SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2014
Commission file number 000-54662
Beamz Interactive, Inc.
(Name of registrant as specified in its charter)
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Delaware
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94-3399024
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(State or other jurisdiction of incorporation)
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(IRS employer identification no.)
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15354 N. 83rd Way, Suite 101
Scottsdale, Arizona 85260
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(480) 424-2053
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(Address of principal executive offices)
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(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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)
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange A. Yes o No x
As of September 24, 2014, 53,803,411 shares of the registrant’s $.001 par value common stock were issued and outstanding (“Common Stock”).
The aggregate market value of the registrant’s voting and non-voting securities held by persons other than affiliates of the registrant – computed at the price at which the registrant’s common equity was last sold is $576,424
BEAMZ INTERACTIVE, INC.
FORM 10-K
JUNE 30, 2014
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PART I
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ITEM 1. BUSINESS
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3
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ITEM 1A. RISK FACTORS
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7
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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7
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ITEM 2. PROPERTIES
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7
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ITEM 3. LEGAL PROCEEDINGS
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7
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ITEM 4. MINE SAFETY DISCLOSURES
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7
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PART II
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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8
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ITEM 6. SELECTED FINANCIAL DATA
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9
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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9
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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14
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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15
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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33
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ITEM 9A. CONTROLS AND PROCEDURES
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33
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ITEM 9B. OTHER INFORMATION
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33
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PART III
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
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34
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ITEM 11. EXECUTIVE COMPENSATION
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35
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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40
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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43
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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44
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PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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45
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EMERGING GROWTH COMPANY STATUS
As a result of the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted in 2012, the information that we are required to disclose has been reduced in a number of ways because, in addition to being a smaller reporting company, we also qualify as an “emerging growth company,” as defined in the JOBS Act (an “EGC”). We will retain that status until the earliest of (A) the last day of the fiscal year in which we have total annual gross revenues of $1,000,000,000 (as indexed for inflation in the manner set forth in the JOBS Act) or more; (B) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our Common Stock pursuant to an effective registration statement under the Securities Act of 1933; (C) the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor thereto. As an EGC, we will continue to be relieved from certain significant disclosure requirements, even if we no longer qualify as a smaller reporting company, including the following:
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EGCs are excluded from Section 404(b) of the Sarbanes-Oxley Act, which requires our auditors to attest to and report on internal controls over financial reporting. The JOBS Act also amended Section 103(a)(3) of the Sarbanes-Oxley Act to provide that (i) any new rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or changes to the auditor’s report to include auditor discussion and analysis (each of which is currently under consideration by the PCAOB) shall not apply to an audit of an EGC and (ii) any other future rules adopted by the PCAOB will not apply to our audits unless the SEC determines otherwise.
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The JOBS Act amended Section 7(a) of the Securities Act to provide that as an EGC we need not present more than two years of audited financial statements in an initial public offering registration statement and in any other registration statement need not present selected financial data pursuant to Item 301 of Regulation S-K for any period prior to the earliest audited period presented in connection with such initial public offering. In addition, as an EGC we are not required to comply with any new or revised financial accounting standard until such date as a private company (i.e., a company that is not an “issuer” as defined by Section 2(a) of the Sarbanes-Oxley Act) is required to comply with such new or revised accounting standard. Corresponding changes have been made to the Exchange Act, which relates to periodic reporting requirements, which would be applicable to us if we were required to comply with them. Also, as long as we are an EGC, we may continue to comply with the reduced requirements applicable to smaller reporting companies under Item 402 of Regulation S-K, which requires extensive quantitative and qualitative disclosure regarding executive compensation
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The JOBS Act will also continue to exempt us from the following additional compensation-related disclosure provisions that were imposed on U.S. public companies pursuant to the Dodd-Frank Act: (i) the advisory vote on executive compensation required by Section 14A(a) of the Exchange Act, (ii) the requirements of Section 14A(b) of the Exchange Act relating to stockholder advisory votes on “golden parachute” compensation, (iii) the requirements of Section 14(i) of the Exchange Act as to disclosure relating to the relationship between executive compensation and our financial performance, and the requirement of Section 953(b)(1) of the Dodd-Frank Act, which will require disclosure as to the relationship between the compensation of our chief executive officer and median employee pay.
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As an EGC, 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.
PART I
ITEM 1. BUSINESS
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 music and laser controller technology that can be implemented in a wide variety of music, game, education, therapy, senior care, lighting and consumer applications. Our professional and consumer products (”Beamz Education and Healthcare”, or “Beamz EHC” and “Beamz by Flo” 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, or by playing the touch screen on their mobile device. 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. By following the diagram on the screen of the attached device, the user is able to identify which laser beam controls the various 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, no previous musical background or training is required to play and enjoy music with the Beamz.
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).
We have commercialized several products that use the Beamz interactive laser controller technology for music making and music-controller related products. Our Beamz EHC product family includes the Professional and Home Editions. The Professional Edition is designed for use by professionals in educational or therapeutic settings. In schools, for example, the Beamz is being used to teach learning concepts, implement therapy protocols in special needs classrooms, or as a sensory solution for children with autism or other disabilities. When used in a therapeutic setting or in a senior home or living facility, the Beamz Professional Edition can be used to motivate children, adults and seniors to achieve their therapeutic goals through the use of music. In addition, during the upcoming months, Beamz is planning to offer professional lesson plans and therapeutic protocol manuals, all of which will be paired and used with Beamz music content, and adapter plates that allow the user to attach the Beamz to a desk, wheelchair, or other platform. The Beamz can also be paired with switches that allow users who are unable to readily break the laser beams to play the sounds to simply push a switch to generate the same result. When paired with the appropriate content and these additional accessories when needed, the Beamz Professional becomes a compelling solution for professional education and therapeutic professionals alike.
In addition, we offer a Beamz Home Edition, which is universally designed so that anyone, regardless of age or ability level, can actively participate in making music. In addition to the sheer pleasure of playing music and creating original song mixes, Beamz can be used in very specific ways to target skill development or extend physical and cognitive therapies at home. Beamz software is totally accessible, meaning if a family member requires the use of a switch, adapted keyboard, touch surface or other option the ability to connect is built in.
As of September 2014, our primary product offering consists of three product lines: the Beamz EHC product family, which includes the Beamz EHC Professional and Home Editions, the Beamz By Flo consumer product family, and stand-alone software applications that work on PCs, MACs, iPhones, iPads and Android devices without connecting to the Beamz hardware. The basic technology for these products has been in full production since late 2010. We produced and distributed to customers approximately 13,000 units of our first and second generation Beamz products. The first units of our Beamz by Flo product began shipping in September 2013 and the Beamz EHC product family first shipped in January 2014. In addition to these primary product lines, we also offer a variety of music and other content which can be purchased for use with our applications and/or the Beamz Products.
During the year ended June 30, 2014 the Company had two customers that represented approximately 46% of net sales. The Company had no accounts receivable at June 30, 2014 from these customers.
Future Products
In August 2014 we introduced our Android tablet and mobile phone applications and are planning to introduce an update to these applications in 2015 that will allow them to also be used with the Beamz hardware products, similar to the iOS products we currently offer. Also in 2015 we expect to introduce compatibility with Windows 8 tablet devices. In September 2014 we will be introducing our new early learning iOS and Android applications, which include interactive music and video content. We also expect to continue to develop ongoing releases of lesson plans, therapeutic protocols and music content for use both with the Beamz hardware products and applications. In the future, we expect to also address new market opportunities such as the toy or gaming markets.
Marketing
We believe we are uniquely positioned to make significant inroads in the sizable education, therapy and special needs markets worldwide. We are currently marketing the Beamz EHC Professional Edition through direct sales to select education markets to build awareness for our products with educators. Our plans also include working with therapists and educators to continue to develop lesson plans and therapeutic protocols for use with the Beamz EHC Professional Edition products. Those collaborations include endorsements from the educators and therapists with whom we are working, as well as their availability for press events and joint presentations at industry trade shows. We have also redesigned our website to feature both the Professional and Home editions of the Beamz EHC family of products. The website includes numerous videos that demonstrate use of the Beamz in various educational, special needs and/or therapeutic situations.
In the senior, special needs, and early learning home markets, we intend to advertise the Beamz EHC Home Edition product to individuals and their families through a digital marketing campaign that includes e-mail, social media, YouTube and Google ad campaigns, particularly through the holiday season. We are also pursuing relationships with select retailers who specialize in sales to the special needs community, as well as with organizations that are also directly involved with individuals who receive services in their homes, and we will participate in trade shows directed at these markets, such as the American Therapy Recreation Association (“ATRA”) trade show, which we recently attended.
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.
Sales Staff Efforts. In addition to our direct sales strategy in select education markets, we have entered into agreements with more than twenty select educational product resellers worldwide and intend to continue to build our reseller network as awareness in the education market grows. We are in the process of building a similar reseller network in the therapy and senior living market and are pursuing a direct sales effort to large corporate providers of senior living facilities. We currently have two international sales resources based in the United Kingdom and two United States sales resources – one who is dedicated to educational market sales and the second who is dedicated to sales in the therapy and senior living markets. We intend to add additional sales resources as funding permits.
Website and Internet Marketing Strategy. We intend to employ a digital marketing campaign, including e-mail, social media, YouTube and Google ad campaigns to not only increase awareness of our products, but also to drive sales through our web store.
Strategic Relationships. We have recently entered into agreements with The Learning Station and Gigglebellies (Magic Factory) to adapt a variety of their early learning educational and entertainment videos for use with the Beamz Products and Beamz Applications, which are available for PC, MAC, iOS and Android operating systems. These newly adapted videos form the basis of our early learning content and are targeted at children from age two through early grammar school. This content is also being promoted through e-mail campaigns and social media in order to drive sales through our applications. In addition, we are collaborating with Learning Station for the creation of educational lesson plans for use with the Learning Station/Beamz video content and both Learning Station and Gigglebellies will be promoting the Beamz early learning content which incorporates their videos to their respective customer bases. We expect to seek strategic relationships with other companies such as Learning Station and Gigglebellies in order to continue to build a wide variety of our application content offering, as well as to extend the Beamz technology into other markets, such as toys or gaming.
Research and Development
We believe continued innovation through research and development is critical to our future success. Through June 30, 2014, 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 $907,055 on research and development in fiscal 2014 and $880,379 in fiscal 2013. 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, strategic relationships, and the availability of funding.
Manufacturing and Assembly
Assembly of our 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.
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 seven U.S. Utility Patents and one U.S. Design Patent. We also have five pending U.S. Utility Patent Applications, three pending International Utility Patent Applications and three 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” and two pending foreign trademark applications. We have a U.S. Registered Copyright on our core Beamz software. We have filed, or will file, copyrights on our original 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”). The restructured agreement expires May 19, 2021. 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 the 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 perpetual 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:
Original Music Licenses
Beamz licenses original music from various labels, publishers and recording artists. In general, the agreements with recording artists provide that they will receive 30% of the net revenue received by Beamz for the sale of such original music.
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 $0.091 for each licensed product sold.
Competition
While there are no direct competitors for the Beamz Products and technology, there are several indirect competitors in both the education and health care market and the consumer market. In education and health care, there are various options that may be chosen by an educator or therapist for accomplishing their particular goals with their students, patients or seniors. While some of those products may include a musical aspect, none provide the music-making enjoyment or stimulation in the same manner as the Beamz Products. There are indirect competitors in the consumer market as well who make 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 of the products offered in Beamz' markets 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 to allow for immediate recreational or therapeutic 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 two full-time employees. All other management and business operations services are provided on a consulting contract basis. We have consulting contracts with nine 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.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide this information.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We do not own any real property. We lease approximately 5,800 square feet of space from Arizona Design LLC for $5,500/month. This lease terminates May 31, 2015. We believe that our current facilities are sufficient to meet our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
We registered and began to be traded on the OTCQB under the symbol “BZIC,” on January 22, 2013 but there is a limited active public market for our securities at this time. OTCQB is one of three tiers established by OTC Markets Group, Inc., which operates one of the world’s largest electronic interdealer quotation systems for broker-dealers to trade securities not listed on a national exchange. The following table sets forth the high and low sales price information of the Company’s common stock for the quarterly periods indicated as reported by NASDAQ. Please note that we do not have this information for the quarter ended September 30, 2012 or December 31, 2012 because we were not yet traded on the OTCQB.
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YEAR
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QUARTER ENDING
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HIGH
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LOW
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2012
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September 30, 2012
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N/A
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N/A
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December 31, 2012
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N/A
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N/A
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2013
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March 31, 2013
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$2.00
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$0.60
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June 30, 2013
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$0.80
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$0.20
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September 30, 2013
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$1.33
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$0.30
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December 31, 2013
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$0.75
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$0.13
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2014
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March 31, 2014
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$0.62
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$0.10
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June 30, 2014
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$0.22
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$0.04
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As of September 24, 2014, we had 53,803,411 shares of Common Stock outstanding and 796,039 shares of Series D Convertible Preferred Stock outstanding that are convertible into 7,960,310 shares of Common Stock. We also have outstanding options for the purchase of 23,325 shares of Common Stock, warrants for the purchase of 1,437,015 shares of Common Stock, and Convertible Secured Subordinated Promissory Notes convertible into 16,155,405 shares of Common Stock.
Holders
Our Common Stock is currently held by approximately 154 holders of record, while our Series D Convertible Preferred Stock is held by 35 holders of record.
Dividends
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in any of our future debt agreements and other factors our Board of Directors may deem relevant. The payment of dividends will also be subject to the requirements of the Delaware General Corporation Law.
The information required to be reported by Item 201(d) of Regulation S-K has been included in Item 12 of this Form 10-K.
Recent Sales of Unregistered Securities
Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the year ended June 30, 2014. As further described in the notes accompanying the financial statements filed herewith, during the year ended June 30, 2014, the Company issued:
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7,205,266 shares of common stock as consideration for services provide by independent contractors and consultants and members of the Board of Directors;
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1,590,110 shares of common stock in relation to the exercise of warrants;
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150,001 shares of common stock for the conversion of Series D preferred stock;
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580,000 shares of common stock for the conversion of accounts payable and debt
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We are currently conducting a convertible secured debt financing of up to $6,500,000. Such loans will bear interest at 10% per annum and have maturity dates through December 2015. For each dollar loaned we will issue to the purchaser a warrant to purchase one-half (1/2) share of Common Stock at an exercise price of $0.02 per share. The warrants have a term of three years. The principal and interest amounts issued pursuant to this debt financing are represented by convertible notes which are convertible into common stock of the Issuer at a rate of $0.40 per share. In February 2014 the convertible debt financing agreement was amended to provide the purchasers after the amendment date a warrant to purchase one share of Common Stock for each dollar loaned at an exercise price of $.02 per share and a term of three years. The conversion price of the notes issued following the amendment date is $0.20 per share. As of the date of this filing we have received proceeds equal to $4,808,509 of which $4,545,809 was provided by related parties.
In July 2014 we initiated a private placement of up to 30,000,000 shares of Common Stock at $0.05 per share including up to 30,000,000 warrants to purchase Common Stock (the “2014 Offering”). The warrants are immediately exercisable, have a term of three years, and have an exercise price of $0.02 per share. As of the date of this filing, we have received proceeds of $1,025,000 in connection with this offering and have issued 20,500,000 shares of Common Stock and 20,500,000 warrants to purchase Common Stock. The placement agent for the unit offering will receive a cash fee equal to 10% of the gross proceeds, excluding proceeds received directly from management or from investing parties introduced by management. The 2014 Offering was made in reliance on the exemption from registration available under Rule 506(c) of Regulation D. Participation in the 2014 Offering was available only to “accredited investors” as such term is defined under Regulation D and we filed a Form D with the SEC also in compliance with Regulation D.
Except as otherwise described in the paragraph above with respect to the 2014 Offering, 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 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide this information.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, expected, estimated, projected, suggested or intended.
Overview
We have developed an interactive laser controller technology that can be used in a wide variety of music, game, education, therapy, lighting and consumer applications. Our Beamz Products can bring music to everyone in a manner that has previously not been possible. By simply interrupting one or more laser beams with their hands, the user can play a wide range of musical instruments and create great music in conjunction with a background rhythm track of original, popular, and children’s songs across numerous music genres, including jazz, blues, hip hop, rock, classical and Latin. Currently, Beamz Products are being used in schools to teach learning concepts, implement therapy protocols and as a sensory solution for children with Autism, as well as in the implementation of therapy protocols to motivate children, adults and seniors to achieve their therapeutic goals through the use of music. Consumers also enjoy the product simply as a form of musical entertainment.
Factors That May Influence Future Results of Operations
The following is a description of factors that may influence our future results of operations, including significant trends and challenges that we believe are important to an understanding of our business and results of operations.
Revenues
The generation of recurring revenues through sales and licensing of our current and new Beamz products, technology and content are an important part of our business model. Our first commercial product began shipping in fiscal 2008 at a retail price point of $599 per unit. Sales at that time were achieved through an exclusive distribution arrangement with Sharper Image, who subsequently filed for bankruptcy in early 2008. We refocused our strategy in 2009 to seek alternative sales and distribution channels, and to reduce the price for our consumer product to $199.95. Based on market feedback, we defined and developed a second generation product that had a much lower cost and a broader range of capabilities. A consumer and professional version of the second generation product began shipping in late 2010, allowing us to achieve net revenues of $563,411 and $338,830 in fiscal years ending June 30, 2011 and 2012, respectively. The revenues related to the second generation product continued through fiscal year ending June 30, 2013, with net revenues of $261,949, although the last quarter of fiscal 2013 sales were not material due to the focus on the next generation product that began shipping in September 2013. Our third generation products, Beamz by Flo and Beamz EHC, include many new features based on continuing market feedback – most notably compatibility with Apple computers and iOS devices such as iPhones and iPads, MIDI capability and a smaller form factor. During the fiscal year ended June 30, 2014 net revenues for the third generation product were $362,851.
Since inception, our revenues relate primarily to the sale of our Beamz Player and Beamz Pro products. We have now phased out these products and expect our material future revenues to come from our Beamz EHC and Beamz By Flo product families, as well as from sales of music content, therapeutic protocols and lesson plans, all developed to provide a satisfying user experience. Historically, our 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.
Our revenue recognition policies are more fully described in the “Critical Accounting Policies and Significant Judgments and Estimates” section below.
Research and Development Costs
Our research and development costs consist primarily of costs associated with the conceptualization, design, testing and prototyping of our various Beamz Products and products under development, and the development of software and content (such as songs, games, and educational content) for such products. This includes the consulting fees, travel and benefits of research and development personnel and contractors; materials and supplies used by our research personnel, sponsored contract research and product development with third parties; and licensing costs. Subject to securing adequate financing, research and development expenses may increase as we: (1) continue to develop enhancements to our product offering; (2) expand our product development efforts for both music, therapeutic and educational content for use with the Beamz product family; and (3) expand research and development to apply our technologies to additional product, market, and technology applications.
Selling, Marketing, General and Administrative Expenses
Our selling, marketing, general and administrative expenses consist primarily of consulting fees and expenses, advertising and commercial fees and endorsement costs related to our relationship with Flo Rida, sales incentive payments and commissions, travel and benefits; share-based compensation; professional fees, including fees for attorneys and outside consultants; intellectual property protection filings, insurance, marketing costs, and other general and administrative expenses, which include corporate licenses and taxes, postage, office supplies and meeting costs. Our selling, general and administrative expenses are expected to increase due to costs associated with the commercialization primarily of our Beamz EHC products, increased consultant fees and/or headcount necessary to support our anticipated growth in operations, and the additional operational and regulatory burdens and costs associated with operating as a publicly traded company. In addition, we expect to incur additional costs associated with protecting our intellectual property rights as necessary to support our product offerings.
Critical Accounting Policies and Significant Judgments and Estimates
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.
Going Concern. The going concern basis of presentation assumes we will continue in operation throughout the next fiscal year and into the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As discussed below, certain conditions currently exist which raise substantial doubt upon the validity of this assumption. The financial statements do not include any adjustments that might result from the outcome of the uncertainty.
The accompanying financial statements as of and for the year ended June 30, 2014, have been prepared assuming that the Company will continue as a going concern. As of June 30, 2014, the Company has yet to achieve profitable operations and is dependent on our ability to raise capital from stockholders or other sources to sustain operations. Ultimately, we hope to achieve viable profitable operations when markets can be developed for our products and sales of our products increase sufficiently to support our costs. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. These factors raise substantial doubt about the Company's ability to continue as a going concern. In their report attached to our financial statements, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements for the fiscal year ended June 30, 2014, concerning the Company’s assumption that we will continue as a going concern.
Management's plans to address these matters include raising additional financing through offering our shares of capital stock in private offerings of our securities and through debt financing if available and needed. However, should the Company be unsuccessful with these financing efforts, it will scale back operations and expects, but has no guarantee, that existing shareholders will continue to support the Company at such reduced levels. The Company plans to become profitable by executing our current sales, marketing, partner and development plans.
Collectability of Accounts Receivable. Accounts receivable consist primarily of amounts due from customers from sales of products and is recorded net of an allowance for doubtful accounts and product returns. The allowance for uncollectible accounts and product returns totaled $9,274 and $4,256 as of June 30, 2014 and 2013, respectively. In order to record our accounts receivable at their net realizable value, we assess their collectability. A considerable amount of judgment is required in order to make this assessment, based on a detailed analysis of the aging of our receivables, the credit worthiness of our customers and our historical bad debts, product returns and other adjustments. If economic, industry or specific customer business trends worsen beyond earlier estimates, we increase the allowance for uncollectible accounts by recording additional expense in the period in which we become aware of the new conditions.
The majority of our customers are based in the United States and European Union. The economic conditions in the United States and European Union can significantly impact the recoverability of our accounts receivable.
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. In determining whether inventory valuation issues exist, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, historical sales and production usage. Shifts in market trend and conditions, changes in customer preferences or the losses of one or more significant customers are factors that could affect the value of our inventories. These factors could make our estimates of inventory valuation differ from actual results. We periodically review our inventory for obsolete items and provide a reserve upon identification of potential obsolete items. With the launch of our next generation product in September 2013, we believed that our second generation products became obsolete and provided a reserve for them in their entirety, in the amount of $100,708, as of June 30, 2013.
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 June 30, 2014, that could have a significant effect on our financial statements. Our returns after 2011 remain open for examination.
Share-based compensation. We account for compensation for all arrangements under which directors, 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 ”. Certain of our directors and consultants have been granted long-term incentive awards, primarily restricted Common Stock, which provides them with equity interests as an incentive to remain in our service and align the recipients' interests with those of our equity holders. We estimate the fair value of restricted stock at the date of grant when awards are granted in accordance with ASC Topic 718 and the vesting date when awards are granted under ASC Topic 505-50. Share-based compensation expense is recognized in sales and marketing expenses and general and administrative expenses ratably over the vesting period at the greater of the amount amortized on a straight-line basis or the amount vested. Historically, we have valued the restricted Common Stock based on the per-share closing price as quoted on the OTCQB market
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
Comparison of the Twelve Months Ended June 30, 2014 to the Twelve Months Ended June 30, 2013
|
|
|
2014
|
|
|
2013
|
|
|
Percentage
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
362,851
|
|
|
|
261,949
|
|
|
|
38.5
|
%
|
|
Cost of goods sold
|
|
|
307,520
|
|
|
|
141,329
|
|
|
|
117.6
|
%
|
|
Depreciation and amortization
|
|
|
31,653
|
|
|
|
683
|
|
|
|
4534.4
|
%
|
|
Research and development expenses
|
|
|
907,055
|
|
|
|
880,379
|
|
|
|
3.0
|
%
|
|
Sales and marketing expenses
|
|
|
1,731,012
|
|
|
|
1,576,836
|
|
|
|
9.8
|
%
|
|
General and administrative expenses
|
|
|
2,731,517
|
|
|
|
1,717,872
|
|
|
|
59.0
|
%
|
|
Inventory impairment
|
|
|
-
|
|
|
|
100,708
|
|
|
|
(100.0)
|
%
|
|
Interest expense, net
|
|
|
708,416
|
|
|
|
585,582
|
|
|
|
21.0
|
%
|
|
Loss on extinguishment of debt
|
|
|
85,640
|
|
|
|
499,320
|
|
|
|
(82.8)
|
%
|
|
Net loss
|
|
|
(6,139,962)
|
|
|
|
(5,240,760)
|
|
|
|
17.2
|
%
|
Sales, net. Sales, net were $362,851 for the year ended June 30, 2014, compared to $261,949 for the year ended June 30, 2013. The increase was primarily due to the launch of the next generation Beamz Products.
Cost of Goods Sold. Cost of goods sold was $307,520 for the year ended June 30, 2014, compared to $141,329 for the year ended June 30, 2013. The increase in cost of goods sold was due to increased fulfillment costs due to the use of two warehouses from September 2013 through March 2014; and, for the year ended June 30, 2014 compared to June 30, 2013, higher revenues, increased shipping costs, and increased royalty fees related to the relationship with Flo Rida. The gross margin decreased to approximately 15% for the year ended June 30, 2014, compared to approximately 46% for the year ended June 30, 2013, and is primarily due to the increased fulfillment and shipping costs of approximately $97,000 and increased royalty fees of approximately $54,000. The Company does not expect additional increases in these fees going forward.
Research and Development Expenses. Research and development expenses were $907,055 for the year ended June 30, 2014, compared to $880,379 for the year ended June 30, 2013. This increase was due primarily to the development efforts associated with the third generation Beamz Products, most of which were completed in the first quarter of fiscal 2014, including both hardware development and software compatibility with the Windows, MAC, and iOS (iPhone and iPad) operating systems. Development of software compatible with the Android operating system, however, continued throughout the fiscal year and was completed after the fiscal year end. The periods ending June 30, 2014 and 2013 also include non-cash development contractor expenses of approximately $306,000 and $158,000, respectively associated with stock compensation.
Sales and Marketing Expenses. Sales and marketing expenses were $1,731,012 for the year ended June 30, 2014, compared to $1,576,836 for the year ended June 30, 2013. The increase was primarily due to contractor services related to the development of a sales and marketing presence in Europe. The years ending June 30, 2014 and 2013 also include non-cash contractor expenses of approximately $380,000 and $150,000, respectively associated with stock compensation.
General and Administrative Expenses. General and administrative expenses were $2,731,517 for the year ended June 30, 2014, compared to $1,717,872 for the year ended June 30, 2013. The increase relates primarily to the issuance of compensatory Common Stock to reward and provide an incentive to our consultants and board of directors and align their interest with our shareholders while conserving cash for expanding marketing, sales and research and development activities. Common Stock was issued by the Company for services and board of directors fees, the contracting with several financial contractors to secure outside financing, and increased legal fees related to the execution of numerous contracts. The periods ending June 30, 2014 and June 30, 2013, include non-cash expenses of approximately $1,544,000 and $563,000, respectively, associated with non-cash compensation (payments for various services were made in stock or bridge loan securities) for directors, the CEO, and other individuals.
Inventory Impairment. Inventory impairment charges decreased to zero for the year ended June 30, 2014. With the launch of our next generation product in September 2013, we believed that our older products became obsolete and provided a reserve for them in their entirety, resulting in an inventory impairment charge for the year ended June 30, 2013 of $100,708.
Other (Income) Expense, Net. Net other expense was $794,058 for the year ended June 30, 2014, compared to net other expense of $1,084,902 for the year ended June 30, 2013. The net decrease was primarily due to a decrease in the charge in fiscal 2014 as compared to 2013 for the extinguishment of debt in the amount of $85,640 and $499,320, respectively, offset by an increase in interest expense as the result of an increase in debt convertible of approximately $2.6 million during the year ended June 30, 2014. Of the $794,058, non-cash expenses totaled $784,747
Liquidity and Capital Resources
Our principal liquidity from inception (2001) to June 30, 2014, came from the sale of equity interests in private transactions and debt financing. As of June 30, 2014, we had issued 32,193,416 shares of Common Stock including the conversion of all shares of Series A, A-1, B, and C Convertible Preferred into shares of Common Stock. We also 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 June 30, 2014, the Company received $4,808,509 from the 2013 Secured Convertible Debt of which $4,545,809 was received from related parties, and $1,981,045 was received from the 2012 Bridge Loans of which $1,530,420 was received from related parties. As of June 30, 2014, total paid in capital equaled $18,382,374. During fiscal 2014, we have used approximately $1,011,912 to fund operations.
As discussed above, we anticipated incurring additional expenditures during fiscal 2014 and 2015 to pursue our planned business operations, including additional research and development of products and technology. Our ability to continue to execute on these plans is dependent on our ability to generate additional investment proceeds and/or cash flow from sales and operations. 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 this fiscal year and the company has now entered 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 and sales do not generate sufficient cash flow, 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. To date we have not had income from operations and our revenues have not been significant enough to be impacted by inflation.
As described in further detail above under Item 5, we are currently conducting a convertible debt financing which is meant to address our present liquidity concerns in addition to a private offering of our common stock. During July and August 2014 the Company has received proceeds of $1,025,000 under a $1.5 million private placement and has paid a commission related to same of $62,500. Included in the proceeds is $375,000 from entities controlled by an officer of the Company.
However, the present circumstances and our dependence on additional financing, raise substantial doubt about the Company's ability to continue as a going concern. In their report attached to our financial statements, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements for the fiscal year ended June 30, 2014, concerning the Company’s assumption that we will continue as a going concern.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk for changes in interest rates relates to our cash equivalents on deposit in demand deposit accounts and certificates of deposit. The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our invested cash without significantly increasing risk of loss. We do not currently use derivative financial instruments. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. Substantially all of our transactions have been denominated in United States dollars; accordingly, we do not have any material exposure to foreign currency rate fluctuations.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
Recent Accounting Pronouncements
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern and in May 2014, the FASB issued new accounting guidance related to revenue recognition.
ASU 2014-15 requires management to perform an assessment of going concern and under certain circumstances disclose information regarding this assessment in the footnotes to the financial statements. ASU 2014-15 is effective for the Company beginning July 1, 2016.
The new revenue recognition standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning July 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting these new accounting standards on our financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements during the year ended June 30, 2014 that are of significance, or potential significance to us.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Beamz Interactive, Inc.
We have audited the accompanying balance sheets of Beamz Interactive, Inc. as of June 30, 2014 and 2013, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Beamz Interactive, Inc. at June 30, 2014 and 2013, and the results of its operations, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring losses from operations and has had negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Certified Public Accountants
Phoenix, Arizona
October 10, 2014
BEAMZ INTERACTIVE, INC.
BALANCE SHEETS
June 30, 2014 and 2013
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
37,054 |
|
|
$ |
152,124 |
|
|
Accounts receivable, net
|
|
|
35,506 |
|
|
|
33,549 |
|
|
Inventory, net
|
|
|
336,205 |
|
|
|
- |
|
|
Prepaid expenses
|
|
|
57,939 |
|
|
|
632,050 |
|
| |
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
466,704 |
|
|
|
817,723 |
|
| |
|
|
|
|
|
|
|
|
|
Prepaid expenses - long term portion
|
|
|
7,000 |
|
|
|
126,750 |
|
|
Property and equipment, net
|
|
|
63,307 |
|
|
|
- |
|
|
Deposits
|
|
|
10,370 |
|
|
|
10,496 |
|
| |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
547,381 |
|
|
$ |
954,969 |
|
The Accompanying Notes are an Integral Part
of the Financial Statements
BEAMZ INTERACTIVE, INC.
BALANCE SHEETS (CONTINUED)
June 30, 2014 and 2013
LIABILITIES AND STOCKHOLDERS’ DEFICIT
| |
|
2014
|
|
|
2013
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
489,541 |
|
|
$ |
343,895 |
|
|
Accrued liabilities
|
|
|
497,916 |
|
|
|
130,060 |
|
|
Advances from related party
|
|
|
509,865 |
|
|
|
- |
|
|
Notes payable, net of discount - current
|
|
|
201,305 |
|
|
|
34,886 |
|
|
Notes payable - related parties, net of discount - current
|
|
|
2,788,289 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,486,916 |
|
|
|
508,841 |
|
| |
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
Notes payable, net of discount
|
|
|
51,314 |
|
|
|
147,473 |
|
|
Notes payable - related parties, net of discount
|
|
|
1,433,750 |
|
|
|
1,810,533 |
|
| |
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,971,980 |
|
|
|
2,466,847 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Stockholders' Deficit:
|
|
|
|
|
|
|
|
|
|
Preferred Stock 10,000,000 shares authorized $.001 par value:
|
|
|
|
|
|
|
|
|
|
Series D Convertible Preferred; 1,300,000 authorized;
|
|
|
|
|
|
|
|
|
|
796,039 and 811,038 shares issued and outstanding
|
|
|
796 |
|
|
|
811 |
|
|
Common Stock, $.001 par value, 40,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized; 32,193,416 and 22,668,039 shares issued and
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
32,193 |
|
|
|
22,668 |
|
|
Additional paid-in capital
|
|
|
18,349,385 |
|
|
|
16,131,654 |
|
|
Accumulated deficit
|
|
|
(23,806,973 |
) |
|
|
(17,667,011 |
) |
| |
|
|
|
|
|
|
|
|
|
Total Stockholders' Deficit
|
|
|
(5,424,599 |
) |
|
|
(1,511,878 |
) |
| |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
|
$ |
547,381 |
|
|
$ |
954,969 |
|
| |
|
|
|
|
|
|
|
|
The Accompanying Notes are an Integral Part
of the Financial Statements
BEAMZ INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
For The Years Ended June 30, 2014 and 2013
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
Sales, net
|
|
$ |
362,851 |
|
|
$ |
261,949 |
|
| |
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
307,520 |
|
|
|
141,329 |
|
| |
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
55,331 |
|
|
|
120,620 |
|
| |
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
31,653 |
|
|
|
683 |
|
|
Research and development expenses
|
|
|
907,055 |
|
|
|
880,379 |
|
|
Sales and marketing expenses
|
|
|
1,731,012 |
|
|
|
1,576,836 |
|
|
General and administrative expenses
|
|
|
2,731,517 |
|
|
|
1,717,872 |
|
|
Inventory impairment
|
|
|
- |
|
|
|
100,708 |
|
| |
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(5,345,906 |
) |
|
|
(4,155,858 |
) |
| |
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(708,416 |
) |
|
|
(585,582 |
) |
|
Loss on extinguishment of debt
|
|
|
(85,640 |
) |
|
|
(499,320 |
) |
| |
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(6,139,962 |
) |
|
|
(5,240,760 |
) |
| Provision for income taxes |
|
|
- |
|
|
|
- |
|
| Net Loss |
|
$ |
(6,139,962 |
) |
|
$ |
(5,240,760 |
) |
| |
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$ |
(0.24 |
) |
|
$ |
(0.35 |
) |
|
Weighted average common shares outstanding - basic
|
|
|
|
|
|
|
|
|
|
and diluted
|
|
|
25,519,419 |
|
|
|
15,185,945 |
|
The Accompanying Notes are an Integral Part
of the Financial Statements
BEAMZ INTERACTIVE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For The Years Ended June 30, 2014 and 2013
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
| |
|
Series D Convertible Preferred
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2012
|
|
|
800,440 |
|
|
$ |
800 |
|
|
|
14,146,082 |
|
|
$ |
14,146 |
|
|
$ |
11,839,928 |
|
|
$ |
(12,426,251 |
) |
|
$ |
(571,377 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D Convertible Preferred Stock
|
|
|
27,500 |
|
|
|
28 |
|
|
|
- |
|
|
|
- |
|
|
|
142,472 |
|
|
|
- |
|
|
|
142,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series D Convertible Preferred Stock
|
|
|
(16,902 |
) |
|
|
(17 |
) |
|
|
169,020 |
|
|
|
169 |
|
|
|
(152 |
) |
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in conjunction with bridge loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
657,358 |
|
|
|
- |
|
|
|
657,358 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services
|
|
|
- |
|
|
|
- |
|
|
|
1,709,000 |
|
|
|
1,709 |
|
|
|
928,771 |
|
|
|
- |
|
|
|
930,480 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt and interest to equity
|
|
|
- |
|
|
|
- |
|
|
|
5,185,260 |
|
|
|
5,185 |
|
|
|
2,535,562 |
|
|
|
- |
|
|
|
2,540,747 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
- |
|
|
|
- |
|
|
|
1,458,677 |
|
|
|
1,459 |
|
|
|
27,715 |
|
|
|
- |
|
|
|
29,174 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,240,760 |
) |
|
|
(5,240,760 |
) |
|
Balance, June 30, 2013
|
|
|
811,038 |
|
|
|
811 |
|
|
|
22,668,039 |
|
|
|
22,668 |
|
|
|
16,131,654 |
|
|
|
(17,667,011 |
) |
|
|
(1,511,878 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series D Convertible Preferred Stock
|
|
|
(14,999 |
) |
|
|
(15 |
) |
|
|
150,001 |
|
|
|
150 |
|
|
|
(135 |
) |
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
433,575 |
|
|
|
- |
|
|
|
433,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services
|
|
|
- |
|
|
|
- |
|
|
|
7,205,266 |
|
|
|
7,205 |
|
|
|
1,557,459 |
|
|
|
- |
|
|
|
1,564,664 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt, interest, and payables to equity
|
|
|
- |
|
|
|
- |
|
|
|
580,000 |
|
|
|
580 |
|
|
|
196,620 |
|
|
|
- |
|
|
|
197,200 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
- |
|
|
|
- |
|
|
|
1,590,110 |
|
|
|
1,590 |
|
|
|
30,212 |
|
|
|
- |
|
|
|
31,802 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,139,962 |
) |
|
|
(6,139,962 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014
|
|
|
796,039 |
|
|
$ |
796 |
|
|
|
32,193,416 |
|
|
$ |
32,193 |
|
|
$ |
18,349,385 |
|
|
$ |
(23,806,973 |
) |
|
$ |
(5,424,599 |
) |
The Accompanying Notes are an Integral Part
of the Financial Statements
BEAMZ INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
For the years ended June 30, 2014 and 2013
| |
|
2014
|
|
|
2013
|
|
|
Reconciliation of Net Loss to Net Cash Used by Operating Activities:
|
|
|
|
|
|
Net Loss
|
|
$ |
(6,139,962 |
) |
|
$ |
(5,240,760 |
) |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
31,653 |
|
|
|
683 |
|
| Non-cash investing and financing for payment of services and interest |
|
|
3,292,190 |
|
|
|
3,804,547 |
|
|
Amortization of debt discount
|
|
|
339,376 |
|
|
|
427,753 |
|
|
Allowance for doubtful accounts
|
|
|
5,018 |
|
|
|
(40,169 |
) |
|
Inventory reserve
|
|
|
- |
|
|
|
(1,284 |
) |
|
Inventory impairment
|
|
|
- |
|
|
|
100,708 |
|
|
Loss on extinguishment of debt
|
|
|
85,640 |
|
|
|
499,320 |
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,975 |
) |
|
|
19,167 |
|
|
Inventory
|
|
|
(336,206 |
) |
|
|
39,792 |
|
|
Prepaid expenses
|
|
|
693,861 |
|
|
|
(493,352 |
) |
|
Deposits
|
|
|
126 |
|
|
|
(7,996 |
) |
|
Accounts payable
|
|
|
145,646 |
|
|
|
(83,150 |
) |
|
Accrued liabilities
|
|
|
367,856 |
|
|
|
84,398 |
|
|
Advances from related parties
|
|
|
509,865 |
|
|
|
- |
|
|
Net cash used by operating activities
|
|
|
(1,011,912 |
) |
|
|
(890,343 |
) |
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(94,960 |
) |
|
|
- |
|
|
Net cash used by investing activities
|
|
|
(94,960 |
) |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
31,802 |
|
|
|
29,174 |
|
|
Proceeds from issuance of debt
|
|
|
50,000 |
|
|
|
50,000 |
|
|
Proceeds from issuance of debt - related parties
|
|
|
910,000 |
|
|
|
950,000 |
|
|
Net cash provided by financing activities
|
|
|
991,802 |
|
|
|
1,029,174 |
|
| |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(115,070 |
) |
|
|
138,831 |
|
|
Cash and cash equivalents, beginning of year
|
|
|
152,124 |
|
|
|
13,293 |
|
|
Cash and cash equivalents, end of year
|
|
$ |
37,054 |
|
|
$ |
152,124 |
|
| |
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
Conversion of debt and interest to common stock
|
|
$ |
40,000 |
|
|
$ |
2,041,427 |
|
|
Common stock issued for services
|
|
$ |
1,638,534 |
|
|
$ |
930,480 |
|
|
Issuance of warrants
|
|
$ |
433,575 |
|
|
$ |
657,358 |
|
|
Issuance of preferred stock for license agreement
|
|
$ |
- |
|
|
$ |
142,500 |
|
|
Loss on extinguishment of debt
|
|
$ |
85,640 |
|
|
$ |
499,320 |
|
|
Debt issued for payment of services and interest
|
|
$ |
78,248 |
|
|
$ |
953,625 |
|
|
Advances from related party converted to debt
|
|
$ |
1,575,408 |
|
|
$ |
1,912,275 |
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
Interest
|
|
$ |
9,310 |
|
|
$ |
9,776 |
|
The Accompanying Notes are an Integral Part
of the Financial Statements
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1
Nature of Corporation
Beamz Interactive, Inc. (the “Company” or “us”) was incorporated in the State of Delaware in 2001. The Company's operations consist of the development and sales of interactive laser controller products, content, and technology (the “Beamz”) that can be used to develop new market opportunities in a wide variety of music, game education, therapy, lighting, and consumer applications throughout the world.
Note 2
Summary of Significant Accounting Policies and Use of Estimates
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, the lives and methods of depreciation of property and equipment, and the 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 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
We adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 for financial instruments measured at fair value on a recurring basis. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The Company’s financial instruments include cash and cash equivalents, deposits, and debt and approximate fair value based on their short maturities or for long-term debt, based on borrowing rates currently available to the Company for loans with similar terms, which represents level 3 inputs.
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, such as the expected stock-price volatility, expected stock option life, 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. 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 options granted to employees and directors.
We account for compensation for all arrangements under which directors, 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 ". Certain of our directors and consultants have been granted long-term incentive awards, primarily restricted Common Stock, which provides them with equity interests as an incentive to remain in our service and align the recipients' interests with those of our equity holders. We estimate the fair value of restricted stock at the date of grant when awards are granted in accordance with ASC Topic 718 and the vesting date when awards are granted under ASC Topic 505-50. Share-based compensation expense is recognized in sales and marketing expenses and general and administrative expenses ratably over the vesting period at the greater of the amount amortized on a straight-line basis or the amount vested. Historically, we have valued the restricted Common Stock based on the per-share closing price as quoted on the OTCQB market.
Cash and Cash Equivalents
Cash equivalents are considered to be all highly liquid investments purchased with a maturity, at the 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. Accounts are written off when all reasonable collection efforts have been exhausted. As of June 30, 2014 and 2013, an allowance has been provided for potentially uncollectible accounts receivable and product returns, in the amounts of $9,274 and $4,256, respectively. Bad debt expense for the years ended June 30, 2014 and 2013 was $32,929 and $2,846, respectively.
Prepaid Expenses
Prepaid expenses represent payments for consulting, development, royalty and director fees and are being amortized to expense on a straight-line basis over the related contract periods.
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. The Company fully impaired inventory of approximately $100,708 in fiscal 2013 related to the write off of the second generation C4 and C6 models and Beamz product components and the finished goods, in contemplation of a new product line.
The Company warrants its products generally for one year. A provision for estimated future warranty costs, based on a review of historical and pending claims and which is currently de minimus, is recorded in the period in which the revenue is recognized.
At June 30, 2014 and 2013, inventory is comprised of the following:
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
Finished goods
|
|
$ |
253,410 |
|
|
$ |
- |
|
|
Components
|
|
|
82,795 |
|
|
|
- |
|
| |
|
|
336,205 |
|
|
|
- |
|
|
Less: allowance for obsolescence
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$ |
336,205 |
|
|
$ |
- |
|
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of approximately one to three years. 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.
Research and Development
Expenditures for research activities relating to product development and improvement are charged to expense as incurred. Such expenditures amounted to $907,055 and $880,379 for the years ended June 30, 2014 and 2013, 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 $511,063 and $279,768 for the years ended June 30, 2014 and 2013, respectively.
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 $639,644 and $803,134 for the years ended June 30, 2014 and 2013, 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. Revenues are presented net of sales taxes.
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 sales returns, which is estimated based upon prior experience. As of June 30, 2014 and 2013, this allowance was $251 and $46, respectively.
Concentrations 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. There are no balances that exceeded federally insured limits at June 30, 2014 and 2013.
During the year ended June 30, 2014 the Company had two customers that represented approximately 46% of net sales. The Company had no accounts receivable at June 30, 2014 from these customers. During the year ended June 30, 2013, the Company had two customers representing approximately 45% of net sales. The Company had $6,142 of accounts receivable at June 30, 2013 from these customers.
During the years ended June 30, 2014 and 2013, the Company purchased substantially all of its inventory from one manufacturer and its inventory was held and processed at the same fulfillment center.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Recent Accounting Pronouncements
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern and in May 2014, the FASB issued new accounting guidance related to revenue recognition.
ASU 2014-15 requires management to perform an assessment of going concern and under certain circumstances disclose information regarding this assessment in the footnotes to the financial statements. ASU 2014-15 is effective for the Company beginning July 1, 2016.
The new revenue recognition standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning July 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting these new accounting standards on our financial statements.
There have been no other recent accounting pronouncements or changes in accounting pronouncements during the year ended June 30, 2014 that are of significance, or potential significance, to us.
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 year. 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. Basic and diluted EPS were the same for fiscal 2014 and 2013, as the Company had losses from operations during both years and therefore the effect of all potential common stock equivalents is anti-dilutive (reduces loss per share). Stock options and warrants representing 1,460,340 and 692,297 shares of Common Stock were outstanding at June 30, 2014 and 2013, respectively, with exercise prices ranging from $0.02 to $0.50 per share. Additionally, there were 796,039 and 811,038 shares of Series D preferred stock outstanding at June 30, 2014 and 2013, respectively, that were convertible into Common Stock on a 1 for 10 basis. As of June 30, 2014, the Company had granted 1,381,875 restricted Common Stock shares that had not yet vested and were excluded from the EPS calculation.
For the years ended June 30, 2014 and 2013, the 10% Convertible Secured Subordinated Debt were anti-dilutive and were convertible into 16,155,405 and 5,587,138 shares, respectively.
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 carry-forwards 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 three 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.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Going Concern
The Company has incurred recurring losses from operations and has had negative cash flows from operations. As of the date of issuance of these financial statements, the Company does not have adequate cash and cash equivalents to continue operations for the next 12 months. In order to address this situation, management is pursuing a $6.5 million convertible secured debt financing and a $1.5 million equity financing. To date, $1,025,000 has been raised on the equity financing and $4,808,509 has been funded as part of the debt financing. Management believes that it will be successful in completing these financing transactions and that as long as at least an additional $1 million is secured it will be able to execute its current sales, marketing, partner and development plans. However, should the Company be unsuccessful with these financing efforts, it will scale back operations and expects, but has no guarantee, that existing shareholders will continue to support the Company at such reduced levels. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern.
Note 3
Property and Equipment
Property and equipment consists of the following as of June 30, 2014 and 2013:
| |
Estimated Useful Life
|
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
|
Tooling
|
3 years
|
|
$ |
94,960 |
|
|
$ |
- |
|
|
Computers and office equipment
|
3 years
|
|
|
- |
|
|
|
10,485 |
|
|
Accumulated depreciation
|
|
|
|
(31,653 |
) |
|
|
(10,485 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
$ |
63,307 |
|
|
$ |
- |
|
For the years ended June 30, 2014 and 2013 depreciation expense was $31,653 and $683, respectively.
Note 4
Notes Payable
As of June 30, 2014 and 2013, notes payable consists of the following:
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
10% Bridge Loan to an entity due April 2014
|
|
$ |
- |
|
|
$ |
40,000 |
|
|
10% Convertible Secured Subordinated Debt due December 2014
|
|
|
210,000 |
|
|
|
160,000 |
|
|
10% Convertible Secured Subordinated Debt due December 2015
|
|
|
52,700 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
262,700 |
|
|
|
200,000 |
|
|
Less: current portion
|
|
|
(210,000 |
) |
|
|
(40,000 |
) |
| |
|
|
|
|
|
|
|
|
|
Notes payable - long-term portion
|
|
$ |
52,700 |
|
|
$ |
160,000 |
|
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
| |
|
2014
|
|
|
2013
|
|
|
Notes payable are presented net of unamortized discounts as follows:
|
|
|
|
|
| |
|
|
|
|
|
|
|
Notes payable - current portion
|
|
$ |
210,000 |
|
|
$ |
40,000 |
|
|
Less: unamortized discount
|
|
|
(8,695 |
) |
|
|
(5,114 |
) |
|
|
|
$ |
201,305 |
|
|
$ |
34,886 |
|
| |
|
|
|
|
|
|
|
|
|
Notes payable - long term portion
|
|
$ |
52,700 |
|
|
$ |
160,000 |
|
|
Less: unamortized discount
|
|
|
(1,386 |
) |
|
|
(12,527 |
) |
| |
|
$ |
51,314 |
|
|
$ |
147,473 |
|
During the years ended June 30, 2013 and 2012, the Company issued Bridge Loans (“2012 Bridge Loans”) to related parties (Note 5) and several unrelated parties. The 2012 Bridge Loans were all retired as of June 30, 2014 through conversion to equity and a loss on the extinguishment of debt in the amount of $85,640 was recorded.
On June 17, 2013 the Company offered a Conversion Option to the 2012 Bridge Loan holders. The option provided for the conversion of principal and accrued interest into Common Stock at $0.40 per share and expired on June 30, 2013. As of June 30, 2013, 2012 Bridge loans, in the aggregate of $1,908,368 and accrued interest related thereto, in the aggregate of $133,059 had been converted to Common Stock under the aforementioned Conversion Option and a loss on the extinguishment of debt, in the amount of $499,320 was recorded.
As of June 30, 2013 there was $1,981,045 in 2012 Bridge Loans issued of the available $2.5 million authorized, $40,000 of which remained outstanding. As of June 30, 2013 the 2012 Bridge Loans are reflected net of discounts of $5,114.
During the year ended June 30, 2013 the Company issued Convertible Secured Subordinated Debt (“2013 Convertible Debt”) to related parties (Note 5) 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 $0.02 per share (Note 8). 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 $0.40 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 includes a commitment that the Company’s Chief Executive Officer, along with other existing investors, will commit 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 June 30, 2013 there was $2,194,855 in 2013 Convertible Debt issued and outstanding of the available $5 million authorized of which $2,034,855 are from related parties (Note 5). As of June 30, 2014 and 2013 the 2013 Convertible Debt to unrelated parties is reflected net of discounts of $10,081 and $17,641, respectively. The 2013 Convertible Debt matures through December 31, 2015. As of September 2013, the aforementioned $2.5 million commitment by the Chief Executive Officer was fulfilled.
On July 22, 2013 the Company amended its 2013 Convertible Debt Agreement to allow for $5 million in financing and to include that the debt can be converted to Common Stock the earlier of January 15, 2014 or when the Company amends their Certificate of Incorporation to authorize 60 million shares of stock. In February 2014, the 2013 Convertible Debt Agreement was amended again to allow for the issuance of warrants to purchase one share of common stock of the Company for each dollar of principal investment that are exercisable at $0.02 per share. The amendment also provides for the conversion of the principal balance and accrued, but unpaid, interest at a price of $0.20 per share for any debt incurred subsequent to the February 2014 amendment date.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5
Related Party Transactions
Notes payable to related parties consisted of the following at June 30, 2014 and 2013:
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
10% Convertible Secured Subordinated Debt due December 2014
|
|
$ |
2,944,855 |
|
|
$ |
2,034,855 |
|
| |
|
|
|
|
|
|
|
|
|
10% Convertible Secured Subordinated Debt due December 2015
|
|
|
1,600,954 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
4,545,809 |
|
|
|
2,034,855 |
|
|
Less: current portion
|
|
|
(2,944,855 |
) |
|
|
- |
|
|
Notes payable - long-term portion
|
|
$ |
1,600,954 |
|
|
$ |
2,034,855 |
|
| |
|
|
|
|
|
|
|
|
|
Notes payable - current portion
|
|
$ |
2,944,855 |
|
|
$ |
- |
|
|
Less: unamortized discount
|
|
|
(156,566 |
) |
|
|
- |
|
|
|
|
$ |
2,788,289 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
Notes payable - long term portion
|
|
$ |
1,600,954 |
|
|
$ |
2,034,855 |
|
|
Less: unamortized discount
|
|
|
(167,204 |
) |
|
|
(224,322 |
) |
| |
|
$ |
1,433,750 |
|
|
$ |
1,810,533 |
|
At June 30, 2014 the Company has a payable to an entity controlled by the chief executive officer in the amount of $509,865 for Company expenses paid by the entity. The payable is non-interest bearing, uncollateralized, and due on demand. The aforementioned entity paid additional expense on behalf of the Company during the year ended June 30, 2013 and converted $677,421 into bridge loans in October 2012, $1,017,665 into convertible secured debt in May 2013, and $217,191 into convertible secured debt in June 2013. The Bridge Loan for $677,421 was converted to Common Stock in June 2013.
During the year ended June 30, 2014, the Company issued $2,510,954 of notes payable to related parties. The Company received $910,000 in cash and the remaining $1,600,954 was related to non-cash conversions of related party payables and advances. The related parties received 2,055,953 warrants to purchase Common Stock at $0.02 per share, expiring three years from the grant date. During the year ended June 30, 2013 the Company issued $2,862,276 of notes payable to entities controlled by the chief executive officer. The Company received $950,000 in cash and the remaining $1,912,275 was related to the conversion of related party advances to notes payable. The entities received 1,431,138 warrants to purchase Common Stock at $0.02 per share, expiring in April 2013. The entities exercised the warrants in June 2013.
During the year ended June 30, 2013 the Company issued 50,000 shares of Common Stock to the audit committee chair for services and 150,000 shares of Common Stock to an officer for services to be performed through July 2013. In addition, the Company issued notes payable, in the aggregate amount of $443,000, to three related parties for services and the conversion of accounts payable.
Effective September 1, 2013 the Company entered into a consulting agreement for business and financial management services with an entity that is 50% owned by an individual who was named President and Chief Financial Officer of the Company. The entity was awarded 1,600,000 shares of restricted Common Stock of which 500,000 shares vested immediately with the balance vesting over a twenty-four month period. The agreement provides for six months of severance pay. In April 2014, the entity was granted an additional 500,000 shares of restricted Common Stock that vests over a twenty-four month period.
The Company has entered into a consulting agreement for business development and project management with an entity owned by an officer. 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 June 30, 2014.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6
Commitments
Pursuant to the July 2010 Bridge Loan Stock Purchase and Security Agreement (the “Loan”), 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 June 30, 2014.
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 $0.091 to $0.30 per record in each electronic transmission record. For the years ended June 30, 2014 and 2013, royalty fees under these licenses were approximately $12,324 and $9,300, respectively, and are included in cost of goods sold on the statement of operations.
The Company is a party to a license agreement that 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 licensee, licensee 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 licensee 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 to the license agreement, Beamz will pay 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 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.
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, all of which has been paid for as of June 30, 2014, the Company has committed to purchase $231,140 of inventory from the manufacturer of which approximately $166,000 has been fulfilled as of June 30, 2014.
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 have been issued as of June 30, 2013, and minimum annual royalties of $100,000, among other provisions. During May 2014, the royalty agreement was amended to reduce the minimum annual royalties to $50,000. Pursuant to the amendment, the Company issued 275,000 shares of common stock and 75,000 common stock warrants with an exercise price of $.20 per share, expiring through June 2017. 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.
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.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
During April 2013, the Company entered into a one year agreement for marketing services including web development, micro site programming, and online marketing. The agreement provides for a $10,000 fee for the development of the micro site and commissions up to 35% of certain net revenues, among other provisions.
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 June 30, 2014 and 2013.
During June 2013 the Company entered into a 24-month lease agreement for office space. For the years ended June 30, 2014 and 2013 the Company incurred rent expense of $48,444 and $3,646, respectively. Future minimum lease payments for the next year are $45,870.
Income Taxes
We have incurred losses since operations commenced in 2001. We currently have net operating loss carryforwards for Federal and State income tax purposes of approximately $22,300,000 and $16,800,000, respectively. The net operating losses expire as follows:
|
Year of expiration
|
|
Federa1
|
|
|
State
|
|
| |
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
2,200,000 |
|
|
June 30, 2016
|
|
|
|
|
|
2,600,000 |
|
|
June 30, 2017
|
|
|
|
|
|
2,000,000 |
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
June 30, 2022
|
|
$ |
1,700,000 |
|
|
|
|
|
|
June 30, 2023
|
|
|
1,800,000 |
|
|
|
|
|
|
June 30, 2024
|
|
|
1,800,000 |
|
|
|
|
|
|
June 30, 2025
|
|
|
2,200,000 |
|
|
|
|
|
|
June 30, 2026
|
|
|
2,800,000 |
|
|
|
|
|
|
June 30, 2027
|
|
|
2,000,000 |
|
|
|
|
|
|
June 30, 2028
|
|
|
4,300,000 |
|
|
|
4,300,000 |
|
|
June 30, 2029
|
|
|
5,700,000 |
|
|
|
5,700,000 |
|
| |
|
$ |
22,300,000 |
|
|
$ |
16,800,000 |
|
The deferred tax assets derived from these net operating losses are fully reserved by a valuation allowance as management has determined that it is more likely than not that the deferred tax assets will not be realized.
A reconciliation of statutory rates is as follows as of June 30:
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Statuatory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State income taxes, net of federal
|
|
|
5.0 |
% |
|
|
5.0 |
% |
|
Reduction in valuation allowance related to net operating loss carryforwards
|
|
|
(39.0 |
) % |
|
|
(39.0 |
) % |
| |
|
|
|
|
|
|
|
|
| |
|
|
0.0 |
% |
|
|
0.0 |
% |
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
As of June 30, 2014 and 2013, the deferred tax asset is as follows:
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
Deferred tax asset - net operating loss carryforwards
|
|
$ |
8,400,000 |
|
|
$ |
6,300,000 |
|
|
Less valuation allowance
|
|
|
(8,400,000 |
) |
|
|
(6,300,000 |
) |
| |
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
- |
|
|
$ |
- |
|
A reconciliation of anticipated tax benefits of net operating losses is as follows for the years ended June 30, 2014 and 2013:
| |
|
2014
|
|
|
2013
|
|
| |
|
|
|
|
|
|
|
Federal benefit of net operating losses
|
|
$ |
1,900,000 |
|
|
$ |
1,450,000 |
|
|
State benefit of net operating losses
|
|
|
200,000 |
|
|
|
150,000 |
|
|
Change in valuation allowance
|
|
|
(2,100,000 |
) |
|
|
(1,600,000 |
) |
|
Net benefit of net operating losses
|
|
$ |
- |
|
|
$ |
- |
|
As of June 30, 2014 and 2013, the Company had no unrecognized tax benefits or liabilities due to uncertain tax positions.
Equity
Common Stock
As of June 30, 2014, the Company has 50,000,000 shares of stock authorized, 40,000,000 shares of which have been designated as Common Stock, $.001 par value. On July 1, 2014 stockholders voted to increase the authorized shares to 100,000,000. There were 32,193,416 and 22,668,039 common shares issued as of June 30, 2014 and 2013, respectively.
During the year ended June 30, 2014, the Company issued 7,205,266 shares of common stock for services valued at $1,564,664, and issued 580,000 shares of Common Stock for the conversion of accounts payable, debt, and accrued interest in the aggregate amount of $197,200. In addition, 1,590,110 shares of Common Stock were issued for proceeds of $31,802, pursuant to the exercise of 1,590,110 warrants and 150,001 shares of Common Stock were issued pursuant to the conversion 14,999 shares of Series D Preferred Stock.
Preferred Stock
As of June 30, 2014 the Company has 10,000,000 shares of preferred stock authorized, $.001 par value, of which 1,300,000 shares are authorized as Series D Convertible Preferred Stock (“Series D Preferred”). There are 796,039 and 811,038 shares of Series D Preferred issued and outstanding at June 30, 2014 and 2013, respectively. Each share of Series D Preferred is convertible into 10 shares of Common Stock and has a liquidation preference of $10 per share. All previously issued shares of Series A, A-1, B, and C Convertible Preferred Stock were converted into shares of Common Stock on June 11, 2011 and those series were cancelled.
During the year ended June 30, 2014, 14,999 shares of Series D Preferred stock were converted into 150,001 shares of Common Stock. During the year ended June 30, 2013 the Company issued 25,000 shares of Series D Preferred pursuant to a renegotiated license agreement. The estimated value of the shares was $142,500, based on a third party valuation of the Company’s Common Stock and the conversion rights. During February, 2013, 16,902 shares of Series D Preferred were converted into 169,020 shares of Common Stock. In addition, the Company has corrected the outstanding Series D shares to include 2,500 Series D shares issued in 2008 with a de minimis value.
Warrants and Options
Pursuant to the 2012 Bridge Loan Financing Agreement and the 2013 Convertible Debt Agreement (the “Loans”), as additional consideration for each of the Loans, the Company granted warrants to the lenders. The warrants provide for the purchase of one share of Common Stock of the Company for each $2 of the principal amount of the lender's Notes. In February 2014 the 2013 Convertible Debt Agreement was amended to provide for the grant of one warrant for each $1 of principal amount of lender’s Notes received subsequent to the amendment date. As of June 30, 2014, 990,538 and 3,251,081 warrants were issued pursuant to the 2012 Bridge Loan.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Financing Agreement and the 2013 Convertible Debt Agreement, respectively. The warrants are exercisable at $0.02 per share and expire through June 2016. As the warrants were issued with the debt, the relative fair value of same was allocated between the debt proceeds and the warrants and the warrant relative value is reflected as a discount on the debt that will be 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 June 30, 2014, 23,325 options under the Plan are outstanding. Options generally become exercisable over vesting periods of up to four years and expire ten years from the date of grant. As of June 30, 2014 there are 7,175 shares available for grant 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 June 30, 2014.
A summary of the options and warrants issued is 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, 2012
|
|
$ |
0.04 |
|
|
|
209,924 |
|
|
|
3.16 |
|
|
$ |
151,955 |
|
|
Granted
|
|
|
0.45 |
|
|
|
3,441,050 |
|
|
|
1.48 |
|
|
|
732,304 |
|
|
Cancelled
|
|
|
1.00 |
|
|
|
(1,500,000 |
) |
|
|
0.17 |
|
|
|
- |
|
|
Exercised
|
|
|
0.02 |
|
|
|
(1,458,677 |
) |
|
|
2.35 |
|
|
|
(610,644 |
) |
|
Outstanding at June 30, 2013
|
|
|
0.06 |
|
|
|
692,297 |
|
|
|
2.68 |
|
|
|
273,615 |
|
|
Granted
|
|
|
0.04 |
|
|
|
2,364,653 |
|
|
|
2.60 |
|
|
|
433,575 |
|
|
Expired
|
|
|
0.50 |
|
|
|
(6,500 |
) |
|
|
- |
|
|
|
|
|
|
Exercised
|
|
|
0.02 |
|
|
|
(1,590,110 |
) |
|
|
2.61 |
|
|
|
(252,267 |
) |
|
Outstanding at June 30, 2014
|
|
$ |
0.07 |
|
|
|
1,460,340 |
|
|
|
2.08 |
|
|
$ |
454,923 |
|
For purposes of determining the fair values of warrants using the Black-Scholes option pricing model, the Company used the following assumptions in the years ended June 30, 2014 and 2013; expected volatility of 40%-150%, risk-free interest rate 1%, warrant life of 1.5 to 3 years and expected dividend rate of 0%. The expected term of current year grants was determined under the simplified method using the average of the contractual term and vesting period of the award as appropriate statistical data required to properly estimate the expected term was not available.
Included in the table above are options to purchase 23,325 and 29,825 shares of Common Stock outstanding at June 30, 2014 and June 30, 2013, respectively. The options are all fully vested as of June 2014. The options expire on various dates through October, 2018. Additionally, the options and warrants had an intrinsic value of $82,275 and $406,311 as of June 30, 2014 and 2013, respectively. Intrinsic value arises when the exercise price is lower than the market.
Options and warrants outstanding at June 30, 2014 and 2013 had no unrecognized compensation costs, and were fully exercisable.
BEAMZ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 9
Subsequent Events
Effective July 1, 2014, upon stockholder approval, the Company amended their Articles to authorize 100,000,000 shares of stock.
Subsequent to the balance sheet date the Board has approved the grant of up to an additional 440,000 shares of Common Stock for services and has issued 40,000 shares.
During July and August 2014 the Company has issued 20,500,000 shares of Common Stock and has received proceeds of $1,025,000 under a $1.5 million private placement and has paid a commission related to same of $62,500. Included in the proceeds is $375,000 from entities controlled by an officer of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 June 30, 2014, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of June 30, 2014, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of June 30, 2014. For this purpose, internal control over financial reporting refers to a process designed by, or under the supervision of, the Company’s principal executive and financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2014 based upon criteria in an Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management believes the Company’s internal control over financial reporting was effective as of June 30, 2014 based on the criteria issued by COSO.
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not required to be attested to by the Company’s independent registered public accounting firm pursuant to applicable law and rules that permit the Company to provide only management’s report in this report.
Changes in Internal Control over Financial Reporting.
There were no changes to our internal control over financial reporting during the fourth quarter ended June 30, 2014 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
At the annual meeting of the stockholders of the Company on July 1, 2014 the stockholders approved a Second Amendment to the Company’s Fourth Amended and Restated Certificate of Incorporation (the “Second Amendment”) increasing the authorized shares of common stock of the Company to 100,000,000. The Second Amendment was filed with the Delaware Secretary of State on July 15, 2014 and was effective on the same date. The Second Amendment is attached to this Form 10-K as Exhibit 3.(i)(3).
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Set forth below is certain information concerning each of the directors and executive officers of the Company as of June 30, 2014:
|
Name
|
|
Age
|
|
Position(s)
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
Charles R. Mollo
|
|
63
|
|
Chairman of the Board and Chief Executive Officer
|
|
Joan W. Brubacher
|
|
60
|
|
President, Chief Financial Officer and Director
|
|
Albert J. Ingallinera, Jr.
|
|
44
|
|
Vice President Product Management and Business Development
|
|
Jeff Doss
|
|
52
|
|
Director
|
|
Jerry Riopelle
|
|
73
|
|
Director
|
|
Jeffrey R. Harris
|
|
66
|
|
Director
|
|
Thomas F. Gardner
|
|
55
|
|
Director
|
Board of Directors & Executive Officers
Charles R. Mollo, Chairman, CEO, and Director – Charlie Mollo has served as a director since 2007 and as our Chairman of the Board and CEO since January of 2009, and is responsible for the overall management of our business strategy including development of product sales channels, marketing, finance and product development. As a successful business leader, Mr. Mollo has worked in a number of industries including wireless telecommunications, consumer electronics, computers, child care and real estate, growing privately-owned entrepreneurial start-up organizations into leading publicly-traded companies. His management experience with mergers and acquisitions, financing, venture capital, strategic planning and technology, and his passion for music have earned him his role as our Chairman of the Board and CEO.
Prior to joining Beamz Interactive, Mr. Mollo was a co-founder and Chairman, President and CEO of Mobility Electronics, Inc. (now iGo, Inc.), a NASDAQ company focused on developing and marketing innovative products for the converging mobile electronics industry from May 1995 to June 2007 (from June 2007 until January of 2009, Mr. Mollo primarily managed his personal investments and consulted with various parties). Mr. Mollo also helped build Alliance Telecommunications Corporation in the late 1980s and early 1990s. This wireless telecommunications company went from start-up to just under $100 million in revenues, and was successfully sold in July 1992 to a New York Stock Exchange listed company. Other notable accomplishments include the management of a variety of venture investments, including a $150 million venture capital fund for Meadows Resources, and managing New Vistas Investments Corporation, a New Mexico real estate and investment company, Mr. Mollo has an MBA from the University of New Mexico, a Master’s in Electrical Engineering from Newark College of Engineering, NJ Institute of Technology and a Bachelor’s in Electrical Engineering from Manhattan College.
Joan W. Brubacher, President, Chief Financial Officer and Director – Ms. Brubacher, who joined the Board in March of 2012 and became the Company’s President and Chief Financial Officer in July of 2013, has served as a principal and Chief Financial Officer at Resolute Commercial Services from October of 2009 through August 2013. Prior to joining Resolute, Ms. Brubacher served as an outside consultant for various companies from February 2009 to October 2009. Ms. Brubacher served as the Executive Vice President and Chief Financial Officer for iGo, Inc., where she was a member of the team that took the company public in 2000, until February of 2009. Prior to her tenure at iGo, Ms. Brubacher was employed at several private small and start-up companies where she served as Controller, Chief Financial Officer and Chief Operating Officer. She started her career on the audit staff of Ernst & Whinney (now Ernst & Young). She holds a Bachelor of Science Degree in Business Administration with Concentration in Accounting from Kansas State University. Ms. Brubacher brings the Company and the Board valuable public company and CFO experience and insight on a broad range of financial and operational issues.
Albert J Ingallinera Jr., VP Product Management and Business Development – Joining Beamz Interactive in March of 2009 as Vice President, Product Management and Business Development, Mr. Ingallinera is responsible for leading product management and marketing, including messaging, advertising and public relations, channel marketing and website development and management. Mr. Ingallinera has more than 20 years of experience launching new hardware and software technology products into consumer, business and vertical markets.
Prior to Beamz Interactive, Mr. Ingallinera was the Vice President of Sales and Marketing for Ambir Technology, Inc., a digital imaging product manufacturer and scanner software provider, from January 2003 to April 2009. In this role, Mr. Ingallinera contributed to the establishment of Ambir as a leading provider of ID card imaging and scanning technology products in the healthcare market through branding, event marketing and business development initiatives. Mr. Ingallinera ventured into the mobile computer world in 1998, when he took a sales and product marketing position with CNF Mobile Solutions, a PC notebook peripheral manufacturer. He eventually moved to Mobility Electronics, Inc. (now iGo, Inc.), where he became the Director of Corporate Marketing and Market Development. Since 1991, Mr. Ingallinera has worked with leading computer product technology manufacturers, distributors and resellers, holding various leadership positions in sales, marketing, business development and product management. Other past employers include Iomega Corporation and Merisel Corporation. Mr. Ingallinera received a Bachelor in Business Administration degree from the University of San Diego and an MBA from the University of Maryland’s Robert H. Smith Business School.
Jeff Doss – Mr. Doss joined the Board in 2009. As founder, President and CEO of Hotwire Development, LLC, an industrial design and product development company, Mr. Doss has built a solid reputation in consumer and mobile computing product markets. Since December of 2005, Mr. Doss has also served as CEO of ShowerStart, LLC, an innovative water and energy saving green company that produced a patented state-of-the-art showerhead. Prior to forming Hotwire in December of 2002, Mr. Doss worked as the Co-Founder, VP Product Development, Technology & Marketing for Mobility Electronics, Inc. (now iGo, Inc.). Prior to iGo, Mr. Doss worked with Mr. Mollo at Andrew Corporation where he developed a variety of wireless telecommunication accessories, and was the president and owner of Unitech Industries, Inc., a wireless telecommunications power and accessories company. Mr. Doss graduated from Arizona State University with a Bachelor of Science degree in Finance. Mr. Doss’s background and experience in leadership roles at a variety of technology companies, and his broad consumer electronics product development experience, allows him to provide valuable guidance to the Board in a variety of areas including strategy, product development, and management.
Jerry Riopelle - As the inventor of the Beamz, Mr. Riopelle has taken his 40 years of experience as an accomplished musician, songwriter and producer, and funneled it into the creation of the Beamz music system.
Mr. Riopelle started creating the Beamz music system in 2001 after many years of envisioning an instrument that could activate sound with laser beams. With Mr. Riopelle’s passion for making music, he envisioned an instrument that anyone could play, that would feature many dimensions of sound that would always work together no matter how they were combined and that would provide a new performance element for accomplished musicians like himself.
Raised in Tampa, Florida, Mr. Riopelle moved to Los Angeles to begin his music career in the 1960s by learning the ropes of independent record production. After playing drums for the Hollywood Argyles he signed on as a staff songwriter for Screen Gems. Upon hearing a single Mr. Riopelle had written and produced with Clydie King titled, “The Thrill is Gone,” Phil Spector hired Mr. Riopelle as a staff writer and producer for Phillies Records.
Mr. Riopelle soon produced a Top 20 hit, “Home of the Brave,” recorded by Bonnie & The Treasures. He also produced Top 40 singles for recording artists April Stevens & Nino Tempo and The Parade. That success earned Mr. Riopelle a job as producer at A&M Records as well as a staff writing position at Irving Music. During that time he wrote and produced for The We Five, Brewer & Shipley, The Parade and Shango, and had songs covered by Herb Alpert, Leon Russell and later Kenny Loggins, Rita Coolidge, Meat Loaf and many others. During his years in Hollywood, Mr. Riopelle also wrote numerous songs and musical pieces for films and television shows.
Mr. Riopelle joined the Board in 2001, and his experience in the music industry provides the Board with unique and valuable contacts and a perspective on issues such as technology development, music and video production, strategy, and music licensing strategy.
Jeffrey R. Harris – Jeff Harris is a proven executive manager with a technical engineering background and an established track record of managing people and processes to identify, define, develop and achieve goals and objectives. Mr. Harris joined the Board in April 2010, and brings to the Board a perspective and expertise developed as the result of a broad range of general management, board, financing, investment, M & A, and strategic planning experience in a number of industries including the following areas:
|
·
|
Electric power production and delivery
|
|
·
|
Real estate development and management
|
|
·
|
Contract negotiations and administration
|
|
·
|
Environmental approvals and licensing
|
|
·
|
Regulatory, financial and legal compliance
|
|
·
|
Accounting and tax issues
|
Since March of 1993, Mr. Harris has served as President of New Vistas Investment Corp., a technology investment and real estate development and management company in Albuquerque, New Mexico. He is also an active angel investor and practicing consultant in a number of local entrepreneurial start-up companies. He has served on the board of directors of several companies and organizations, including Advent Solar, iGo, Inc. and the Border Trade Alliance.
Mr. Harris is a registered professional engineer in the state of New Mexico. He previously retired from Public Service Company of New Mexico in 2002, where he had worked since 1972, most recently as Director, International Business Development.
Thomas F. Gardner – Mr. Gardner is the founder of Gardner Real Estate Company. As a commercial real estate entrepreneur, broker and investor since 1983, Mr. Gardner seeks out opportunities to fund and invest in innovative technology. Mr. Gardner joined the board in late 2008.
Upon graduation from Arizona State University in 1982, Mr. Gardner obtained a Series 3 license and traded commodity futures. After a year, he was offered a Marketing Director position with a medium-sized development company, and relocated to Dallas to establish its Texas office. At the same time, he obtained a Texas real estate license and began his nearly three-decade adventure in commercial real estate brokerage, investment, and, ultimately, development.
After 10 years in Dallas, Mr. Gardner returned to Phoenix and established Gardner Real Estate Company, of which he has served as a principal since 1993. An Arizona licensed, full-service commercial real estate brokerage, its varied completed transactions range from the sale of Mirabel, a 1000 acre luxury golf course community in far north Scottsdale, to the Villages of Queen Creek, another golf course community located in the far southeast valley, and other deals located geographically in between. Gardner Real Estate Company has evolved over time into a consulting firm as well, for services ranging from bankruptcy guidance to land entitlement to asset management. It also served as the development vehicle for investment in and construction of a large mixed-use project named Villa Pallavicini, in Chandler, Arizona.
Mr. Gardner has been active in various fund raising activities for Arizona State University. Initially he was instrumental in raising $1 million to establish the endowment for the Furst Private Equity program in the College of Business, and has since been heavily involved in the Sun Angel Foundation, acting as Chair of the Sun Angel Foundation Committee, and creator and Chairman of several significant event committees responsible for raising in excess of another $1 million.
At the Company’s annual shareholder meeting held on July 1, 2014, Mr. Gardner was not reelected to the Board.
None of the officers or directors listed above has been involved with or subject to, in the last ten years, any of the legal matters set forth under Item 401(f) of Regulation S-K.
BOARD COMPOSITION AND COMMITTEES
We may expand the number of members constituting our Board of Directors and will seek persons who are “independent” within the meaning of the rules and regulations of NASDAQ to fill vacancies created by any expansion. We currently have an audit committee and a compensation committee with the following members:
Audit Committee: Jeffrey Harris (Chair) and Jeff Doss
Compensation Committee: Jeffrey Harris (Chair) and Jeff Doss
The Board meets periodically throughout the year as necessity dictates. No current director has any arrangement or understanding whereby they are or will be selected as a director or nominee.
We believe both Jeffrey Harris and Jeff Doss qualify as “audit committee financial experts” under applicable regulations of the Securities and Exchange Commission. Further, neither of Messrs. Doss or Harris is a current or former employee of the Company or is engaged in any relationship or holds any position that would require disclosure under Item 404 or Item 407(e) (iii) of Regulation S-K. Both Messrs. Doss and Harris are independent under the NASDAQ Marketplace Rules applicable to audit committee members of boards of directors.
DIRECTOR COMPENSATION
We do not pay our directors a fee for attending scheduled or special meetings of our board of directors. We intend to reimburse each director for reasonable travel expenses related to such director’s attendance at board of directors and committee meetings. We also provide each director with shares of Common Stock each year. For the calendar year 2014, each director received 40,000 shares of Common Stock. In the future we may offer additional compensation to attract the caliber of independent board members the Company is seeking.