other factors.
 
Synchronization and Master Lease Agreements
 
Video song synchronization agreements grant Beamz a worldwide, nonexclusive, irrevocable, unencumbered and transferable right to use, perform, reproduce, and fix the compositions in synchronization with visual images when used in conjunction with the Beamz device.  Each license includes two components, one with a record company (e.g. Hollywood Records and Walt Disney Records, Capital Records, LLC dba EMI Music Services, Rhino Entertainment, Blind Pig Records, Polyvinyl Record Company, and others,) and one with the music publisher (i.e. Seven Peaks Music and Seven Summits Music, EMI Music Publishing, Warner Music Inc., Viper Music, Sony ATV Music Publishing LLC, Polyvinyl Record Company, and others). In general, for downloads, Beamz pays both the music publishers and the record label the greater of $0.30 per sale or 17.5% of the net sales of the licensed product. In the case of licensed product that is included with the Beamz Products, Beamz pays both the publisher and the label $0.15 for each licensed product. Such agreements typically have a term of ten years and call for non-refundable advances that are recoupable from all compensation otherwise payable by Beamz to the licensors.  

Mechanical Licensing Agreements
 
Beamz also secures statutory rate mechanical licenses from various publishers, and via the Harry Fox Agency, for its audio-only cover versions of popular songs. The mechanical licensing rate is $.091 for each licensed product sold.

Competition
 
While there are no direct competitors for the Beamz Products and technology, there are several indirect competitors whose products consumers may compare to the Beamz music-making experience. These include traditional musical instruments, electronic keyboards/digital pianos and music games using pre-programmed music (e.g. Guitar Hero, Rock Band, and DJ Hero) on PCs, consoles and mobile devices.
 
Although some electronic keyboards and digital pianos include pre-programmed instrument notes and chords from hundreds of different instruments plus options to play into pre-programmed rhythm tracks, they are not setup for immediate recreational music making.  In contrast, Beamz songs are setup to be harmonious regardless of how they are played and the music samples assigned to a laser beam offer more complexity, often with several notes, chords and/or series of music samples controlled by touching one of the laser beams.

Employees
 
As of the date of this filing, we had no employees. All human resources are provided on a consulting contract basis.  We have consulting contracts with thirteen key individuals or firms that provide sales, engineering, software development, song and content production, operations, accounting, and marketing services. All such contracts may be terminated with sixty days’ notice.  Upon completion of our current private offering, we anticipate converting some of these contractors to employee status.

Critical Accounting Policies

 Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.
 
 
 
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As an emerging growth company under the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards.
 
While our significant accounting policies are more fully described in the notes to our financial statements included herewith and in our Annual Report, we believe that the following accounting policies and estimates are our most critical to a full understanding and evaluation of our reported financial results.
 
Inventory. Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. All items included in inventory relate primarily to our third generation Beamz products. We periodically review our inventory for obsolete items and provide a reserve upon identification of potential obsolete items. We do not expect any of our current products to become obsolete in the foreseeable future as they will be complementary to our planned new products.
 
Valuation Allowance for Deferred Tax Assets and Liabilities. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that included the enactment date.
 
Valuation allowances are recorded for deferred tax assets when the recoverability of such assets is not deemed more likely than not.
 
We have evaluated the effect of guidance provided by GAAP regarding accounting for uncertainty in income taxes. In that regard, we have evaluated all tax positions that could have a significant effect on the financial statements and determined that we have no uncertain tax positions at September 30, 2013 that could have a significant effect on our financial statements. Our returns after 2009 remain open for examination.
 
Share-Based Compensation. We account for compensation for all arrangements under which employees, consultants and others receive shares of stock or equity instruments (including options and warrants) in accordance with FASB ASC Topic 718 “Compensation – Stock Compensation”, or ASC Topic 505-50 “Equity Based Payments to Non-Employees”. Under ASC Topic 718, the fair value of each award is estimated and amortized as compensation expense over the requisite service period. The fair value of our share-based awards is estimated on the grant date using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected price volatility and estimated option term. As we have been operating as a public company, with limited trading to date, we are unable to use actual price volatility and option life data as input assumptions within our Black-Scholes valuation model. We have used expected volatilities based on the historical volatility of the industry sector in which we operate, in accordance with the guidance set forth in ASC Topic 718.
 
To estimate the expected term, we chose to utilize the “simplified” method for “plain vanilla” options as discussed in the Securities and Exchange Commission’s Staff Accounting Bulletin 107 (“SAB 107”). We believe that all factors listed in SAB 107 as pre-requisites for utilizing the simplified method are true for us and for our share-based payment arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available.
 
Our risk-free interest rates are based on a zero-coupon U.S. treasury instrument, the term of which is consistent with the expected term of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of Common Stock; therefore, the expected dividend yield is assumed to be zero. The fair value of share-based payments is generally amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. The warrants issued during the three months ended September 30, 2013 were valued based on the market price at the date of grant, a term of 3 years, and a volatility of 150%.
 
We believe there is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under ASC Topic 718. Currently, there is not a market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of stock option awards is determined in accordance with ASC Topic 718 using an option pricing model, that value may not be indicative of the fair value observed in a market transaction between a willing buyer and a willing seller. If factors change and we employ different assumptions in the application of ASC Topic 718 in future periods than those currently applied under ASC Topic 718, the compensation expense we record in future periods under ASC Topic 718 may differ significantly from what we have historically reported.
 
 
 
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Research and Development costs. Expenses related to research, design and development of products are charged to research and development costs as incurred. These expenditures include direct salary costs and/or consultant expenses for research and development personnel and contractors, costs for materials used in research and development activities and costs for outside services.
 
 
Results of Operations and Financial Condition
 
For the three months ended September 30, 2013 compared with the three months ended September 30, 2012:

Revenues.  The Company generated revenues for the three months ended September 30, 2013 of $9,523, as compared to revenues of $103,124 for the three months ended September 30, 2012, or a 91% decrease in revenues. The decrease is primarily due to cessation of the sale of old second generation products in the last quarter of fiscal year 2013 in anticipation of the roll out of the new products which began in late September 2013.
 
Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2013 were $16,588, as compared to cost of sales of $35,872 for the three months ended September 30, 2012, for a decrease in cost of sales of 54%. This is due to decreased sales levels in 2013. The gross margin for the three months ended September 30, 2013 was (74%) as compared to the gross margin of approximately 65% for the three months ended September 30, 2012.   The decrease in the gross margin is primarily due to warehousing costs during the current quarter related to our old second generation product that the Company no longer markets.
 
Research and Development (“R&D”). R&D expenses for the three months ended September 30, 2013 were $317,438, as compared to R&D expenses of $113,648 for the three months ended September 30, 2012, or a 179% increase.  The increase is due to the increased cost associated with our next-generation product development including IOS (iPhone and iPad) and MAC software applications during the three months ended September 30, 2013. In addition, the three month periods ending September 30, 2013 and 2012 included approximately $114,600 and $31,750, respectively, of non-cash expenses associated with stock grants to various development consultants.
 
General and Administrative expenses (“G&A”). G&A expenses for the three months ended September 30, 2013 were $1,011,373 as compared to G&A expenses of $314,119 for the three months ended September 30, 2012, or a 222% increase in G&A expenses.  The increase is due to increased costs related to raising capital in addition to services provided by various  consultants for strategic planning and financial consulting.  The increase also includes fees for services of the President and Chief Financial Officer and included non-cash G&A expenses of approximately $637,800 for the three months ending September 30, 2013. For the three months ended September 30, 2012 G&A included non-cash expenses of approximately $121,700.
 
Sales & Marketing expenses.  Sales and Marketing expenses for the three months ended September 30, 2013 were $639,937, as compared to sales and marketing expenses of $129,522 for the three months ended September 30, 2012, or an increase of $510,415.  The increase is due primarily to increased costs of producing videos and commercials in addition to increased infrastructure and consulting personnel to position the Company to implement its fiscal year 2014 sales plans and new product launch, and included approximately $146,900 in non-cash expenses during the three months ended September 30, 2013. Sales and Marketing expenses for the three months ended September 30, 2012 included approximately $8,333 in non-cash expenses.
 
Interest Expense.   Interest expense was $120,545 for the three months ended September 30, 2013, as compared to $61,920 for the three months ended September 30, 2012, or an increase of $58,625. The increase is due to additional bridge notes and convertible debt outstanding in 2013, which resulted in additional non-cash amortization of debt discounts of approximately $57,000 on the debt.
 
Net Loss. We had a net loss for the three months ended September 30, 2013 of $2,104,271, as compared with a net loss of $552,107 for the three months ended September 30, 2012, or an increase in net loss of $1,552,164. The increase in net loss for the three months ended September 30, 2013 is due primarily to the increase in sales and marketing expense and research and development costs associated with the next-generation product development and launch as previously discussed. Approximately $899,000 of this loss was non-cash for 2013.
 
 
 
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All material changes in financial condition and results of operations for the three months ended September 30, 2013 compared with the three months ended September 30, 2012 are identified in the above analysis for the periods ended September 30, 2013 and 2012.
 
Liquidity and Capital Resources
 
Our principal liquidity from inception (2001) to September 30, 2013, came from the sale of equity interests and debt financing. We issued 24,971,790 common shares related to the issuance of Common Stock and the conversion of all shares of Series A, A-1, B, and C Convertible Preferred into Common Stock in addition to 16,902 shares of Series D Convertible Preferred Stock. We have issued $6,730,208 of notes payable with interest rates between 8% and 10%, which were subsequently converted to Series D Convertible Preferred Stock in June 2012. Through September 30, 2013, the Company received $1,981,045 from the bridge loan financing, of which $1,530,420 was received from related parties.   Through September 30, 2013, the Company received $2,794,855 from the Convertible Secured Subordinated Debt, of which $2,634,855 was received from related parties.  As of September 30, 2013, total paid-in capital was $17,686,922.  During the three months ended September 30, 2013, we used $645,712 to fund operations that were funded primarily by loans from related parties.  
 
We anticipate incurring significant expenditures during fiscal 2014 to pursue our planned business operations including additional research and development of products and technology.  Our ability to execute on these plans is dependent on our ability to generate additional investment proceeds.  In the event that we are unable to raise the necessary funds, we will have to modify our current business plans and may not be able to attract the customers necessary to generate positive income from operations; in such case, the business plan would have to be modified to address the funding issues.  
 
The past operating expenses and cash needs are not indicative of our current planned operations, as we have completed our development stage, and the Company is now entering a sales, marketing and operating business phase.  Our plan may require substantially more cash to operate depending upon how quickly new product sales and new distribution channels can be established.  However, if funding is not secured, we will be scaled back proportionately. At this time, we are dependent on outside funding to support our operations and anticipate we will need outside funding for at least the next twelve to twenty-four months to support our business model.  If we are unable to obtain continued outside funding, our operations would be severely impacted and it may not be possible to remain in business.  Given current operations, traditional debt financing is not likely and we will have to continue to rely on equity or debt investments from outside non-banking sources.
 
We are currently conducting both a  bridge loan financing and a convertible secured subordinated debt financing, both of which are meant to address our present liquidity concerns. However, given the present circumstances and our dependence on additional financing, there can be no assurance that the Company's efforts will be successful.  The Company's continued existence is dependent upon its ability to achieve and maintain profitable operations and obtain additional financing.
 
   Since inception, our revenues relate primarily to the sale of our Beamz Player and Beamz Pro products. In the future we expect to also have material licensing revenue from our licensing arrangement with Cypher and other parties. Our historical business has typically been affected by seasonal sales trends primarily resulting from the timing of the holidays in the quarter ending December 31. In the future as additional markets and distribution channels are developed our business is expected to be less seasonal.
 
The Company's independent registered public accounting firm has included an explanatory paragraph regarding the uncertainty about the Company's ability to continue as a going concern in their audit report attached to our financial statements for the years ended June 30, 2013 and 2012. The condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties.
 
 
Off-Balance Sheet Arrangements
 
None.
 
Recent Accounting Pronouncements
 
There have been no recent accounting pronouncements or changes in accounting pronouncements that are expected to have a material impact on the Company’s financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide this information.
 
 

 
 
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Item 4. Controls and Procedures
 
Disclosure Controls and Procedures.
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of September 30, 2013, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of September 30, 2013, our disclosure controls and procedures were effective as of September 30, 2013.

Changes in Internal Control over Financial Reporting.
 
There were no changes to our internal control over financial reporting during the first quarter ended September 30, 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


PART II — OTHER INFORMATION

Item 1.  Legal Proceedings
None.

Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide this information.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the three months ended September 30, 2013.  The securities bear a restrictive legend and no advertising or public solicitation was involved.

The Company issued 2,273,751 shares of common stock to various contractors, officers, and directors for services that were valued at approximately $1,386,000 and 30,000 shares of common stock upon the exercise of warrants.  In addition, the Company issued 300,000 warrants in conjunction with its offering of convertible debt.

The issuances described above were made in private transactions or private placements intending to meet the requirements of one or more exemptions from registration, including the exemption provided under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”).  The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities; the shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions.  We have never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.
 
Item 3. Defaults upon Senior Securities
None.

Item 4.  Mine Safety Disclosures
None.
 
 
 
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Item 5. Other Information
None.

Item 6. Exhibits
The following documents are filed as part of this Report:
 
EXHIBIT INDEX



Number
  
Description
3(i).1
  
Fourth Amended and Restated Certificate of Incorporation(1)
     
3(i).2
 
Amendment to Fourth Amended and Restated Certificate of Incorporation(1)
     
3(ii)
  
Bylaws(1)
     
4.1
  
HumanBeams, Inc. 2004 Incentive Compensation Plan(1)
     
4.2
 
Beamz Interactive 2009 Incentive Compensation Plan(1)
     
4.3
 
First Amendment to Beamz Interactive 2009 Incentive Compensation Plan(1)
     
4.4
 
Second Amendment to Beamz Interactive 2009 Incentive Compensation Plan(1)
     
4.5
 
Non-Qualified Deferred Compensation Plan(1)
     
10.1
 
Consulting Agreement dated July 12, 2013 (2)
     
31.1
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3)
     
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3)
     
32.1
  Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3) 
     
32.2
 
Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3)
     
101    Interactive data files pursuant to Rule 405 of Regulation S-T. 
(1) Previously filed as an exhibit to the Company’s Registration Statement on Form 10, filed April 19, 2012.
(2) Previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on July 16, 2013
(3) Filed herewith

 
 
 
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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
Date: November 14, 2013
 
 
 
 
Date: November 14, 2013
BEAMZ INTERACTIVE, INC.
 
 
 
By   /s/ Charles R. Mollo
Charles R. Mollo
Chief Executive Officer
 
By  /s/Joan W. Brubacher
Joan W Brubacher
President/CFO
   


 
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