UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

 EXCHANGE ACT OF 1934

For the quarterly period ended:  September 30, 2014

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission file number

000-54662

Beamz Interactive, Inc.

(Name of registrant as specified in its charter)

Delaware	94-3399024
(State or other jurisdiction of incorporation)	(IRS employer identification no.)
15354 N. 83rd Way, Suite 101  Scottsdale, Arizona 85260	(480) 424-2053
(Address of principal executive offices)	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer o Accelerated filer o Non-accelerated filer o   Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Shares issued and outstanding of the registrant’s $.001 par value common stock as of November 7, 2014;

55,093,416.

PART I – FINANCIAL INFORMATION
Item 1:  Financial Statements
Condensed Balance Sheets as of September 30, 2014 (unaudited)	3
and June 30, 2014
Unaudited Condensed Statements of Operations	4
for the three months ended September 30, 2014 and 2013
Unaudited Condensed Statements of Cash Flows	5
for the three months ended September 30, 2014 and 2013
Notes to Unaudited Condensed Financial Statements	6
Item 2:  Management’s Discussion and Analysis of Financial Condition	15
and Results of Operations
Item 3: Quantitative and Qualitative Disclosures about Market Risk	23
Item 4:  Controls and Procedures	23
PART II – OTHER INFORMATION
Item 1:   Legal Proceedings	23
Item 1A: Risk Factors	23
Item 2:    Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3:    Defaults upon Senior Securities	24
Item 4:    Mine Safety Disclosures	24
Item 5:   Other Information	24
Item 6:   Exhibits	24
Signatures	25

2

PART I – FINANCIAL INFORMATION

BEAMZ INTERACTIVE, INC.

CONDENSED BALANCE SHEETS

September 30, 2014 and June 30, 2014

ASSETS
	September 30,			June 30,
	2014			2014
	(Unaudited)
Current Assets:
Cash and cash equivalents	$	390,983		$	37,054
Accounts receivable, net		24,469			35,506
Inventory, net		332,825			336,205
Prepaid expenses		54,719			57,939
Total Current Assets		802,996			466,704
Prepaid expenses - long term portion		5,000			7,000
Property and equipment, net		55,393			63,307
Deposits		10,370			10,370
Total Assets	$	873,759		$	547,381
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable	$	355,062		$	489,541
Accrued liabilities		642,311			497,916
Advances from related parties		424,865			509,865
Notes payable, net of discount		299,588			201,305
Notes payable - related parties, net of discount		2,772,635			2,788,289
Total Current Liabilities		4,494,461			4,486,916
Long-Term Liabilities
Notes payable, net of discount		51,546			51,314
Notes payable - related parties, net of discount		1,461,769			1,433,750
Total Liabilities		6,007,776			5,971,980
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 shares issued and outstanding		796			796
Common Stock, $.001 par value, 250,000,000 shares
authorized; 53,803,416 and 32,193,416 shares issued and
outstanding		53,803			32,193
Additional paid-in capital		19,391,917			18,349,385
Accumulated deficit		(24,580,533	)		(23,806,973	)
Total Stockholders' Deficit		(5,134,017	)		(5,424,599	)
Total Liabilities and Stockholders' Deficit	$	873,759		$	547,381

The Accompanying Notes are an Integral Part

of the Condensed Financial Statements

3

BEAMZ INTERACTIVE, INC.

CONDENSED STATEMENTS OF OPERATIONS

 (Unaudited)

	Three Months Ended September 30,
	2014			2013
Sales, net	$	100,512		$	9,523
Cost of goods sold		54,247			16,588
Gross profit		46,265			(7,065	)
Depreciation and amortization		7,914			7,913
Research and development expenses		73,228			317,438
Sales and marketing expenses		190,447			639,937
General and administrative expenses		316,154			1,011,373
Loss from Operations		(541,478	)		(1,983,726	)
Interest expense		(232,082	)		(120,545	)
Loss before provision for income taxes		(773,560	)		(2,104,271	)
Provision for income taxes		-			-
Net Loss	$	(773,560	)	$	(2,104,271	)
Loss per share
Basic and diluted loss per
common share	$	(0.02	)	$	(0.09	)
Weighted average common shares
outstanding - basic and diluted		49,018,797			24,690,160

The Accompanying Notes are an Integral Part

of the Condensed Financial Statements

4

BEAMZ INTERACTIVE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

For the Three Months Ended September 30, 2014 and 2013

(Unaudited)

	2014			2013
	(Unaudited)			(Unaudited)
Reconciliation of Net Loss to Net Cash Used by Operating Activities
Net Loss	$	(773,560	)	$	(2,104,271	)
Cash flows from operating activities:
Depreciation and amortization		7,914			7,913
Equity issued for services and liabilities		101,642			1,386,000
Allowance for doubtful accounts		-			8,062
Amortization of debt discount		110,880			56,690
Payment of services by related parties		-			333,454
Changes in Operating Assets and Liabilities
Accounts receivable		11,037			(896	)
Inventory		3,380			(269,831	)
Prepaid expenses and other assets		5,220			(484,321	)
Accounts payable		(134,479	)		301,991
Accrued liabilities		144,395			119,497
Net cash used by operating activities		(523,571	)		(645,712	)
Cash flows from investing activities:
Purchase of equipment		-			(94,960	)
Net cash used by investing activities		-			(94,960	)
Cash flows from financing activities:
Related party advances		15,000			-
Proceeds from related party bridge loans and convertible debt		-			600,000
Proceeds from equity financing		862,500			-
Proceeds from exercise of warrants		-			600
Net cash provided by financing activities		877,500			600,600
Increase (decrease) in cash and cash equivalents		353,929			(140,072	)
Cash and cash equivalents, beginning of period		37,054			152,124
Cash and cash equivalents, end of period	$	390,983		$	12,052
Non-cash investing and financing activities:
Related party payments of accounts payable	$	-		$	333,454
Warrants issued with bridge loans	$	-		$	170,972
Conversion of related party advances to equity	$	100,000		$	-
Equity issued for payment of services and liabilities	$	101,642		$	1,386,000
Cash paid for:
Income taxes	$	-		$	-
Interest	$	-		$	785

The Accompanying Notes are an Integral Part

of the Condensed Financial Statements

5

BEAMZ INTERACTIVE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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

Presentation of Interim Information

The condensed financial statements included herein have been prepared by Beamz Interactive, Inc. (“we”, “us”, “our” or “Company”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements as of June 30, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe the disclosures, which are made, are adequate to make the information presented not misleading. Further, the condensed financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2014, and the results of our operations and cash flows for the periods presented. The June 30, 2014 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim results may be subject to seasonal variations and the results of operations for the three months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.

Significant Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to establish accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. These financial statements include estimates and assumptions that are based on informed judgments and the experience of management. Significant estimates include, but are not limited to, classification of research and development costs incurred, 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 the actual amounts, adjustments are made in subsequent periods to reflect more current information. We believe the following accounting policies are critical to the preparation of our financial statements due to the estimation process and business judgment involved in their application.

Fair Value of Financial Instruments

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

6

BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

· 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.

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.

Accounts Receivable, Net

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

The Company provides an allowance for doubtful accounts based upon an individual review of the accounts outstanding, as well as the prior history of bad debts.  Accounts are considered past due or delinquent based on contractual terms, recent payment activity, and our judgment of collectability. The Company charges off uncollectible receivables when all reasonable collection efforts have been exhausted.  As of September 30, 2014 and June 30, 2014, an allowance has been provided for potentially uncollectible accounts receivable and product returns in the amount of $9,274.  Bad debt expense for the three months ended September 30, 2014 and 2013 was $150 and $8,062, respectively.

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 warrants its products generally for one year.  A provision for estimated future warranty costs, based on a review of historical and pending claims, is recorded in the period in which the revenue is recognized, which currently is de minimus.

7

BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

At September 30, 2014 and June 30, 2014 inventory is comprised of the following:

	September 30, 2014		June 30, 2014
	(Unaudited)
Finished goods	$	244,479	$	253,410
Components		88,346		82,795
		332,825		336,205
Less: allowance for obsolescence		-		-
Net inventory	$	332,825	$	336,205

Property and Equipment

Property andequipment 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.  For the three months ended September 30, 2014 and 2013 depreciation expense was $7,914.

		September 30, 2014			June 30, 2014
		(Unaudited)
Computers and office equipment	3 years	$	-		$	-
Tooling	3 years		94,960			94,960
			94,960			94,960
Accumulated depreciation			(39,567	)		(31,653	)
		$	55,393		$	63,307

Research and Development

Expenditures for research activities relating to product development and improvement are charged to expense as incurred. Such expenditures amounted to $73,228 and $317,438 for the three months ended September 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 $50,876 and $134,622 for the three months ended September 30, 2014 and 2013, respectively.

Concentration of Credit Risk

Management maintains the Company’s cash and cash equivalents in bank accounts, which at times may exceed federally insured limits.  The Company has not experienced any losses in such accounts, and Management believes the Company is not exposed to any significant credit risk on cash and cash equivalents. The Company’s cash balance exceeds the federally insured limit at September 30, 2014 by $184,924 and did not exceed the limit as of June 30, 2014.

8

BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

During the three months ended September 30, 2014 the Company had four customers that represented approximately 64% of net sales.  The Company had approximately $11,900 in accounts receivable at September 30, 2014 from these customers.  During the three months ended September 30, 2013, the Company had two customers representing approximately 52% of net sales.  The Company had approximately $4,900 in accounts receivable at September 30, 2013 from these customers.

During the three months ended September 30, 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.

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 three months ended September 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 period. Net loss equates to loss available to common stockholders as there is no dividend accrued for preferred stock.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock.  The calculation of basic and diluted EPS were the same for the three months ended September 30, 2014 and 2013, as the Company had losses from operations during all periods and therefore the effect of all potential common stock equivalents is anti-dilutive (reduces loss per share).  Stock options and warrants representing 21,969,340 and 962,297shares of Common Stock were outstanding at September 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 September 30, 2014 and 2013, respectively, that were convertible into common stock on a 1 for 10 basis.  As of September 30, 2014 the Company had granted 1,144,750 restricted Common Stock shares that had not yet vested and were excluded from the EPS calculation.

For the three month period ended September 30, 2014, the 10% Convertible Secured Subordinated Debt were anti-dilutive and were convertible into 16,155,405 shares of Common Stock.

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.

9

BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

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.

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 their report dated October 10, 2014, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements as of and for the year ended June 30, 2014 concerning the Company’s assumption that we will continue as a going concern.  In order to address this situation, management is pursuing a $6.5 million convertible secured debt financing and a $1.5 million equity financing. Through September 30, 2014, $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 2 - Notes Payable

As of September 30, 2014 and June 30, 2014, notes payable, excluding related parties, consists of the following:

	September 30, 2014			June 30, 2014
	(Unaudited)
10% Convertible Secured Subordinated Debt due December 2014	$	310,000		$	210,000
10% Convertible Secured Subordinated Debt due December 2015		52,700			52,700
		362,700			262,700
Less: current portion		(310,000	)		(210,000	)
Notes payable - long-term portion	$	52,700		$	52,700
Notes payable are presented net of unamortized discounts as follows:
Notes payable - current portion	$	310,000		$	210,000
Less: unamortized discount		(10,412	)		(8,695	)
	$	299,588		$	201,305
Notes payable - long  term portion	$	52,700		$	52,700
Less: unamortized discount		(1,154	)		(1,386	)
	$	51,546		$	51,314

10

BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

During the years ended June 30, 2014 and 2013 the Company issued Convertible Secured Subordinated Debt (“2013 Convertible Debt”) to related parties (Note 3) and two unrelated parties.  The 2013 Convertible Debt provides for the issuance of warrants to purchase one share of common stock of the Company for each two dollars of principal investment that are exercisable at $.02 per share (Note 5).  A discount, related to the relative fair value of the warrants at the date of grant, was recorded and is being amortized to interest expense over the term of the loans under the effective interest method. The 2013 Convertible Debt provides that each noteholder can convert all of the principal balance and accrued, but unpaid, interest on such noteholders’ 2013 Convertible Debt into Common Stock at a price of $.40 per share.  The 2013 Convertible Debt also included a commitment by the Company’s Chief Executive Officer, along with other existing investors, to purchase at least $2.5 million of the $5 million offering by September 30, 2013, which had been fulfilled as of that date.  The debt is secured by all assets of the Company and is subordinated to all senior indebtedness.

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 increase the offering from $5 million to $6.5 million and 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.  The 2013 Convertible Debt Agreement was further amended in August 2014 to require written consent of investors owning a majority of the then outstanding principal amount of the notes for any assignments of the notes.

As of September 30, 2014 there was $4,808,509 in 2013 Convertible Debt issued and outstanding of the available $6.5 million authorized of which $4,445,809 are from related parties (Note 3).  The 2013 Convertible Debt matures through December 31, 2015.

Note 3 - Related Party Transactions

Notes payable to related parties consisted of the following at September 30, 2014 and June 30, 2014:

	September 30, 2014			June 30, 2014
	(Unaudited)
10% Convertible Secured Subordinated Debt due December 2014	$	2,844,855		$	2,944,855
10% Convertible Secured Subordinated Debt due December 2015		1,600,954			1,600,954
		4,445,809			4,545,809
Less: current portion		(2,844,855	)		(2,944,855	)
Notes payable - long-term portion	$	1,600,954		$	1,600,954
Notes payable are presented net of unamortized discounts as follows:
Notes payable - current portion	$	2,844,855		$	2,944,855
Less: unamortized discount		(72,220	)		(156,566	)
	$	2,772,635		$	2,788,289
Notes payable - long term portion	$	1,600,954		$	1,600,954
Less: unamortized discount		(139,185	)		(167,204	)
	$	1,461,769		$	1,433,750

At September 30, 2014 the Company has a payable to an entity controlled by the chief executive officer in the amount of $424,865 for Company expenses paid by the entity.  The payable is non-interest bearing, uncollateralized, and due on demand. During July 2014, $100,000 of the payable was converted to equity by the aforementioned entity.

11

BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

During the three months ended September 30, 2014 the Company received $275,000 in cash and converted $100,000 of a related party payable for issuance of 7,500,000 shares of Common Stock and 7,500,000 warrants to purchase Common Stock at $.05 per share, expiring in July 2017.

As of September 30, 2014 and June 30, 2014, the Company had $120,000 and $60,000, respectively, of accrued expenses due to the three officers for services.

Note 4 - 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 September 30, 2014, but has not been recorded in the accompanying financial statements.

The Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has had limited operations and no pending litigation or potential claims. As a result of these items, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of September 30, 2014 and June 30, 2014.

Note 5 - Equity

Common Stock

As of September 30, 2014, the Company has 100,000,000 shares of stock authorized, 90,000,000 of which have been designated as common stock, $.001 par value. There were 53,803,416 shares of common stock issued and outstanding at September 30, 2014.  On October 21, 2014, our Board of Directors approved the adoption of our Fifth Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), which, among other things, authorizes the increase in the total authorized capital stock of the Company from 110,000,000 to 260,000,000, and increases the number of authorized shares of our Common Stock from 100,000,000 to 250,000,000. (The number of shares of Preferred Stock authorized for issuance remains at 10,000,000.) On the Record Date, that amendment was approved by the written consents of the holders of approximately 59.35% of the issued and outstanding voting securities of the Company. No further action of our stockholders is required to approve the adoption of the Certificate of Incorporation.

During the three months ended September 30, 2014 the Company initiated an equity offering of $1,500,000 through a placement agent (the “Equity Offering”).  The Equity Offering provides for the sale of one share of Common Stock and one Common Stock Warrant, with a term of three years and an exercise price of $0.05.  The Company received proceeds $1,025,000 and issued 20,500,000 shares of Common Stock and 20,500,000 Common Stock Warrants pursuant to the Equity Offering and paid commissions of $62,500.

During the three months ended September 30, 2014, the Company issued 1,110,000 shares of common stock to various contractors for services and recognized $101,642 of equity compensation related to contractors for services provided.

Preferred Stock

As of September 30, 2014 the Company has 10,000,000 shares of preferred stock, $.001 par value, authorized of which 1,300,000 shares are designated as Series D Convertible Preferred Stock (“Series D”). There are 796,039 shares of Series D issued and outstanding at September 30, 2014.  Each Series D share is convertible into 10 shares of common stock and has a liquidation preference of $10 per share.

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BEAMZ INTERACTIVE, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

Warrants and Options

During the three months ended September 30, 2014 the Company issued 20,500,000 Common Stock Warrants pursuant to the Equity Offering.  The Warrants have a term of three years and an exercise price of $0.05 per common share.

2004 Incentive Compensation Plan

The Company has adopted the 2004 Incentive Compensation Plan (the “2004 Plan”).  The 2004 Plan provides for the issuance of incentive and non-incentive stock options or shares.  The Company has reserved 750,000 shares of Common Stock for issuance underlying the grants under the Plan. As of September 30, 2014 options for the purchase of 23,325 shares of Common Stock are outstanding under the Plan. Options and warrants generally become exercisable over vesting periods of up to four years and expire ten years from the date of grant.  As of September 30, 2014 there are 7,175 shares of common stock available for issuance pursuant to grants under the Plan.

2009 Incentive Compensation Plan

In January 2009, the Company adopted the 2009 Incentive Compensation Plan (the "2009 Plan") that permits the issuance of options or shares to selected employees and directors of, and consultants to, the Company.  The Plan was amended in January 2012 to reserve 1,150,000 shares of Series C Convertible Preferred Stock for issuance underlying the grants of stock, stock options and warrants and to provide Common Stock awards rather than Series C Convertible Preferred shares.  The Company has issued 765,906 shares of Series C Convertible Preferred Stock pursuant to the Plan, all of which were converted to Common Stock as of June 30, 2011.  Options generally become exercisable over vesting periods of up to four years and expire ten years from the date of grant.  There are 384,094 shares available for grant as of September 30, 2014.

A summary of the options and warrants for the three months ended September 30, 2014 are presented in the table below:

	Weighted Average Exercise Price		Number of Options and Warrants		Weighted Average Remaining Contractual Term		Aggregate Fair Value
Outstanding at June 30, 2014	$	0.07		1,460,340		2.08	$	454,923
Granted		0.05		20,509,000		2.79		410,090
Outstanding at September 30, 2014 (unaudited)	$	0.05		21,969,340		2.73	$	865,013

For purposes of determining the fair values of warrants issued during the three months ended September 30, 2014 using the Black-Scholes option pricing model, the Company used the following assumptions; expected volatility 40%, risk-free interest rate 1%, warrant life of 3 years, and expected dividend rate of 0%.

Included in the table above are 23,325 options outstanding at September 30, 2014 and June 30, 2014.  The options are subject to various vesting periods up to thirty-three months and all were fully vested as of March 2013.   The options expire on various dates between February, 2015 and October, 2018. Additionally, the options and warrants had an intrinsic value of $12,154 as of September 30, 2014.  Intrinsic value arises when the exercise price is lower than the market value, which was $0.03 per share at September 30, 2014.

The options outstanding at September 30, 2014 had no unrecognized compensation costs.

Note 6 – Subsequent Events

In October, 2014 the Company issued 1,290,000 shares of common stock for services.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2014 and with the unaudited financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

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

The following discussion and analysis should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Form 10-K for the year ended June 30, 2014.

Business Overview

General

We were incorporated in Delaware in 2001 under the name HumanBeams, Inc.  On December 18, 2007, we changed our name to Beamz Interactive, Inc. Our principal executive office is located at 15354 North 83rd Way, Suite 101, Scottsdale, Arizona 85260, and our telephone number is 480-424-2053. Our principal operations are located in Scottsdale, Arizona. Our website address is www.thebeamz.com.

Products

We have developed an interactive 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).

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We have commercialized several products that use the Beamz interactive laser controller technology for music making and music-controller related products, including the Professional and Home Editions of our Beamz EHC product family.

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, in September 2014 we began offering the Beamz Therapy Guide, a 90-page manual that includes fifteen therapeutic protocols for use with the Beamz, each paired with specific Beamz music and including patient evaluation forms for use by primarily recreation therapists.  During November 2014 we expect to begin shipment of the Beamz Music Therapy Protocols for use by Music Therapists, the Beamz Life Skills Classroom Lesson Plans for use in special needs classrooms, and the Beamz Professional Sample Activities Guide which includes samples from the more comprehensive guides and will be included with the purchase of each Beamz Professional Edition.  Each of these content offerings have been developed in collaboration with experts in the various classroom and therapeutic fields and we expect to continue to expand such materials in the upcoming months.  We also now offer adapter plates that allow the user to attach the Beamz to a desk, wheelchair, or other platform and wireless, large button switches that can be paired with the Beamz hardware and allow users who are unable to readily break the laser beams to play the sounds by simply pushing 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 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.

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 introduced 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.

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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 three United States sales resources – one who is dedicated to educational market sales and two in the therapy and senior living markets.  We intend to add additional sales resources in the educational arena in the next few months and will add others in appropriate markets 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 September 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 and, as a result, our spending on research and development in the three months ended September 30, 2014 was only $73,228 compared to $317,438 during the same period in 2013; 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.

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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 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—Universal Music Enterprises, 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.

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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 three full-time employees and one part-time employee. 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.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

As an emerging growth company under the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards.
 

While our significant accounting policies are more fully described in the notes to our financial statements included herewith, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

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.  In their report dated October 10, 2014, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements as of and for the year ended June 30, 2014 concerning the Company’s assumption that we will continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of the uncertainty.

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The accompanying financial statements as of and for the three months ended September 30, 2014, have been prepared assuming that the Company will continue as a going concern. As of September 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.

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 as of September 30, 2014 and June 30, 2014. 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.

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 recognize 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.

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Research and development costs.Expenses related to research, design and development of products are charged to research and development costs as incurred. These expenditures include direct salary costs and/or consultant expenses for research and development personnel and contractors, costs for materials used in research and development activities and costs for outside services.

Results of Operations and Financial Condition

For the three months ended September 30, 2014 compared with the three months ended September 30, 2013:

Revenues.  The Company generated revenues for the three months ended September 30, 2014 of $100,512, as compared to revenues of $9,523 for the three months ended September 30, 2013, or a $90,989 increase in revenues. The increase is primarily due to additional efforts in the healthcare and education markets which took place during the first quarter of fiscal year 2015.

Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2014 was $54,247, as compared to cost of sales of $16,588 for the three months ended September 30, 2013, for an increase in cost of sales of $37,659. This is primarily due to increases in warehousing and fulfillment costs for the three months ended September 30, 2014 compared to the same period in 2013 due to the increase in sales.  The gross margin for the three months ended September 30, 2014 was 46% as compared to gross margin of approximately (74%) for the three months ended September 30, 2013.   The increase in the gross margin is primarily due to the increase in direct product gross margin for the three months ended September 30, 2014 compared to the same period in 2013 resulting from an increase in sales, offset in part by the corresponding increase in warehousing and fulfillment costs.

Research and Development (“R&D”). R&D expenses for the three months ended September 30, 2014 were $73,228, as compared to R&D expenses of $317,438 for the three months ended September 30, 2013, or a 77% decrease.  The decrease is due to the cost associated with our next-generation product development including iOS (iPhone and iPad) and MAC software applications during the three months ended September 30, 2013, which were completed prior to July 1, 2014. In addition, the three month periods ending September 30, 2014 and 2013 included approximately $800 and $114,600, respectively, of non-cash expenses associated with stock grants to various development consultants.

General and Administrative Expenses (“G&A”). G&A expenses for the three months ended September 30, 2014 were $316,154 as compared to G&A expenses of $1,011,373 for the three months ended September 30, 2013, or a 69% decrease in G&A expenses.  The decrease is due to increased costs incurred in the three months ended September 30, 2013 related to raising capital in addition to services provided by various consultants for strategic planning and financial consulting.  The September 2013 costs also includes fees for a signing bonus for the President and Chief Financial Officer which are included in non-cash G&A expenses of approximately $637,800 for the three months ending September 30, 2013. For the three months ended September 30, 2014 G&A included non-cash expenses of approximately $125,100.

Sales & Marketing Expenses.  Sales and Marketing expenses for the three months ended September 30, 2014 were $190,447, as compared to sales and marketing expenses of $639,937 for the three months ended September 30, 2013, or a decrease of 70%.  The decrease is due primarily to the reduction in commercial and video production costs, and included approximately $30,300 in non-cash expenses during the three months ended September 30, 2014. Sales and Marketing expenses for the three months ended September 30, 2013 included approximately $146,900 in non-cash expenses.

Interest Expense.   Interest expense was $232,082 for the three months ended September 30, 2014, as compared to $120,545 for the three months ended September 30, 2013, or an increase of $111,537. The increase is due to additional convertible debt outstanding during the three months ended September 30, 2014.   Interest expense for the three months ended September 30, 2014 and 2013 includes non-cash amortization of debt discounts of approximately $111,000 and $57,000, respectively.

Net Loss. We had a net loss for the three months ended September 30, 2014 of $773,560, as compared with a net loss of $2,104,271 for the three months ended September 30, 2013, or a decrease in net loss of $1,330,711. The decrease in net loss for the three months ended September 30, 2014 is due primarily to the decreases in research and development costs associated with the next-generation product due to the launch in September 2013, decreases in general and administrative costs related to strategic planning and financial consulting services which were not continued in the three months ended September 30, 2014, decreases in sales and marketing costs due to decreased commercial and video production costs due to the change in the Company’s go-to-market strategy, offset by increased interest costs related to the additional convertible debt secured subsequent to September 30, 2013.  For the three months ended September 30, 2014 and September 30, 2013, approximately $267,200 and $899,000, respectively, of the loss was non-cash.

All material changes in financial condition and results of operations for the three months ended September 30, 2014 compared with the three months ended September 30, 2013 are identified in the above analysis for the periods ended September 30, 2014 and 2013.

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Liquidity and Capital Resources

Our principal liquidity from inception (2001) to September 30, 2014, came from the sale of equity interests and debt financing. We issued 53,803,416 common shares related to the issuance of Common Stock and the conversion of all shares of Series A, A-1, B, and C Convertible Preferred into Common Stock and also includes the conversion of 31,901 shares of Series D Convertible Preferred Stock. We have issued $6,730,208 of notes payable with interest rates between 8% and 10%, which were subsequently converted to Series D Convertible Preferred Stock in June 2012. Through September 30, 2013, the Company received $1,981,045 from the bridge loan financing, of which $1,530,420 was received from related parties.   Through September 30, 2014, the Company received $4,808,509 from the Convertible Secured Subordinated Debt, of which $4,445,809 was received from related parties.  As of September 30, 2014, total paid-in capital was $19,446,516.  During the three months ended September 30, 2014, we used $523,571 to fund operations that were funded primarily by funds received in private equity offering.  

As discussed above, we anticipated incurring additional expenditures during fiscal 2014 and 2015 to pursue our planned business operations, including additional sales and marketing expenditures as well as possible increases in expenditures for 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 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 in Note 5 to the Financial Statements above, 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 for the fiscal year ended June 30, 2014, our independent registered public accounting firm included an emphasis-of-matter paragraph concerning the Company’s assumption that we will continue as a going concern.

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.

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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 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of September 30, 2014, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of September 30, 2014, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting.

There were no changes to our internal control over financial reporting during the first quarter ended September 30, 2014 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is information regarding the issuance and sales of the Company’s securities without registration for the three months ended September 30, 2014.  (other than issuances previously disclosed in the Company's Annual Report on Form 10-K for the twelve month ended June30, 2014).

The Company issued a total of 1,110,000 shares of common stock and 9,000 warrants to various contractors for services that were valued at approximately $80,800.

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The issuances described above were made in private transactions or private placements intending to meet the requirements of one or more exemptions from registration, including the exemption provided under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Act”).  The investors were not solicited through any form of general solicitation or advertising, the transactions being non-public offerings, and the sales were conducted in private transactions where the investor identified an investment intent as to the transaction without a view to an immediate resale of the securities; the shares were “restricted securities” in that they were both legended with reference to Rule 144 as such and the investors identified they were sophisticated as to the investment decision and in most cases we reasonably believed the investors were “accredited investors” as such term is defined under Regulation D based upon statements and information supplied to us in writing and verbally in connection with the transactions.  We have never utilized an underwriter for an offering of our securities and no sales commissions were paid to any third party in connection with the above-referenced sales.

Item 3. Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following documents are filed as part of this Report:

EXHIBIT INDEX

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

          Date:  November 14, 2014         Date: November 14, 2014   BEAMZ INTERACTIVE, INC.       By   /s/ Charles R. Mollo Charles R. Mollo Chief Executive Officer   By  /s/Joan W. Brubacher Joan W Brubacher President/CFO

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