BEAMZ INTERACTIVE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2012 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, 2012.

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 102, 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 used to develop new market opportunities in a wide variety of music, game, therapy, education, senior care, lighting and consumer applications. Our first commercial products ("Beamz Player" and "Beamz Pro") bring music to everyone in a manner that has previously not been possible. By connecting the Beamz Player to a PC computer and installing the included software, the user can "play" a wide range of digitized musical instruments by simply interrupting one or more laser beams with their hands, thereby creating great music in conjunction with a background rhythm track of original, popular, disc jockey (DJ) and children's songs across numerous music genres (including Jazz, Blues, Hip Hop, Rock, Classical, Latin). In each song the user can select up to 12 different instruments, music clips and sound effects that are harmoniously paired with a background rhythm track, amounting to hundreds of instruments to choose from across all songs in the Beamz Music Library. These are often actual recordings of artists playing such instruments, thus sound just like a high quality digital recording of the instrument. The included Beamz Player software makes it easy to make great sounding music in minutes by following the diagram of the Beamz Player on the screen of the attached computer that allows the user to identify which laser beam controls which instruments. Beamz songs are set up to be harmonious regardless 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. Because the music is harmonious no matter which laser beam is interrupted Beamz Products allow people that have no previous musical background or training to play and enjoy music within minutes, yet it has the depth to enable accomplished DJs, artists and musicians to perform, compose and create sophisticated interactive music.

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.

18 --------------------------------------------------------------------------------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 Player interactive music 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 (e.g. put their hands or any other object through the path of) the laser beams.

In the consumer market, the Beamz Player 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 for purchase, 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 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. Content from musician David Ellefson is an example of new music created and published to be experienced exclusively through the Beamz interactive music systems. Musicians may also record their "performances" with the interactive Beamz songs, which may vary depending on how they choose to playback the pre-programmed samples, yielding significant variations of songs.

For the performing musician and/or DJ, the Beamz laser controller may be used with 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). 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.

Our current hardware product offering consists of three major product lines: the Beamz Player consumer product family, the Beamz DJ and Beamz Pro product family, and the Beamz Education, Special Needs, and Physical Rehabilitation product family (collectively the "Beamz Products"). The basic hardware for these products has been in full production since late 2010. We have produced and distributed to customers approximately 10,000 units of our first and second generation Beamz Player and Beamz Pro products.

Our product offering consists of a variety of hardware configurations, content and software that are tailored to each target market.

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.

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, we believe that the following accounting policies and estimates are 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 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.

19 --------------------------------------------------------------------------------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 December 31, 2012 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 no 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 that have been issued with our 2012 bridge financing during the six months ended December 31, 2012 have been valued at $.55/share based on a third party valuation. The warrants issued with our 2012 bridge financing during the year ended June 30, 2012 have been valued at $.98/share, based on the offering price in our private placement memorandum, and a volatility of 150%. As the Company begins trading on the OTCQB market, or the Company sells securities at a different price, this value may change with respect to future issuances as the market price varies for our Common Stock.

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.

Common Stock issuances are currently being valued at $.57/share, which is the estimated market price based on a third-party valuation due to limited trading to date. As the Company trading on the OTCBB market increases, or the Company sells securities at a different price, this value may change with respect to future issuances as the market price varies for our common stock.

20 --------------------------------------------------------------------------------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 & development activities and costs for outside services.

Results of Operations and Financial Condition For the three months ended December 31, 2012 compared with the three months ended December 31, 2011: Revenues. The Company generated revenues for the three months ended December 31, 2012 of $74,048, as compared to revenues of $152,858 for the three months ended December 31, 2011, or a 52% decrease in revenues. The decrease in revenue is due primarily to: (a) the elimination of several retail accounts in 2012 and (b) the appearance on "The View" TV show which drove material sales in 2011, and was not replicated in 2012. These programs were not pursued in 2012 as the Company concentrated on developing its next-generation product, minimizing expenses and pursuing necessary financing to implement a more substantial consumer marketing program in the latter part of 2013.

Cost of Goods Sold. Cost of goods sold for the three months ended December 31, 2012 were $30,991, as compared to cost of sales of $83,568 for the three months ended December 31, 2011, for a decrease in cost of sales of $52,577. This is due to ongoing product cost reductions, a favorable product & channel mix in 2012 and lower sales levels. The gross margin rose to approximately 58% for the three months ended December 31, 2012 as compared to the gross margin of approximately 45% for the three months ended December 31, 2011. The increase in the gross margin is primarily due to product cost reductions and a favorable product and channel mix in 2012.

Research and Development ("R&D"). R&D expenses for the three months ended December 31, 2012 were $212,640, as compared to R&D expenses of $28,662 for the three months ended December 31, 2011, or a 642% increase. The increase is due to the increased cost associated with our next-generation product development in 2012. In addition, the three month period ending December 31, 2012 included approximately $26,000 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 December 31, 2012 were $450,784 as compared to G&A expenses of $142,810 for the three months ended December 31, 2011, or a 215% increase in G&A expenses. The increase is due to increased costs of approximately $192,000 related to raising capital and related services provided by various financial consultants, and included non-cash G&A expenses of approximately $159,000 for the three months ending December 31, 2012.

Sales & Marketing expenses. Sales and Marketing expenses for the three months ended December 31, 2012 were $198,546, as compared to sales and marketing expenses of $83,737 for the three months ended December 31, 2011, or a 137% increase. The increase is due to increased infrastructure and consulting personnel to position the Company to implement its 2013 sales plans, and included approximately $45,000 in non-cash expenses during 2012.

Registration Costs. Registration costs for the three months ended December 31, 2012 were $47,883 as compared to nil for the three months ended December 31, 2011. The increase is due to the additional costs related to the preparation and filing of the Form 10 during the three months ended December 31, 2012 and various legal costs related to being a public company.

Interest Expense. Interest expense was $133,990 for the three months ended December 31, 2012, as compared to $797 for the three months ended December 31, 2011, or an increase of $133,193. The increase is due to additional bridge notes executed in 2012 in addition to the non-cash amortization of debt discounts of approximately $105,000 on the bridge loans.

Net Loss. We had a net loss for the three months ended December 31, 2012 of $1,000,936, as compared with a net loss of $192,272 for the three months ended December 31, 2011, or an increase in net loss of 421%. The increase in net loss for the three months ended December 31, 2012 is due to the increase in registration costs incurred to file the Company's Form 10 and ongoing compliance, the increase in general and administrative costs-most notably related to financing activities and the increase in research and development costs, offset by improved gross margins as previously discussed. Approximately $230,000 of this loss was non-cash.

21 --------------------------------------------------------------------------------All material changes in financial condition and results of operations for the three months ended December 31, 2012 compared with the three months ended December 31, 2011 are identified in the above analysis for the periods ended December 31, 2012 and 2011.

For the six months ended December 31, 2012 compared with the six months ended December 31, 2011: Revenues. The Company generated revenues for the six months ended December 31, 2012 of $177,173, as compared to revenues of $273,320 for the six months ended December 31, 2011, or a 35% decrease in revenues. The decrease in revenue is due primarily to: (a) the decrease in sales generated from a one-time sale to our strategic license partner in 2011; (b) elimination of several retail accounts in 2012 and (c) the appearance on "The View" TV show that drove material sales in 2011 and was not replicated in 2012. These programs were not pursued in 2012 as the Company concentrated on developing its next-generation product, minimizing expenses and pursuing necessary financing to implement a more substantial consumer marketing program in the latter part of 2013.

Cost of Goods Sold. Cost of goods sold for the six months ended December 31, 2012 were $66,863, as compared to cost of sales of $204,813 for the six months ended December 31, 2011, for a decrease in cost of sales of $137,950. This is due to ongoing product cost reductions, a favorable product & channel mix and lower sales levels in 2012. The gross margin rose to approximately 65% for the six months ended December 31, 2012 as compared to the gross margin of approximately 25% for the six months ended December 31, 2011. The increase in the gross margin is primarily due to a one-time $83,200 product sale to Cypherat about cost in the period ended September 30, 2011, product cost reductions and a favorable product and channel mix in 2012.

Research and Development ("R&D"). R&D expenses for the six months ended December 31, 2012 were $326,288, as compared to R&D expenses of $88,342 for the six months ended December 31, 2011, or a 269% increase. The increase is due to the increased cost associated with our next generation product development in 2012.

In addition, the six months ending December 31, 2012 included approximately $58,000 of non-cash expenses associated with stock grants to various development consultants General and Administrative expenses ("G&A"). G&A expenses for the six months ended December 31, 2012 were $638,500 as compared to G&A expenses of $270,159 for the six months ended December 31, 2011, or a 136% increase in G&A expenses. The increase is due to increased costs of approximately $263,000 related to raising capital and related services provided by various financial consultants, and included non-cash G&A expenses of approximately $280,000 for the six months ending December 31, 2012.

Sales & Marketing expenses. Sales and Marketing expenses for the six months ended December 31, 2012 were $328,068, as compared to sales and marketing expenses of $192,884 for the six months ended December 31, 2011, or a 70% increase. The increase is due to additional infrastructure and consulting personnel to position the Company to implement its 2013 sales plans, and included approximately $53,000 in non-cash expenses during 2012.

Registration Costs. Registration costs for the six months ended December 31, 2012 were $174,288 as compared to nil for the six months ended December 31, 2011. The increase is due to additional costs related to the preparation and filing of the Form 10 during the six months ended December 31, 2012 and various legal costs related to being a public company.

Interest Expense. Interest expense was $195,910 for the six months ended December 31, 2012, as compared to $2,934 for the six months ended December 31, 2011, or an increase of $192,976. The increase is due to additional bridge notes executed in 2012 in addition to the non-cash amortization of debt discounts of approximately $155,000 on the bridge loans.

Net Loss. We had a net loss for the six months ended December 31, 2012 of $1,553,044, as compared with a net loss of $496,923 for the six months ended December 31, 2011, or an increase in net loss of 212%. The increase in net loss for the six months ended December 31, 2012 is due to the increase in registration costs incurred to file the Company's Form 10 and ongoing compliance, the increase in general & administrative costs-primarily related to financing activities and the increase in research and development costs, offset by improved gross margins as previously discussed. Approximately $545,000 of this loss was non-cash.

All material changes in financial condition and results of operations for the six months ended December 31, 2012 compared with the six months ended December 31, 2011 are identified in the above analysis for the periods ended December 31, 2012 and 2011.

22 --------------------------------------------------------------------------------Liquidity and Capital Resources Our principal liquidity from inception (2001) to December 31, 2012, came from the sale of equity interests and debt financing. We issued 15,093,782 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. 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 2011. Through December 31, 2012, the Company received $1,333,075 from the 2012 bridge loan financing of which $1,200,420 was received from related parties. As of December 31, 2012, total paid-in capital was $12,456,769. During the six months ended December 31, 2012, we used approximately $61,749 to fund operations that was funded primarily by loans from related parties.

We anticipate incurring significant expenditures during fiscal 2013 and 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 private placement of our common stock and bridge loan 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.

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, 2012 and 2011.

Off-Balance Sheet Arrangements None.

Recent Accounting Pronouncements For the period ended December 31, 2012, there were no changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended June 30, 2012.

[ Back To Technology News's Homepage ]