Significant Accounting Policies and Use of Estimates (Policies)

3 Months Ended

Sep. 30, 2014

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

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

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.

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

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 Policy

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, 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.

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 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. 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

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

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.

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

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

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 962,297 shares 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 Policy

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.

Going Concern

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.

BEAMZ INTERACTIVE INC 10-Q