S-1 1 lbt_s1-082611.htm REGISTRATION STATEMENT lbt_s1-082611.htm
As filed with the U.S. Securities and Exchange Commission on August 26, 2011
Registration No. 333-_______________
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM S-1
 
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
 
Location Based Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
3663
20-485758
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(IRS Employer
Identification No.)
 
49 Discovery, Suite 260
Irvine, California 92618
888-600-1044
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)
 
David M. Morse, Chief Executive Officer
49 Discovery, Suite 260
Irvine, California 92618
888-600-1044
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
Neal H. Brockmeyer
Christopher J. Husa
Locke Lord Bissell & Liddell llp
300 South Grand Avenue, 26th Floor
Los Angeles, California 90071
Tel:  213-687-6774
Fax:  213-341-6774
Jonathan R. Zimmerman
Matthew R. Kuhn
Faegre & Benson LLP
2200 Wells Fargo Center
Minneapolis, Minnesota 55402
Tel: 612-766-7000
Fax: 612-766-1600

 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  5 _______________
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  5 _______________
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  5 _______________
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer  5                                                                                    Accelerated filer  5
 
Non-accelerated filer  5                                                                                      Smaller reporting company  x
(Do not check if a smaller reporting company)
 
 
 

 
 
CALCULATION OF REGISTRATION FEE
 
 
Title of Each Class of
Securities to be Registered
 
Amount to be
Registered
Proposed Maximum
Offering Price
per Share(1)
 
Proposed Maximum
Aggregate Offering Price
 
Amount of
Registration Fee(3)
Common Stock $.001 par value
59,054,079 shares(2)
$0.90
$53,148,672
$6,170.56
 
(1)
Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, based on $0.90, the average of the bid and asked prices reported on the OTC Bulletin Board on August 22, 2011.
(2)
Pursuant to Rule 416 under the Securities Act of 1933, this Registration Statement also covers any additional securities that may be offered or issued in connection with any stock split, stock dividend or similar transaction.
(3)
Calculated pursuant to Rule 457(c) under the Securities Act of 1933.
 
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

 
 
The information in this prospectus is not complete and may be changed.  We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.  This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED AUGUST 26, 2011
 
PROSPECTUS
 
59,054,079 Shares
 
LOCATION BASED TECHNOLOGIES, INC.
 
This prospectus covers the sale by the selling stockholders named beginning on page 37 of up to 59,054,079 shares of our common stock, $0.001 par value, which include:

   
50,000,000 shares of common stock; and

   
9,054,079 shares of common stock underlying warrants.

These shares will be offered for sale by the selling stockholders identified in this prospectus in accordance with the methods and terms described in “Plan of Distribution.”  We will not receive any of the proceeds from the sale of these shares.  However, we may receive up to $3,566,576 upon the exercise of the warrants if the holders exercise them for cash.  If some or all of the warrants are exercised, the money we receive will be used for general corporate purposes, including working capital requirements.  We will pay all the expenses incurred in connection with the offering described in this prospectus, with the exception of brokerage expenses, fees, discounts and commissions, which will all be paid by the selling stockholders.  Our common stock is more fully described in “Description of Securities.”

The prices at which the selling stockholders may sell the shares of common stock that are part of this offering may be market prices prevailing at the time of sale, at negotiated prices, at fixed prices or at varying prices determined at the time of sale.   See “Plan of Distribution.”

Our common stock is currently quoted on the OTC Bulletin Board under the symbol “LBAS.”  On August 25, 2011, the last reported price was $0.79 per share.

 
These are speculative securities and involve a high degree of risk.  You should not invest in our common stock unless you can afford to lose your entire investment.  Please see “Risk Factors” beginning on page 6 of this prospectus.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus.  Any representation to the contrary is a criminal offense
 
The date of this prospectus is _______________, 2011
 
 
 

 
 
TABLE OF CONTENTS
 
Page
 
PROSPECTUS SUMMARY
3
 
RISK FACTORS
6
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
15
 
MARKET FOR COMMON EQUITY
16
 
SELECTED FINANCIAL DATA
17
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18
 
BUSINESS
23
 
MANAGEMENT
29
 
RELATED PARTY TRANSACTIONS
34
 
PRINCIPAL STOCKHOLDERS
36
 
SELLING STOCKHOLDERS
37
 
DESCRIPTION OF SECURITIES
42
 
PLAN OF DISTRIBUTION
44
 
LEGAL MATTERS
46
 
EXPERTS
46
 
WHERE YOU CAN FIND MORE INFORMATION
46
 
INDEX TO FINANCIAL STATEMENTS
F-1
 
Please read this prospectus carefully.  You should rely only on the information contained in this prospectus.  We have not, and the selling stockholders have not, authorized any other person to provide you with different information.  The information in this prospectus is accurate only as of the date on the front cover, but the information may have changed since that date.

 This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted.

 
2

 

PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus.  It does not contain all of the information that you should consider before investing in our common stock.  You should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and the related notes.  

All references to “we,” “us,” “our,” and the “company” mean Location Based Technologies, Inc., including its  subsidiary and predecessors.
 
Our Company
 
We design, develop and sell leading-edge personal locator GPS devices and services that incorporate patented, proprietary technologies designed to enhance and enrich the way businesses and families interact globally.  We developed the PocketFinder family of products, which include small location devices that enable users to locate a person, pet, vehicle or other valuable asset.  The personal locator devices are completely wireless and users can monitor the safety and location of family members, pets, vehicles and other valuable assets using Global Positioning System (“GPS”) and General Packet Radio Service (“GPRS”).  The initial pilot run of approximately 350 PocketFinder devices was completed in March 2011 and market-ready demonstration devices were immediately made available to strategically identified sales channels and distributors.  We are also developing other types of devices and exploring applications in multiple markets.
 
Location Based Technologies®, PocketFinder® and PocketFinder Pets® are registered trademarks, and PocketFinder Network™, PocketFinder People™, PocketFinder Vehicle™, PocketFinder Luggage™, PocketFinder Mobile™ and VehicleFleetFinder™ are trademarks, of the company.  With respect to this prospectus, we reserve all rights to the foregoing trademarks regardless of whether they carry the “®” or “™” designation.
 
Recent Developments
 
On July 21, 2011, we entered into a purchase agreement with certain investors, the “July 2011 private placement,” for the sale of up to 50,000,000 shares of our common stock at a purchase price of $0.20 per share.  Closings for the sale of such shares took place on July 22, July 25 and July 27, 2011, at which a total of 50,000,000 shares were issued.  The estimated net proceeds from the sale of these shares, after deducting the placement agent fees and estimated expenses, were approximately $8,900,000.  The holders of the shares purchased in the July 2011 private placement are entitled to weighted-average antidilution protection, with certain exceptions, until the 12-month anniversary of the initial closing in the event of sales and issuances of securities by us at less than the purchase price under the purchase agreement.
 
Craig-Hallum Capital Group LLC and ThinkEquity LLC served as placement agents for the July 2011 private placement and received as compensation for their services an aggregate of $800,000 in cash and five-year warrants to purchase an aggregate of 1,000,000 shares of our common stock at an exercise price of $0.20 per share.
 
Following the July 2011 private placement, $2,157,178 of our outstanding debt, including accrued interest, was converted into 10,785,891 shares of our common stock at a conversion rate of $0.20 per share.
 
The Offering
 
In connection with the July 2011 private placement as described above under “Recent Developments,” we agreed to register on Form S-1 under the Securities Act of 1933, as amended (the “Securities Act”), the shares of common stock that were issued to the investors.  We also agreed to register under the Securities Act the shares of common stock issuable on exercise of the warrants issued to the placement agents.
 
In addition to the shares issued to the investors and issuable to the placement agents on exercise of their warrants, we are registering other shares issuable on exercise of warrants issued by us from August 15, 2007 to January 5, 2011 pursuant to registration rights that the holders obtained in connection with the issuance of the warrants.
 
 
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We are registering shares of our common stock for sale by the selling stockholders identified in “Selling Stockholders.”  The shares included in the table identifying the selling stockholders consist of:
 
50,000,000 shares of common stock issued to the investors in the July 2011 private placement; and
 
1,000,000 shares of common stock underlying warrants issued to the placement agents in the July 2011 private placement; and
 
8,054,079 shares of common stock underlying warrants issued to others.

On August 23, 2011, there were 189,647,890 issued and outstanding shares of our common stock.  This number does not include:
 
9,382,394 shares of common stock reserved for issuance upon the exercise of outstanding stock purchase warrants;
 
1,215,384 shares of common stock reserved for issuance upon the conversion of outstanding convertible securities; and
 
6,000,000 shares of common stock reserved for issuance upon the exercise of outstanding stock options granted to management, subject to meeting certain performance goals.

If all of our outstanding options and warrants are exercised, and all of our convertible securities are converted, we would have a total of 206,245,668 shares of common stock issued and outstanding.

The shares of common stock offered under this prospectus may be sold by the selling stockholders in the manner described in “Plan of Distribution.”  Information regarding the selling stockholders, the shares they are offering to sell under this prospectus, and the times and manner in which they may offer and sell those shares is set forth in “Selling Stockholders” and “Plan of Distribution.”  We will not receive any of the proceeds from those sales.  However, we may receive up to $3,566,576 upon the exercise of the warrants if the holders exercise them for cash.  The registration of common stock pursuant to this prospectus does not necessarily mean that any of those shares will ultimately be offered or sold by the selling stockholders.

Corporate Information
 
We were incorporated under the laws of the State of Nevada in April 2006 as Springbank Resources, Inc. (“SRI”).  SRI was formed to engage in the exploration and development of oil and gas, and by 2007 had disposed of all of its assets and satisfied its liabilities.  In October 2007, SRI acquired all of the outstanding stock of Location Based Technologies, Corp. (“Old LBT”), following which SRI merged Old LBT into itself and, in the process, SRI’s name was changed to Location Based Technologies, Inc.  Old LBT had been incorporated in September 2005 by David Morse, Joseph Scalisi and Desiree Mejia, who became our officers and directors, in order to develop the PocketFinder personal locators.
 
Our principal executive offices are located at 49 Discovery, Suite 260, Irvine, California 92618, and our telephone number is 888-600-1044.
 
Our corporate website, www.locationbasedtech.com, provides a description of our corporate business along with our contact information including address, telephone number and e-mail address.  Our corporate website also provides access to corporate investor relations information, and includes a link to our customer website, www.pocketfinder.com, which provides prospective customers with relevant information about our products, pricing and payment options, pre-ordering capability, and answers to frequently asked questions.  Information contained on our websites is not a part of this prospectus and should not be relied upon with respect to this offering.
 
 
4

 
 
Summary Financial Data
 
The summary consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.
 
   
Year Ended August 31
   
Nine Months Ended May 31
   
   
2009
   
2010
   
2010
   
2011
   
               
(Unaudited)
   
(Unaudited)
   
Statement of Operations Data:
                     
Net revenue
  $ 957,862     $ 67,090     $ 61,738     $ 9,442  
Gross profit (loss)
    595,497       (90,620 )     (84,317 )     (11,635 )
Operating expenses
    5,560,632       4,179,708       3,253,494       2,190,302  
Net operating loss
    (4,965,135 )     (4,270,328 )     (3,337,811 )     (2,201,937 )
Other income (expense)
    (4,776,206 )     (4,791,811 )     (2,114,187 )     (3,063,929 )
Net loss
    (9,742,141 )     (9,062,939 )     (5,452,798 )     (5,266,666 )
 
   
As of
May 31, 2011
(Unaudited)
                   
Balance Sheet Data:
                       
Cash and cash equivalents
  $ 354,526                          
Working capital (deficiency)
    (7,297,685 )                        
Total assets
    1,772,995                          
Total liabilities
    7,703,496                          
Total stockholders’ equity (deficit)
    (5,930,501 )                        

The historical financial data in these tables does not take into account the sale of 50,000,000 shares of our common stock in the July 2011 private placement, the estimated net proceeds from which were approximately $8,900,000, after deducting the placement agent fees and estimated offering expenses.  In addition, $2,157,178 of our outstanding debt, including accrued interest, was converted into 10,785,891 shares of our common stock at a conversion rate of $0.20 per share.  See “Recent Developments” above.
 
 
5

 
 
RISK FACTORS
 
Investing in our common stock is highly speculative and involves a high degree of risk.  Any potential investor should carefully consider the risks and uncertainties described below before purchasing any shares of our common stock.  The risks described below are those we currently believe may materially affect us.  If any of them occur, our business, financial condition, operating results or cash flows could be materially harmed.  As a result, the trading price for our stock could decline, and you might lose all or part of your investment.
 
Risks Related to Our Business
 
We have had operating losses since formation and expect to incur net losses for the near term.
 
We reported a net loss of $9,062,939 for the fiscal year ended August 31, 2010, a net loss of $9,742,141 for the fiscal year ended August 31, 2009 and a net loss of $5,266,666 for the nine months ended May 31, 2011.  We anticipate that we will lose money in the near term and we may not be able to achieve profitable operations.  In order to achieve profitable operations we need to secure sales of product, and to begin sales in the United States we need to obtain required federal and carrier certification.  We cannot be certain that our business will be successful or that we will generate significant revenues and become profitable.
 
We may not be successful in developing our new products and services.
 
We are a technology and telecommunications company whose purpose is to develop, market and provide new wireless communications products and systems which combine the features of pocket pagers with cellular telephones.  The market for telecommunications products and services is characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards.  These market characteristics are exacerbated by the emerging nature of this market and the fact that many companies are expected to introduce continually new and innovative products and services.  Our success will depend partially on our ability to introduce new products, services and technologies continually and on a timely basis and to continue to improve the performance, features and reliability of our products and services in response to both evolving demands of prospective customers and competitive products.
 
There can be no assurance that any of our new or proposed products or services will maintain the market acceptance already established.  Our failure to design, develop, test, market and introduce new and enhanced products, technologies and services successfully so as to achieve market acceptance could have a material adverse effect upon our business, operating results and financial condition.
  
There can be no assurance that we will not experience difficulties that could delay or prevent the successful development, introduction or marketing of new or enhanced products and services, or that our new products and services will adequately satisfy the requirements of prospective customers and achieve significant acceptance by those customers.  Because of certain market characteristics, including technological change, changing customer needs, frequent new product and service introductions and evolving industry standards, the continued introduction of new products and services is critical.  Delays in the introduction of new products and services may result in customer dissatisfaction and may delay or cause a loss of revenue.  There can be no assurance that we will be successful in developing new products or services or improving existing products and services that respond to technological changes or evolving industry standards.
 
In addition, new or enhanced products and services introduced by us may contain undetected errors that require significant design modifications.  This could result in a loss of customer confidence which could adversely affect the use of our products, which in turn could have a material adverse effect upon our business, results of operations or financial condition.  If we are unable to develop and introduce new or improved products or services in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition will be materially and adversely affected.

 
6

 

We have no experience or history of operations or earnings.
 
We are wholly dependent on our ability to market and sell our products and services for future earnings.  The continued development of our products and services involves significant risks, which a combination of experience, knowledge and careful evaluation may not be able to overcome.  There can be no assurance that unanticipated problems will not occur which would result in material delays in our continued product development or that our efforts will result in successful product commercialization.  An investment in our common stock is highly speculative and no assurance can be given that the stockholders will realize any return on their investment or that they will not lose their entire investment.
 
Our future financial results are uncertain and we can expect fluctuations in revenue.
 
We have not been able to launch our marketing plan and have achieved light sales of our vehicle units.  We rely heavily on retail organizations, affinity groups and telecommunications carriers to sell our products.  If any of these relationships change or are disrupted, we could lose a significant portion of our anticipated revenues.
 
Our results of operations may vary from period to period because of a variety of factors, including our R&D costs, our introduction of new products and services, cost increases from third-party service providers or product manufacturers, production interruptions, the availability of industry service providers, changes in marketing and sales expenditures, acceptance of our websites, competitive pricing pressures, the interest in PocketFinder and general economic and industry conditions that affect customer demand and preferences.
 
As with any relatively new business enterprise operating in a specialized and intensely competitive market, we are subject to many business risks which include, but are not limited to, unforeseen marketing, promotional and development expenses, unforeseen negative publicity, competition, product liability and lack of operating experience.  Many of the risks may be unforeseeable or beyond our control.  There can be no assurance that we will successfully implement our business plan in a timely or effective manner, or generate sufficient interest in the PocketFinder products or services, or that we will be able to market and sell enough products and services to generate sufficient revenues to continue as a going concern.
 
There are risks of international sales and operations.
 
We anticipate that revenue from the sale of our products and services may be derived from customers located outside the United States.  As such, a portion of our sales and operations could be subject to tariffs and other import-export barriers, currency exchange risks and exchange controls, foreign product standards, potentially adverse tax consequences and the possibility of difficulty in accounts receivable collection.  There can be no assurance that any of these factors will not have a material effect on our business, financial condition and results of operations.
 
Although we will monitor our exposure to currency fluctuations, there can be no assurance that exchange rate fluctuations will not have an adverse effect on our results of operations or financial condition.  In the future, we could be required to sell our products and services in other currencies, which would make the management of currency fluctuations more difficult and expose our business to greater risks in this regard.
 
Our products may be subject to numerous foreign government standards and regulations that are continually being amended.  Although we will endeavor to satisfy foreign technical and regulatory standards, there can be no assurance that we will be able to comply with foreign government standards and regulations, or changes thereto, or that it will be cost effective for us to redesign our products to comply with such standards or regulations.  Our inability to design or redesign products to comply with foreign standards could have a material adverse effect on our business, financial condition and results of operations.
 
In addition to the uncertainty as to our ability to generate revenues from foreign operations, there are certain risks inherent in doing business internationally, such as unexpected changes in regulatory requirements, export restrictions, trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, software piracy or difficulty in enforcing intellectual property rights, seasonal reductions in business activity in certain other parts of the world and potentially adverse tax consequences, which could adversely impact the success of our international operations.  There can be no assurance that one or more of such factors will not have a material adverse effect on our potential future international operations and, consequently, on our business, operating results and financial condition.
 
 
7

 
 
Because of the global nature of the telecommunications business, it is possible that, although transmissions by us originate primarily in the State of California, the governments of other states and foreign countries might attempt to regulate our transmissions or prosecute us for violations of their laws.  There can be no assurance that violations of local laws will not be alleged or changed by state or foreign governments, that we might not unintentionally violate such laws, or that such laws will not be modified, or new laws enacted, in the future.  Any of the foregoing developments could have a material adverse effect on our business, results of operations and financial condition.
 
We may have substantial future cash requirements but no assured financing source to meet such requirements.
 
In the audit report on our financial statements for our fiscal years ended August 31, 2010 and 2009, our auditors stated that our recurring losses and working capital deficit raise substantial doubt about our ability to continue as a going concern.  We will continue our research and development activities which require working capital.  To date, we have received minimal revenues from sales of our products or services.  Our continuing research and development activities will require a commitment of substantial additional funds.  Our future capital requirements will depend on many factors, including continued progress in its research and development programs, the magnitude of these programs, the time and costs involved in obtaining any required regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents, successful completion of technological, manufacturing and market requirements, changes in existing research relationships, establishing collaborative arrangements, and the cost of finalizing licensing agreements to produce licensing revenues.
 
We do not know whether additional financing will be available when needed, or on terms favorable to us or our stockholders – particularly in light of current economic conditions and the availability of credit and other sources of capital.  We may raise any necessary funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements.  To the extent we raise additional capital by issuing equity securities, our stockholders will experience dilution.  If we raise funds through debt financings, we may become subject to restrictive covenants.  To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.
 
If adequate funds are not available, we may be required to delay, scale-back or eliminate our research and development programs or obtain funds through collaborative partners or others that may require us to relinquish rights to certain of our potential products that we would not otherwise relinquish. There can be no assurance that additional financing will be available on acceptable terms or at all, if and when required.
 
We are dependent on third-party providers and consultants for development, marketing and other services.
 
We are dependent upon various consultants for one or more significant services required for PocketFinder products, which services will be provided to our business pursuant to agreements with such providers.  Inasmuch as the capacity for certain services by certain consultants may be limited, our inability, for economic or other reasons, to continue to receive services from existing providers in a timely manner or to obtain similar products or services from additional providers in a timely manner could have a material adverse effect on our business.
 
We do not have manufacturing capability.  To meet our product cost goals, we will rely on Jabil Circuits to produce our product.  Any problems experienced by such supplier could negatively affect our operations.
 
We have entered a contractual agreement with Jabil Circuits, a leading manufacturer of mobile electronic devices, for manufacturing support.  If product volume requires, we expect to be able to use additional Jabil facilities for the production of the PocketFinder devices.  Any significant problem in this company or its suppliers could result in a delay or interruption in the supply of materials to us until that supplier cures the problem or until we locate an alternative source of supply.  Any delay or interruption would likely lead to a delay or interruption in production and could negatively affect our operations.  Changes in purchasing patterns may affect revenue timing, production schedules, inventory costs, inventory practices and new product development and introduction.
 
 
8

 
 
If product liability lawsuits are successfully brought against us, we may incur substantial damages and demand for the potential products may be eliminated or reduced.
 
Faulty operation of our PocketFinder device could result in product liability claims.  Regardless of their merit or eventual outcome, product liability claims may result in:
 
·  
decreased demand for the PocketFinder devices or withdrawal from the market;
·  
injury to our reputation and significant media attention;
·  
costs of litigation; and
·  
substantial monetary awards to plaintiffs.
 
We have arranged to procure product liability insurance in the amount of $10,000,000 at launch.  Although this meets retailer requirements for product liability coverage, this coverage may not be sufficient to fully protect us against product liability claims.  We intend to expand our product liability insurance coverage as sales of our products expand.  Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or limit the commercialization of our products and expose us to liability in excess of our coverage.
 
If we fail to adequately protect our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing devices.
 
Our intellectual property rights cover certain products and methods of manufacturing and using these products.  Our commercial success will depend in part on our success in obtaining patent protection for our key products or processes.  Our patent position, like that of other technology companies, is highly uncertain.  One uncertainty is that the United States Patent and Trademark Office (“USPTO”) may deny or require significant narrowing of claims made under our patent applications.
 
The USPTO, as well as patent offices in other jurisdictions, has often required that patent claims reciting technology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting their scope of protection. Further, technology that is disclosed in patent applications is ordinarily published before it is patented. As a result, if we are not able to get patent protection, we will not be able to protect that technology through trade secret protection. Thus, if we fail to obtain patents having sufficient claim scope or fail to adequately protect our trade secrets, we may not be able to exclude competitors from using our key products or processes.
 
Even if the USPTO grants patents with commercially valuable claim scope, our ability to exclude competitors will subsequently depend on our successful assertion of these patents against third party infringers and our successful defense of these patents against possible validity challenges.  Our competitors, many of which have substantial resources and have made significant investments in competing technologies, may make, use or sell our proprietary products or processes despite our intellectual property.  Litigation may be necessary to enforce our issued patents or protect our trade secrets.  The prosecution of intellectual property lawsuits is costly and time-consuming, and the outcome of such lawsuits is uncertain.  An adverse determination in litigation could result in narrowing of our scope of protection or the loss of our intellectual property, thereby allowing competitors to design around or make use of our intellectual property and sell our products in some or all markets.  Thus, if any of our patents are invalidated or narrowed in litigation, we may not be able to exclude our competitors from using our key technologies.
 
Another risk regarding our ability to exclude competitors is that our issued patents or pending applications could be lost or narrowed if competitors with overlapping technologies provoke an interference proceeding (determination of first to invent) at the USPTO.  The defense and prosecution of interference proceedings are costly and time-consuming to pursue, and their outcome is uncertain.  Similarly, a third party may challenge the validity of one or more of our issued patents by presenting evidence of prior publications to the USPTO and requesting reexamination of such patents.  Thus, even if we are able to obtain patents that cover commercially significant innovations, one or more of our patents may be lost or substantially narrowed by the USPTO through an interference or reexamination proceeding.  Consequently, we may not be able to exclude our competitors from using our technologies.

 
9

 
 
Third party patents, or extensions of third party patents beyond their normal expiration dates, could prevent us from making, using or selling our preferred products and processes, or require us to take licenses or to defend against claims of patent infringement.
 
We may have a limited opportunity to operate freely.  Our commercial success will depend in part on our freedom to make, use and sell our products.  If third party patents have claims that cover any of these products, then we will not be free to operate as described in our business plan, without invalidating or obtaining licenses to such patents.  We may not be successful in identifying and invalidating prior claims of invention.  Similarly, a license may be unavailable or prohibitively expensive. In either case, we may have to redesign our products.  Such redesign efforts may take significant time and money and may fail to yield commercially feasible options.  If we are unable to develop products or processes that lie outside the scope of the third party’s patent claims, and we continue to operate, then we may be faced with claims of patent infringement, wherein the third party may seek to enjoin us from continuing to operate within our claim scope and seek monetary compensation for commercial damages resulting from our infringing activity.
 
The technology industry has been characterized by extensive patent litigation and companies have employed intellectual property litigation to gain a competitive advantage.
 
The defense of patent infringement suits is costly and time-consuming and their outcome is uncertain.  An adverse determination in litigation could subject us to significant liabilities, require us to obtain licenses from third parties, or restrict or prevent us from selling our products in certain markets.  Although patent and intellectual property disputes are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties.  Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all.  Thus, as discussed above, if third party patents cover any aspect of our products, then we may lack freedom to operate in accordance with our business plan.  Among such patents are various patents owned by third parties that cover the manufacture, sale and use of various forms of wireless technology.  If necessary, we believe we can avoid possible infringement of these patents by designing around them, obtaining licenses or delaying entry into certain markets, until expiration of the relevant patents. Nevertheless, there remains some risk arising from these patents.
 
If any of our key senior executives discontinue their employment with us, our efforts to develop our business may be delayed.
 
We are highly dependent on the principal members of our management team and the loss of our Co-President and Chief Executive Officer, David Morse, or our Co-President and Chief Development Officer, Joseph Scalisi, or our Chief Operating Officer and Secretary, Desiree Mejia, could significantly impede the achievement of our development efforts and objectives.
 
We may not be able to obtain the licenses and consents from governmental agencies or other holders of intellectual property that are necessary for our business plan to be accomplished.
 
The utilization or other exploitation of the products and services developed by us may require us to obtain licenses or consents from government regulatory agencies or from other producers or other holders of patents, copyrights or other similar rights relating to our products and services.  In the event we are unable, if so required, to obtain any necessary license or consent on terms and conditions which we consider to be reasonable, we may be required to stop developing, utilizing, or exploiting products and services affected by government regulation or by patents, copyrights or similar rights.  In the event we are challenged by a government regulatory agency, or by the holders of patents, copyrights or other similar rights, there can be no assurance that we will have the financial or other resources to defend any resulting legal action, which could be significant.
 
We may rely on certain proprietary technologies, trade secrets and know-how that are not patentable.  Although we may take steps to protect our unpatented trade secrets, technology and proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors, there can be no assurance that (i) these agreements will not be breached, (ii) we would have adequate remedies for any breach; or (iii) our proprietary trade secrets and know-how will not otherwise become known or be independently developed or discovered by competitors.  There is also no assurance that our actions will be sufficient to prevent imitation or duplication of either of our products and services by others or prevent others from claiming violations of their trade secrets and proprietary rights.

 
10

 
 
Rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements which characterize the telecommunications industry would adversely affect our financial condition if we are not able to respond with upgrades or changes that are acceptable to the market.
 
Our future success will depend upon our ability to enhance the technologies and to develop and introduce new products and technologies that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance.  We may determine that, in order to remain competitive, it is in our best interests to introduce new products and technologies and to cease exploitation of the technologies.  It is doubtful that we would be able to maintain operations should changes render the technologies obsolete or should we determine that the technologies are unexploitable.
 
Our financial success will depend on continued growth in use of wireless telecommunications products, as well as the ability of the wireless networks we plan to use to withstand natural and other disasters.
 
Our future success is at least partially dependent upon continued growth in the use of wireless telecommunications products.  The PocketFinder may not prove to be viable commercial products for a number of reasons, including lack of acceptable functionality, potentially inadequate development of the necessary infrastructure or timely development and commercialization of performance improvements.  To the extent that PocketFinder experiences significant growth in the number of users and use, there can be no assurance that our infrastructure will continue to be able to support the demands placed upon it by such potential growth or that the performance or reliability of our systems will not be adversely affected by this continued growth.  If use of the PocketFinder does not increase, or if our infrastructure does not effectively support growth that may occur, our business, operating results and financial condition may be materially and adversely affected.
 
Our systems may fail due to natural disasters, telecommunications failures and other events, any of which would limit the use of our products.  Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage our communications hardware and computer hardware operations for our products and services and cause interruptions in our services.  If any of these circumstances were to occur, our business could be harmed.  Our insurance policies may not adequately compensate us for any losses that may occur due to any failures of or interruptions in our systems.

An investor might lose its entire investment if we are unable to pay our obligations or are liquidated and dissolved.
 
As set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” we remain obligated under a significant amount of notes payable, and Silicon Valley Bank and Greggory S. Haugen have been granted security interests in our assets.  If we are unable to pay these or other obligations, the creditors could take action to enforce their rights, including foreclosing on their security interests, and we could be forced into liquidation and dissolution.

In the event of our liquidation, the proceeds realized from the sale of our assets, if any, will be distributed to our stockholders only after satisfaction of claims of our creditors.  The ability of our stockholders to recover all or any portion of their purchase price for the shares in that event will depend on the amount of funds realized and the claims to be satisfied therefrom.
 
We will require additional cash to fully implement our business strategies, including cash for (i) payment of increased operating expense and (ii) additional implementation of those business strategies.  No assurance can be given, however, that we will have access to additional funds in the future, or that additional funds will be available on acceptable terms and conditions to satisfy our cash requirements to implement our business strategies.  Our inability to obtain acceptable financing could have a material adverse effect on our results of operations and financial condition.
   
 
11

 

Our production and operating costs may be greater than anticipated.
 
We have used reasonable efforts to assess and predict costs and expenses.  However, there can be no assurance that implementing our business plan may not require more employees, capital equipment, supplies or other expenditure items than management has predicted.  Similarly, the cost of compensating additional management, employees and consultants or other operating costs may be more than our estimates, which could result in sustained losses.
 
Risks Related to Owning Our Common Stock
 
Our common stock is quoted on the OTC Bulletin Board for trading, and we expect that the price of our common stock will fluctuate substantially.
 
Our stock will be available for trading on the OTC Bulletin Board for the foreseeable future.  An active public trading market may not develop or, if developed, may not be sustained.  The market prices for securities of technology companies historically have been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.  The market price of our common stock will be affected by a number of factors, including:
 
·  
product liability claims or other litigation;
·  
the announcement of new products or product enhancements by us or our competitors;
·  
quarterly variations in our or our competitors’ results of operations;
·  
changes in earnings estimates or comments by securities analysts;
·  
developments in our industry;
·  
developments in patent or other proprietary rights;
·  
general market conditions; and
·  
future sales of common stock by existing stockholders.
 
If any of the above-listed risks occur, it could cause our stock price to fall dramatically and may expose us to class action securities lawsuits which, even if unsuccessful, would be costly to defend and a distraction to management.
 
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
 
Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.  We are no longer obligated to file periodic reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), but have done so on a voluntary basis.  We make publicly available the “current public information” required of nonreporting issuers and therefore our stockholders may sell their common stock in compliance with Rule 144 of the Securities and Exchange Commission (the “SEC”).  Inasmuch as  we are considered a voluntary filer under the Exchange Act for purposes of Rule 144, a one-year holding period currently applies to shareholders interested in selling restricted shares of our stock pursuant to Rule 144.  Once the registration statement of which this prospectus is a part is declared effective by the SEC, we will become obligated to file periodic reports under the Exchange Act.  Beginning 90 days following the registration statement being declared effective by the SEC, the applicable holding period under Rule 144 will be shortened to six months for shareholders interested in selling restricted shares of our stock pursuant to Rule 144.

In addition to the shares being registered in this offering, we estimate that there are at least 48,154,732 shares of our common stock that are restricted and have been held over one year, including 46,558,696 shares held by our officers and directors that may be resold subject to applicable volume limitations.  As additional shares of our common stock become available for resale in the public market under Rule 144 or otherwise, the supply of our common stock will increase, which could decrease the per share price of our common stock.

Our principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.
 
Our officers, directors and principal stockholders together control approximately 28.5% of our outstanding common stock.  These stockholders intend to act together, although they have not signed an agreement to do so.  If they act together, they may be able to exercise control over our management and affairs in all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.  This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock.  This concentration of ownership may not be in the best interest of our other stockholders.
 
 
12

 
 
In selling our convertible notes, we may have violated the registration requirements of the Securities Act which, if it occurred, would give noteholders a right to rescind their purchases.
 
In 2007, we sold convertible notes each bearing interest at a rate of 8%.  The proceeds raised from the sale of these notes have been used for research and development, as well as operating costs.  The notes were sold to accredited investors.  We made these sales in reliance on an exemption from registration provided by Section 4(2) of the Securities Act and similar state exemptions.  Our counsel has advised us that the availability of those exemptions cannot be determined with legal certainty due to the fact that we may not have complied with all of the provisions of exemption safe-harbors for such sales offered by rules promulgated under the Securities Act by the SEC.  Thus, it is possible that the sale of the convertible notes may have violated the registration requirements of the Securities Act. As to those sales, a right of rescission may exist on which the statute of limitations has not run.  For those noteholders that elect to convert to common stock, we may have a contingent liability arising from the original purchase of the convertible notes that such noteholders converted.  Assuming all noteholders convert their notes to common stock, if these sales had to be rescinded, our total potential liability could be $5,242,000 plus interest that may be accrued.  That liability would extend for up to three years (five years in California) after the date of the sale of the applicable convertible note that was converted to common stock.

We have identified material weaknesses with our internal controls over financial reporting, which could result in material misstatements in and restatements of our financial statements and adversely affect our stock price.

In connection with preparing our financial statements for our most recently completed fiscal year, our management evaluated the effectiveness of our internal control over financial reporting and concluded that there were material weaknesses.  These material weaknesses arise from a lack of segregation of duties to provide effective controls and our limited corporate governance structure, including the lack of an audit committee.  We restated our revenue for the quarter ended February 28, 2010, relating to a consulting project.  This also affected accounts receivable, the allowance for doubtful accounts, costs and estimated earnings in excess of billings on uncompleted contracts and bad debt expense for the period and as of the end of the period.  Our failure to implement required new or improved controls could cause us to fail to meet our periodic reporting obligations, result in material misstatements in our financial statements and cause investors to lose confidence in us, any of which could adversely affect the price of our common stock.
 
We incur substantial costs as a result of being a public company.
 
As a public company, we incur significant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies.  We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly.  For example, as a result of being a public company, we intend to add independent directors, create board committees and adopt additional policies regarding internal controls and disclosure controls and procedures.  In addition, we will incur additional costs associated with our public company reporting requirements.  We also expect these rules and regulations to make it difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.  We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
The application of  the SEC’s “penny stock” rules to our common stock could limit trading activity  in the market, and our stockholders may find it more difficult to sell their stock.
 
Our common stock is currently trading at less than $5.00 per share and is therefore subject to the SEC’s penny stock rules.  Before a broker-dealer can sell a penny stock, these rules require that it first approve the customer for the transaction and receive from the customer a written agreement to the transaction.  It must furnish the customer a document describing the risks of investing in penny stocks.  The broker-dealer must also tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade.  Finally, it must send monthly account statements showing the market value of each penny stock held in the customer’s account.  These disclosure requirements tend to make it more difficult for a broker-dealer to make a market in penny stocks, and could, therefore, reduce the level of trading activity in a stock that is subject to the penny stock rules.  Consequently, our stockholders may find it more difficult to sell their stock as compared to other securities.

 
13

 
 
We do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future.

We currently intend to retain any future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future.  Any payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements and such other factors as our board of directors may deem relevant at that time.  Therefore, you should not expect to receive cash dividends on our common stock.

If securities or industry analysts do not publish research or reports about us, or publish negative reports about our business, our share price could decline.

Securities analysts currently do not cover our common stock and may not do so in the future.  Our lack of analyst coverage might depress the price of our common stock and result in limited trading volume.  If we do receive analyst coverage in the future, any negative reports published by such analysts could have similar effects.

Certain provisions of Nevada law may discourage parties interested in taking control of the company.

We are subject to certain provisions of Nevada law by virtue of being incorporated in that State.  This includes a control share law that focuses on the acquisition of a “controlling interest” in a corporation that has a specified presence in Nevada, which is currently not applicable to us, and a business combination law that restricts business combinations with an “interested stockholder” for a period of three years unless the transaction by which the person first became an “interested stockholder” was approved by the corporation’s board of directors.  These laws are more fully described in “Description of Securities—Nevada Control Share and Business Combination Laws.”

 
14

 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Included in this prospectus are “forward-looking” statements, as well as historical information.  Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct.  Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in “Risk Factors.”  Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should” and similar expressions, including when used in the negative.  Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements.  Actual results may be materially different than those described herein.  Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include the factors described in the section titled “Risk Factors” and elsewhere in this prospectus.
 
All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors.  We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise, except to the extent required by federal securities laws.
 
 
15

 
 
MARKET FOR COMMON EQUITY
 
Our common stock has been quoted on the OTC Bulletin Board under the symbol “LBAS” since October 2008.  The last reported price of our common stock on August 25, 2011 was $0.79 per share.
 
The following table sets forth the range of high and low trading prices for each quarter for each of the last two fiscal years and the current fiscal year.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.  The quotations have been adjusted to reflect a three-for-one stock split effected in the form of a 200% stock dividend, the record date for which was October 20, 2008.
 
Fiscal Quarter Ended
 
High ($)
 
Low ($)
 
November 30, 2008
    3.08     0.66  
February 28, 2009
    1.37     0.65  
May 31, 2009
    1.85     0.42  
August 31, 2009
    1.37     0.61  
November 30, 2009
    1.13     0.60  
February 28, 2010
    0.68     0.24  
May 31, 2010
    0.43     0.14  
August 31, 2010
    0.34     0.10  
November 30, 2010
    0.31     0.07  
February 28, 2011
    0.26     0.12  
May 31, 2011
    0.19     0.13  
August 31, 2011 (through August 23, 2011)
    1.34     0.16  

Holders

We had approximately 382 record holders of our common stock as of August 23, 2011.  The number of record holders does not include any estimate by us of the number of beneficial owners of common shares held in street name.

Reports to Stockholders

We are not obligated to file periodic reports under the Exchange Act, but have volunteered to do so.  We have therefore been filing annual, quarterly and current reports with the SEC.  We will provide annual reports to our stockholders, which will include audited financial statements.

Dividends

We have never declared or paid any cash dividends on our common stock and we do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future.  Any future determination regarding the payment of cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our board of directors may deem relevant at that time.

 
16

 
 
SELECTED FINANCIAL DATA
 
The following selected consolidated statement of operations data for the years ended August 31, 2009 and August 31, 2010, and the selected balance sheet data at those dates, are derived from our financial statements and notes thereto audited by Comiskey & Company, our independent registered public accounting firm.  The statement of operations data for the nine months ended May 31, 2010 and May 31, 2011 are unaudited.  The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus.
 
Statement of Operations
 
   
Year Ended August 31
   
Nine Months Ended May 31
 
   
2009
   
2010
   
2010
   
2011
 
               
(Unaudited)
   
(Unaudited)
 
Net revenue
                       
Devices
  $ 12,597     $ 10,090     $ 6,386     $ 5,889  
Services
    2,542       10,126       8,478       3,553  
Consulting
    942,723       46,874       46,874       -0-  
Total net revenue
    957,862       67,090       61,738       9,442  
Cost of revenue
    362,365       157,710       146,055       21,077  
Gross profit (loss)
    595,497       (90,620 )     (84,317 )     (11,635 )
Operating expenses
                               
General and administrative
    864,879       907,185       815,157       529,332  
Officer compensation
    1,682,250       540,000       405,000       405,000  
Professional fees
    1,339,788       909,756       647,570       1,004,005  
Rent
    138,312       174,970       132,166       127,302  
Research and development
    1,535,403       1,647,797       1,253,601       124,663  
Total operating expenses
    5,560,632       4,179,708       3,253,494       2,190,302  
Net operating loss
    (4,965,135 )     (4,270,328 )     (3,337,811 )     (2,201,937 )
Other income (expense)
    (4,776,206 )     (4,791,811 )     (2,114,187 )     (3,063,929 )
Net loss
  $ (9,742,141 )   $ (9,062,939 )   $ (5,452,798 )   $ (5,266,666 )
 
Balance Sheet Data
 
   
As of
May 31, 2011
(Unaudited)
                   
Cash and cash equivalents
  $ 354,526                          
Working capital (deficiency)
    (7,297,685 )                        
Total assets
    1,772,995                          
Total liabilities
    7,703,496                          
Total stockholders’ equity (deficit)
    (5,930,501 )                        
 
The historical financial data in these tables does not take into account the sale of 50,000,000 shares of our common stock in the July 2011 private placement, the estimated net proceeds from which were approximately $8,900,000, after deducting the placement agent fees and estimated offering expenses.  In addition, $2,157,178 of our outstanding debt, including accrued interest, was converted into 10,785,891 shares of our common stock at a conversion rate of $0.20 per share. See “Prospectus Summary—Recent Developments.”
 
 
17

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this prospectus.
 
Overview
 
In July 2011, we sold 50,000,000 shares of our common stock at a purchase price of $0.20 per share.  The estimated net proceeds from the sale of these shares, after deducting the placement agent fees and estimated expenses, were approximately $8,900,000.  Following the July 2011 private placement, approximately $2,157,178 of our outstanding debt,  including accrued interest, was converted into 10,785,891 shares of our common stock at a conversion rate of $0.20 per share.
 
Since 2008, our growth was primarily hindered by a lack of access to capital.  The July 2011 private placement has permitted us to proceed with the execution of our business plan.  The funds raised are being utilized to build the first 10,000 PocketFinder People devices, which we expect to be completed at the Jabil facility in San Jose, California, and shipped to our launch partner in the fourth calendar quarter of 2011.  We will also be able to add employees to fill some key positions, as we build our corporate infrastructure in anticipation of growth.
 
Our financial condition was further strengthened by the conversion of $2,157,178 of debt to equity.  By substantially reducing our outstanding debt and building our balance sheet, we have enhanced our position as a going concern and the sustainability of our operations for the foreseeable future.  This has helped to solidify our relationship with business partners, both current and prospective.
 
Results of Operations
 
For the fiscal year ended August 31, 2010 as compared to the fiscal year ended August 31, 2009
 
Revenue.  For the years ended August 31, 2010 and 2009, we generated $67,090 and $957,862 of net revenue primarily from the Professional Services Agreement with LoadRack, LLC.  The LoadRack consulting revenues were earned pursuant to a development agreement totaling $1,200,000 for the design, construction and implementation of a location tracking system for transportation fleets.  We are recognizing this revenue according to our estimate of our current progress to completion toward identifiable project milestones.  For the years ended August 31, 2010 and 2009, we recognized LoadRack consulting revenues approximating $47,000 and $943,000, respectively.

We commenced PocketFinder Vehicle sales at the end of August 2009.  For the year ended August 31, 2010, we generated $20,000 of device sales and service revenue from the sale of PocketFinder Vehicle devices.

Cost of Revenue.  For the years ended August 31, 2010 and 2009, cost of revenue totaled $157,710 and $362,365, respectively.  As contract revenues are recognized using management’s estimate of total costs to complete a project, it is at least reasonably possible that the profit margin estimate could change in the near term, although management is not aware of any factors which would have a material bearing on its present revenue recognition.
 
Operating Expenses.  For the year ended August 31, 2010, our total operating expenses were $4,179,708 as compared to total operating expenses of $5,560,632 for the year ended August 31, 2009.  Operating costs decreased by approximately $1,381,000 or 2.5% in fiscal 2010 from 2009.  The fluctuation in operating expenses is primarily attributed to the following:
 
 
·
A $1,142,250 decrease in officer compensation to $540,000 for the year ended August 31, 2010, as compared to $1,682,250 for the year ended August 31, 2009, due to the recognition of $1,296,000 in stock compensation during the year ended August 31, 2009, in accordance with executive employments agreements for receiving Federal Communications Commission approval of the devices;
 
 
·
A $430,032 decrease in professional fees to $909,756 for the year ended August 31, 2010, as compared to $1,339,788 for the year ended August 31, 2009.  The decrease in professional fees is primarily attributed to an overall decrease in legal fees and a decrease in stock based compensation for sales, marketing and technology consultants;
 
 
18

 
 
 
·
A $112,394 increase in research and development costs to $1,647,797 for the year ended August 31, 2010, as compared to $1,535,403 for the year ended August 31, 2009, due to the costs involved in obtaining various certifications; and
 
 
·
A $36,658 increase in rent to $174,970 for the year ended August 31, 2010, as compared to $138,312 for the year ended August 31, 2009, due to moving our offices to Irvine, California.
 
Other Expenses.  For the year ended August 31, 2010, we reported other expenses consisting of net interest expense, financing costs, debt issuance costs, amortization expense, foreign currency gains and losses, gains on asset disposal and loss on asset impairment totaling $4,791,811 as compared to $4,776,206 for the year ended August 31, 2009.  

Net Loss.  For the year ended August 31, 2010, we reported a net loss of $9,062,939 as compared to a net loss of $9,742,141 for the year ended August 31, 2009, primarily due to decreases in operating and other expenses as previously discussed.
 
For the nine months ended May 31, 2011 as compared to the nine months ended May 31, 2010
 
Revenue.  For the nine months ended May 31, 2011, we generated $9,442 of net revenue from the sale of devices and services for PocketFinder Vehicle and VehicleFleetFinder as compared to $61,738 of net revenue for the nine months ended May 31, 2010, that primarily consisted of consulting revenue from the Professional Services Agreement with LoadRack, LLC.  The LoadRack, LLC consulting revenues were earned pursuant to a development agreement for the design, construction and implementation of a location tracking system for transportation fleets.

Cost of Revenue.  For the nine months ended May 31, 2011, cost of revenue totaled $21,077 as compared to $146,055 for the nine months ended May 31, 2010.
 
Operating Expenses.  For the nine months ended May 31, 2011, our total operating expenses were $2,190,302 as compared to total operating expenses of $3,253,494 for the nine months ended May 31, 2010.  Operating costs decreased by approximately $1,063,000 or 33% in fiscal 2011 from 2010.  The fluctuation in operating expenses is primarily attributed to the following:
 
 
·
A $356,435 increase in professional fees to $1,004,005 for the nine months ended May 31, 2011, as compared to $647,570 for the nine months ended May 31, 2010.  The increase in professional fees is due to an increase in capital raising advisory services necessary to raise additional funds and an increase in sales and marketing advisory services to assist in securing purchase orders;
 
 
·
A $1,128,938 decrease in research and development costs to $124,663 for the nine months ended May 31, 2011, as compared to $1,253,601 for the nine months ended May 31, 2010, as research and development activities significantly decreased due to the lack of funding and due to our nearing completion on the development of our devices; and
 
 
·
A $285,825 decrease in general and administrative costs to $529,332 for the nine months ended May 31, 2011, as compared to $815,157 for the nine months ended May 31, 2010, due to the lack of funding.
 
Other Expenses.  For the nine months ended May 31, 2011, we reported other expenses consisting of net interest expense, financing costs, amortization of beneficial conversion feature on convertible notes payable, amortization of deferred financing costs and foreign currency losses totaling $3,063,929 as compared to $2,114,187 for the nine months ended May 31, 2010.  The increase in other expenses is primarily the result of a significant increase in financing costs to obtain additional funding and to extend the repayment terms for existing funding.
 
Net Loss.  For the nine months ended May 31, 2011, we reported a net loss of $5,266,666 as compared to a net loss of $5,452,798 for the nine months ended May 31, 2010, primarily due to an increase in other expenses that was offset by a decrease in operating expenses as previously discussed.
 
 
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Liquidity and Capital Resources
 
We had cash and cash equivalents of $354,526 as of May 31, 2011, as compared to $267 as of August 31, 2010.  Prepaid expenses and other assets totaled $39,118 as of May 31, 2011, as compared to $0 as of August 31, 2010, and consisted primarily of packaging supplies, prepaid insurance and prepaid rent.  Deferred financing costs totaled $12,167 as of May 31, 2011, as compared to $10,002 as of August 31, 2010, and consisted of unamortized financing costs related to the issuance of common stock in connection with debt issuances or extensions.
 
As of May 31, 2011, the total of our property and equipment, less accumulated depreciation, was a net value of $13,522, compared to a net value of $33,413 for our property and equipment, less accumulated depreciation, as of August 31, 2010.  There was an impairment adjustment to the net value of the website and database during the year ended August 31, 2010, as the recoverability of this asset was in doubt due to uncertainties related to the poor economy and availability of financing.  The website and database continue to be fully operational and functional.
 
Other assets consisted of patents and trademarks, net of amortization, and deposits.  Deposits consisted of security deposits on the Irvine offices and amounted to $64,000 as of May 31, 2011 as compared to $16,159 as of August 31, 2010.  Patents and trademarks, net of amortization, amounted to $1,289,662 as of May 31, 2011, as compared to $1,303,675 as of August 31, 2010.  We periodically assess our patents and intellectual property for impairment and none has been recorded to date.
 
Our total assets as of May 31, 2011, were $1,772,995, as compared to $1,363,516 as of August 31, 2010.  The increase in our total assets as between the two periods was due primarily to an overall increase in cash, prepaid expenses, deferred financing costs and deposits.
 
As of May 31, 2011, our accounts payable and accrued expenses, including accrued officer compensation, were $2,971,735 as compared to $3,318,895 as of August 31, 2010.  The decrease in accounts payable and accrued expenses, including accrued officer compensation, is primarily a result of paying down accounts payable from the line of credit proceeds.

There were $909,939 outstanding advances from officers, including accrued interest, as of May 31, 2011, as compared to $993,832 as of August 31, 2010, reflecting an increase in accrued interest on officer advances of $52,331, offset by net repayments of $136,224.  
 
Notes payable and related accrued interest totaled $236,704 as of May 31, 2011 as compared to $265,487 as of August 31, 2010.  The $185,298 in promissory notes are short term, to be repaid out of potential future permanent financing.

Convertible notes payable and related accrued interest totaled $2,579,521 as of May 31, 2011, as compared to $1,396,539 as of August 31, 2010.  The $2,385,000 in convertible promissory notes are short term, to be repaid out of potential future permanent financing.

On January 5, 2011, we entered into a Loan and Security Agreement with Silicon Valley Bank for a $1,000,000 line of credit expiring January 5, 2012.  The Loan and Security Agreement was amended by a First Amendment to Loan and Security Agreement dated August 24, 2011.  The outstanding balance and accrued interest due on the line of credit totaled $1,005,597 as of May 31, 2011.  Silicon Valley Bank was granted a security interest in all of our personal property.  Prior to its amendment, the Loan and Security Agreement contained certain financial covenants including minimum levels of accounts receivable and a specific amount of outside financing to be attained by certain dates.  We did not meet the financial covenants as they came due, but under the First Amendment to Loan and Security Agreement the defaults were waived and the financial covenants were adjusted.

 
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On December 1, 2010, in anticipation of entering into the Loan and Security Agreement with Silicon Valley Bank and in connection with loans that he had made to us, we entered into a Financing Agreement with Greggory S. Haugen under which, among other things, Mr. Haugen agreed to personally guaranty our obligations under the Loan and Security Agreement with Silicon Valley Bank.  We are obligated to reimburse Mr. Haugen for any amounts, including interest, he pays under the guaranty.  To compensate Mr. Haugen for his guaranty, we issued a warrant to him to purchase 3,600,000 shares of our common stock at an exercise price of $0.20 per share and we agreed to pay him $5,000 per month for so long as he has any obligation under the guaranty or he has not been reimbursed by us for any amounts paid by him under the guaranty.  Currently the $5,000 monthly fee is payable in cash or shares of our common stock at Mr. Haugen’s option.  Under the Financing Agreement, we granted Mr. Haugen board observation rights, certain registration rights, and the right to approve our use of funds drawn under the Loan and Security Agreement.  We also agreed to grant Mr. Haugen a security interest in all of our assets, junior only to the security interest of Silicon Valley Bank.  In the event of an “Actionable Violation,” which is defined to include, among other things, our failure to maintain certain minimum net income levels, our failure to maintain a specified minimum account balance, or our failure to make any payment required under the Financing Agreement or any other agreement between Mr. Haugen and us, Mr. Haugen may, among other things, market our assets (including our intellectual property) and require us to sell such assets (subject to the approval of Silicon Valley Bank) with the proceeds to be applied to all amounts then due to Silicon Valley Bank and thereafter to any amounts due by us to Mr. Haugen under the Financing Agreement or any other agreement or instrument.  In January 2011, we entered into the following agreements with Mr. Haugen: (i) a Security Agreement granting him a security interest in all of our assets to secure the reimbursement obligation under the Financing Agreement and every other debt, liability or obligation that we currently or at any time in the future owe to him and (ii) a related Intellectual Property Security Agreement granting him a security interest in all of our intellectual property.  Mr. Haugen has converted his promissory notes and accrued interest into shares of our common stock and we are no longer indebted to him.

In 2007, we sold $5,242,000 in convertible notes that were subsequently converted into 15,726,000 shares of common stock.  The notes were sold to accredited investors.  We made these sales in reliance on an exemption from registration provided by Section 4(2) of the Securities Act and similar state exemptions.  Our counsel has advised us that the availability of those exemptions cannot be determined with legal certainty due to the fact that we may not have complied with all of the form filings or other notice filing provisions of safe-harbor exemptions for such sales offered by rules promulgated under the Securities Act by the SEC and applicable state laws.  Thus, it is possible that the sale of the convertible notes may have violated the registration requirements of the Securities Act and applicable state laws.  As to those sales, a right of rescission may exist on which the statute of limitations has not run.  We performed an analysis under ASC 450-20, Loss Contingencies, and concluded that the likelihood of a right of rescission being successfully enforced on the convertible note sales is remote.

In July 2011, we consummated the sale of 50,000,000 shares of our common stock in the July 2011 private placement at a purchase price of $0.20 per share.  The estimated net proceeds from the sale of these shares, after deducting the placement agent fees and estimated expenses, were approximately $8,900,000.  Following the July 2011 private placement, approximately $2,157,178 of our outstanding debt, including accrued interest, was converted into 10,785,891 shares of our common stock at a conversion rate of $0.20 per share.
 
Cash Requirements
 
We are an early stage wireless technology company focused on the marketing and sales of the PocketFinder family of products for retail distribution.  Since our inception, we have generated significant losses.  As of May 31, 2011, we had an accumulated deficit of $34,095,591 and we expect to incur continual losses until sometime in calendar year 2012.
 
We have a limited history of operations.  To date, we have funded our operations primarily through personal loans by the founders and the private placement of our common stock and convertible notes.
 
As of May 31, 2011, we had $354,526 in cash and cash-equivalents.  During the nine months ended May 31, 2011, we received loans totaling $3,438,298 to fund operations.  This includes a $1,000,000 line of credit expiring January 5, 2012 with Silicon Valley Bank.

In July 2011, we consummated the sale of 50,000,000 shares of our common stock in the July 2011 private placement at a purchase price of $0.20 per share.  The estimated net proceeds from the sale of these shares, after deducting the placement agent fees and estimated expenses, were approximately $8,900,000.

 
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We expect that additional capital will be required in the coming months to fulfill purchase orders, to maintain inventory and for related purposes such as packaging, shipping, and direct sales and marketing.  We are not able to estimate the amount of funds necessary as it will be determined by the volume represented by purchase orders from targeted retailers who desire to sell our product.  We anticipate that the additional funds will largely be provided through a working capital line of credit from a financial institution, although we may also need to sell additional equity in the company.

Our additional funding requirements will depend on numerous factors, including:
 
 
·
Costs involved in production and manufacturing to fill purchase orders, software and interface customization for OEM partners, and the network necessary to commence the commercialization of the PocketFinder People and PocketFinder Pets devices;
 
 
·
The costs of outsourced manufacturing;
 
 
·
The costs of commercialization activities, including product marketing, sales and distribution and customer service and support; and
 
 
·
Our revenues, if any, from successful commercialization of the PocketFinder People and PocketFinder® Pets devices and the PocketFinder Network platform services.
 
The sale of additional equity securities may result in additional dilution to our stockholders.  Sale of debt securities could involve substantial operational and financial covenants that might inhibit our ability to follow our business plan.  Additional financing may not be available in amounts or on terms acceptable to us or at all.  If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned commercialization activities, which could adversely affect our financial condition and operating results.
 
Product Research and Development
 
Production ready units are now available.  We plan to continue to develop new product enhancements while we deliver the initial market launch of the PocketFinder People and PocketFinder Pets devices in 2011.    We anticipate that we will be prepared to begin delivery of product to retailers in 2011 although there can be no assurance that we will meet that targeted time period.
 
Plant and Equipment, Employees
 
We do not plan to purchase or sell any significant equipment, plant or properties during the foreseeable future.  Our business operations have been historically based on a strategic outsourcing model, thereby negating the need for additional plant and equipment, or significant numbers of employees.  Due to the cash infusion from the sale of our common stock to investors in the July 2011 private placement, it is anticipated that we may hire up to 10 to 15 employees over the next 12 months.
 
 
22

 

BUSINESS
 
We design, develop, and sell personal, pet and vehicle locator devices and services.  We developed the PocketFinder family of products and the PocketFinder Network.  The PocketFinder family of products currently includes PocketFinder People, PocketFinder Vehicle, PocketFinder Pets, PocketFinder Luggage, PocketFinder Mobile and VehicleFleetFinder.  The PocketFinder is a small location device that enables a user to locate a vehicle, person, pet or other valuable asset at any time from almost anywhere.  PocketFinder personal locator devices are completely wireless.  Using our recently upgraded website at www.pocketfinder.com, users can monitor the safety and location of family members, pets, automobiles and other valuable assets using Global Positioning System (“GPS”) and General Packet Radio Service (“GPRS”) technologies. 

The initial pilot run of approximately 350 PocketFinder devices was completed in March 2011 and market-ready demonstration devices were immediately made available to strategically identified sales channels and distributors. We are currently in negotiations to establish distribution or re-sale agreements with a number of strategic channel members and distributors – including retail outlets.  Funds received from Silicon Valley Bank and other key investors enabled us to complete this essential pilot run and place product.  These initial pilot run devices allowed us to identify our big-box launch partner.  All support activities are underway.

In the process of delivering and meeting with strategic partners, we also identified the need for a small location device that delivered as much as 30 days of battery life for asset tracking and, more specifically, the shipping of high value parts and/or products.  We delivered the first prototype to a potential high volume customer of this extended battery life device in mid-June for testing purposes. A small number of production units are now being built for review and testing for other asset tracking solutions.

Through our Professional Services Agreement with Loadrack, LLC, we developed a new User Interface designed for the trucking and freight monitoring industry.  We assisted LoadRack, LLC in building a dynamic, real time, internet-based system that will increase the efficiency of moving produce and refrigerated items, ensure the safety of temperature controlled foods during transport, and increase on-time deliveries of food and perishable products.  LoadRackTracker (“LRT”) is positioning to be the premier provider of truck and load matching with this industry first real-time asset tracking application.  Their advanced application allows shippers, carriers and truck brokers to optimize resources and coordination by procuring available trucks and loads while ensuring load integrity across the supply chain.  Accessed via the Internet, the system allows users to determine load location and status, view zones, monitor load temperatures, facilitate route changes and effectively manage equipment problems and delays.  This opportunity permits us to leverage a vast vertical market by applying our cutting edge PocketFinder Network™ with its smartphone and hardware applications to enhance the way commerce is moved, contain costs and facilitate the delivery of goods to stores cheaper, better and faster throughout the United States.
 
We have now begun to fulfill the first order for the LRT hardware components and are working with our vendors to prepare for future orders.  We plan to work closely with LRT to grow our potential mutual customer base, which will also allow both companies to achieve significant cash flow benefits by filling pent up demand.  Such a “win-win” relationship will also provide the ability for LRT to begin payments toward outstanding bills for custom work delivered. 
 
Our associated VehicleFleetFinder devices use similar advanced technology to help businesses optimize their mobile resources (vehicles, equipment, sales forces, etc.) by providing location, direction, speed and other information that enables enhanced coordination and leveraging of assets.  Strategic sales partnerships for this market segment are being established at this time.
 
We are currently selling mobile applications that allow the Android phone (Google, T-Mobile), Apple’s iPhone, Blackberry’s Bold and Curve, and GPS enabled smartphones using the Windows Mobile Professional 6.0 Operating System to act as a PocketFinder with all of the features and functionality of our devices and to monitor all devices on a user’s account.  We have not been actively marketing the mobile applications since GPS performance varies by each cellular device manufacturer.  These mobile applications work world-wide as long as the phone has access to a compatible network.  Furthermore, with the launch of the PocketFinder Vehicle first time driver campaign and as PocketFinder People and Pets devices enter the U.S. market, the mobile applications will be able to seamlessly add our devices.  These GPS mobile applications interact with our easy to use web-based interface from any telecom network (Global System for Mobile communication (“GSM”) or Code Division Multiple Access (“CDMA”)).  Our billing system is now operational and all downloads, with the exception of the iPhone, are now available directly from our website for $0.99 per month.  Our Android Mobile PocketFinder Mobile application won both the Handango 2009 Award for “Best GPS/Map Application” and its 2009 “Groundbreaker Award.”  The Handango awards recognize best in class applications for a number of mobile platforms and functionalities.
 
 
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Prior to the sale of our common stock to investors in the July 2011 private placement, we had been successful in securing sufficient funds from revenues and short-term loans that allowed us to support operations from quarter to quarter.   We will continue to enhance the functional capability of our products on an ongoing basis as new vertical market opportunities are regularly being discovered.  OEM opportunities are also an element of our strategic direction.
 
In some measure, due to the dramatic downturn in the economy and the financial markets, we see evidence of market demand for location-based services that will allow family members to keep in touch with one another in an increasingly busy and highly mobile world and for products that allow companies to more efficiently utilize their vehicles and their mobile workforce.  In July 2010, Frost & Sullivan projected growth of location based services (“LBS”) for wireless carriers to be $1.58 billion in 2015.  In the study they stated, “In tandem with smartphone advances, carriers are making their networks and locating capability more accessible to LBS application developers.”  We are at the forefront of this movement and working closely to utilize carrier based location information to enhance the in-door performance of the PocketFinder family of products.

Strategy Analytic’s Nitesh Patel released the “The $10 B Rule: Location, Location, Location” study in May 2011.  Mr. Patel believes that the evolution of location based services has momentum of its own sufficient to further evolve and develop the market to a point where it is projected to be valued at $10 billion by 2016.  He further states that “Consumers are increasingly demanding services such as search, maps, or navigation, for which location information is either fundamental to or provides greater context, utility and therefore appeal.”

We are aggressively moving the PocketFinder family of products web-based features and functionality onto more robust mobile applications to better meet the needs of our highly mobile society.  We are seeing similar demands and requirements in families and in businesses.  By taking advantage of the latest in GPS, GSM and Internet technology, small and medium sized businesses will be able to more effectively and efficiently manage their mobile assets and key human resources.  Recently, a UK based company utilized our PocketFinder device for added security while a manager was on site working with a client in Zambia, Africa.  The device provided real-time location information to the firm and to the manager’s family.
  
The PocketFinder family of products enhances the ability for families with young children, or families with elder care, to stay connected and to meet the demands of a fast-paced life.  Knowing the whereabouts of family members is a crucial step to coordination and planning.  Several of the pilot units went to families with autistic children with great success and consistent comments of “peace of mind knowing where my child is at any time” being received.
 
In addition, vertical applications may include: outdoor and extreme sports enthusiasts, parents, adult children of the elderly, elder care providers of patients with Alzheimer’s and dementia, special needs providers for those with disabilities, pet owners, and for the tracking and recovery of valuable property and luggage while traveling.  Our device is fifty millimeters in diameter or about two inches.  It fits easily into a child’s pocket, a backpack, or onto a belt.  The PocketFinder People and PocketFinder Pets devices will come with a form fitting silicone pouch that can easily slide onto a belt or a pet’s collar.

We operate with an “outsourced” model of highly selected individuals and organizations that have quick growth capacity to keep pace with our anticipated rate of growth.  Having concluded the engineering intensive phase of the PocketFinder for People and Pets, we have significantly reduced our use of full and part time contract workers in that area of our business.  We continue to tightly control our overhead and ensure that we have the right resources in place at the right time.   We have a very talented senior management team that brings the right knowledge, skills and abilities to deliver world-class products and services.  Due to the cash infusion from the sale of our common stock to investors in the July 2011 private placement, it is anticipated that we may hire up to 10 to 15 employees over the next 12 months, including several key employees, to supplement our existing team of contractors and employees.

Distribution opportunities are being negotiated as we carefully analyze each market opportunity against the cost of entry, potential growth, economic value and support capability metrics.  We are developing a business model for international market opportunities and are in discussions with wireless carriers and/or distributors in at least eleven countries at this time.
  
 
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Our Personal Locator Services

We commenced the initial pilot run of approximately 350 demonstration PocketFinder devices during the second quarter of 2011.  We began delivery of these market ready devices in early April with the express purpose of generating purchase orders from distributors we have been working with for some time.  We will provide end-user customer service and support in the United States through existing, award winning call centers.  We anticipate exploring multiple vertical markets, including the following:
 
 
·
Parents of young children (primarily 5 to 12 years of age) who seek the peace of mind of knowing that their children are where they are supposed to be;
 
 
·
Families with members who are Autistic or have Down Syndrome, Alzheimer’s, etc.;

 
·
Elder care support and applications;
 
 
·
Pet care and location capability;
 
 
·
Asset tracking and location capability: cars, trucks, fleet management, luggage, boats, RVs, and other high-valued assets; and
 
 
·
Military applications.

Our Intellectual Property Investment

We have invested significantly, and continue to invest, in intellectual property, which consists of apparatus patents and applications and system and method patents and applications.  We have filed claims that cover all aspects of the PocketFinder, its operating system and user interface.  We have expanded and filed additional claims this fiscal year that cover new aspects of the PocketFinder People device, its operating system and user interface.  Our intellectual property portfolio includes 26 issued U.S. patents, 16 pending U.S. patents, six pending foreign patents, six PCT filings, 16 registered trademarks, one pending trademark and four Madrid protocol trademark cases.

We own the Internet domain name www.pocketfinder.com, as well as numerous other related domain names that could have use in future business and vertical marketing initiatives and for Internet marketing purposes.  Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix, such as “.org,” or with a country designation.  The regulation of domain names in the United States and in foreign countries is subject to change, and we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our domain names.

Our Target Markets and Marketing Strategy

We provide wireless location based solutions for global positioning products and our proprietary “friendly user interface” software system.  Our PocketFinder family of products delivers rugged, compact products with real-time location-based information over our proprietary server architecture.  Our products simplify the ability for families to stay connected with one another, for pet owners to know where their pets are on demand, and solutions for asset tracking – such as shipping of high value assets or LRT’s trucking solution.  We have the ability to provide platform support for the integration of other location-based GPS services within its applications in order to simplify the customers need to locate all location-based devices in one easy tool.
 
We launched PocketFinder Vehicle, VehicleFleetFinder and the LoadRackTracker tracking device and system.  We have identified a retail launch partner for the PocketFinder People and PocketFinder Pets devices in the United States and Canada.  We anticipate delivering the first 10,000 devices to the launch partner during the fourth calendar quarter of 2011.  We are also working on several “white label” marketing opportunities.  In addition, licensing opportunities are being explored on the international front.
 
 
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For our PocketFinder family of products, we believe that the primary target market will consist of parents with school-aged children from ages 5 to 12.  Secondary markets may include medical and elder care providers, campers, hikers, backpackers, adventure seekers, extreme sports enthusiasts, freight and cargo carriers, delivery services, pet owners, vehicle finance companies, auto dealerships, law enforcement agencies, military organizations and individuals wishing to track valuable personal items.
 
Based on census information, there are over 37,000,000 children in the 5 to 12 year old market segment in the United States with an additional 4,000,000 in the prime focus areas in Canada.  The European Community has an additional 42,500,000 children in this primary age group.  Adding in the elder care market this represents a target market of more than 109,200,000 potential customers in our focus age group.
 
Closely related to personal locators is the desire for pet locators as it is estimated there are 70,000,000 pets in the U.S.  A locator device will give a pet owner the ability to locate a pet if it were to become lost or missing as well as to ensure that services paid for are received, i.e., that a walking service or pet care facility actually provide the outdoor activity contractually agreed to.  In addition, we are finding significant interest in the PocketFinder Pets product in European countries.

Our marketing initiatives may include:
 
 
·
Licensing opportunities for the products in international areas or regions;
 
 
·
Self branded or “white label” opportunities for niche market or vertical market sales;
 
 
·
Affinity group marketing and outreach opportunities;
 
 
·
Utilization of direct response sales due to public relations outreach in special interest magazines and newsletters; and
 
 
·
Retail distribution initiatives.
    
Our Revenue Sources

We expect our revenues to be based on the following sales and revenue sources:
 
 
·
Potential licensing fees;
 
 
·
Organizations that will self-brand the PocketFinder devices for specialized niche markets (“white label”);
 
 
·
Personal locator device sales to retailers;
 
 
·
Personal locator device sales through affinity groups and through our web site;
 
 
·
Personal locator device accessory sales;
 
 
·
Monthly recurring service fees; and
 
 
·
GPS smartphone mobile application sales (one-time or monthly fees as applicable).
     
Our Growth Strategy

Our objective is to become a premier provider of personal and asset location services in the location based services market.  Our strategy is to provide high quality devices that meet the market’s requirements whether it is for their children, their pets or tracking assets (luggage, vehicles, boats, etc.).  Key elements of our strategy include:
 
 
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·
A mass market retail price of under $150.00 for Personal Locator devices (customized trucking solutions with additional features and capabilities will be sold at a higher price);
 
 
·
A basic monthly service fee for Personal Locator devices of under $15.00 with multiple convenient access points (mobile phone, land line, or via the Internet);
 
 
·
Ease of use at the location interface point as well as with the device; and
 
 
·
Rugged design that meets the rigors of an active child or pet.  
 
Our Competition

Personal location and property tracking devices are beginning to significantly penetrate the marketplace.  We believe this condition represents a tremendous opportunity as customers will be attracted in large numbers once the intrinsic value of such devices is recognized and mass market adoption begins.
 
Our competitors include Geospatial Platform Providers, Application Developers, Zoombak, GTU-100, Little Buddy, Lo-Jack, Blackline GPS and Spotlight.  These competitors may be better financed, or have greater marketing and scientific resources than we do.
 
In related markets, GPS devices have become widely used for automotive and marine applications where line-of-sight to GPS satellites is not a significant issue.  Manufacturers such as Garmin, Navman, Magellan, TomTom, Pharos, NovAtel and DeLorne are finding a market interested in using these products for both business and leisure purposes.  As a result, use of GPS technology in devices such as chart plotters, fitness and training devices, fish finders, laptop computers, and personal digital assistant (“PDA”) location devices are gaining significant market acceptance and commercialization.  Prices range from $199.00 to several thousand dollars.  We expect that increasing consumer demand in these markets will drive additional applications and lower price points.

Government Regulation

We are subject to federal, state and local laws and regulations applied to businesses generally as well as Federal Communications Commission, Internationale Canada (“IC”) and CE (European Economic Area) wireless device regulations and controls.  We believe that we are in conformity with all applicable laws in all relevant jurisdictions.  We do not believe that we will be adversely affected by the application of any environmental laws and regulations of the United States and the states in which we operate.
 
Our Research and Development

As funds become available we will invest in ongoing research and development to enhance the size and performance of our existing products as well as to customize products to better fit specific vertical market needs and requirements.  We will continue to work with our manufacturer and several other entities that are conducting research on key aspects of the device itself (including expanded antennae capability, battery capacity, Iridium Satellite connectivity and enhanced location reliability and accuracy) in an ongoing effort to provide the best quality product at the very best size and value in the market.  We anticipate ongoing involvement with some level of developmental activities throughout the foreseeable future.
 
Employees and Outsourced Assistance

We have significantly limited our use of contracted professionals who have been engaged in hardware and software development, early marketing and sales preparation, and preparation for customer service support.  Mr. Scalisi, our Co-President and Chief Development Officer, Mr. Morse, our Co-President and Chief Executive Officer, and Mrs. Mejia, our Chief Operating Officer, currently devote 100% of their business time to our operations.  Due to the cash infusion from the sale of our common stock to investors in the July 2011 private placement, it is anticipated that we may hire up to 10 to 15 employees over the next 12 months.  Remaining true to our “outsourced” model for growth and expansion, any large personnel increase will be supplemented through contracts with sales and customer support outsourced organizations.  We will remain focused on our core competency of providing location devices and services.
 
 
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Property

On May 11, 2011, we entered into a lease agreement with The Irvine Company LLC to lease approximately 4,700 square feet of general office space located at 49 Discovery, Suite 260, Irvine, California, for base rent ranging from $6,199 to $7,193 per month over a 48-month lease term commencing July 1, 2011 and ending June 30, 2015.

Legal Proceedings

On April 5, 2011, Gemini Master Fund, Ltd., filed a complaint for breach of contract against the company for non-payment of outstanding loans. The complaint specifies damages totaling $858,292, plus pre-judgment interest, costs of suit and other relief. The entire amount of the loans plus accrued interest, which together approximate the specified damages, are included in the accompanying financial statements. On June 8, 2011, we filed a cross-complaint against Gemini Master Fund, Ltd. for monetary damages related to the creditor’s disposition of shares of our common stock which had been pledged as collateral for the loans.

 
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MANAGEMENT
 
Executive Officers and Directors

Our directors are elected by the stockholders for a term of one year and serve until successors are elected and qualified.  Officers hold their positions at the pleasure of the board of directors, subject to any employment contracts.  Each of our three executive officers serves pursuant to employment contracts which terminate in October 2012, subject to the automatic and successive one-year extensions if not cancelled by either party.  See “Executive Compensation – Employment Contracts.”
 
The following table sets forth information regarding our executive officers and directors:
 
Name
Age
Position
David M. Morse
58
Co-President, Chief Executive Officer and Director
Joseph F. Scalisi
48
Co-President, Chief Development Officer and Director
Desiree Mejia
40
Chief Operating Officer, Secretary and Director
 
Dr. Morse has served as Co-President, Chief Executive Officer and Chairman of the Board of Directors since October 8, 2007.  From late 2001 to 2005, Dr. Morse was involved in several start-up ventures providing consulting services (People Basics from August 2001 to April 2002 and ESP Networks from April 2002 to July 2004).  In September 2005, he joined with Joseph Scalisi and Desiree Mejia to incorporate Location Based Technologies, Corp. (“Old LBT”) (formerly known as PocketFinder, Inc.), which we acquired in October 2007.  Old LBT had been formed to develop the PocketFinder personal locators.  Dr. Morse brings 20 years of executive-level experience to us.  The majority of his career focused on the consumer market, leading him to serve as Vice President of Consumer Billing Services for Pacific Bell from 2000 to 2001.  His passion for customer service led to his appointment as Chief Customer Officer for Pacific Bell from 1997 to 2000 where he worked directly with the Chairman and the Executive Committee to establish the alignment of corporate strategy and process management objectives.  Prior to Pacific Bell, he served as Vice President of Sales and Service for SBC, now AT&T, the second largest telecommunications company in the United States, from 1991 to 1997.  While at SBC, he led an organization of more than 4,000 employees in 23 locations, serving 7,000,000 households.  Subsequent to leading the consumer organization, he served as Vice President of Product Marketing responsible for SBC’s core billing product.
 
Dr. Morse received a PhD in Organizational Behavior from Columbia Pacific University, a Master of Arts degree in Psychology from the University of Northern Colorado and a Bachelor of Science degree from Brigham Young University.
 
Dr. Morse has given keynote addresses on education and business management to several organizations and lectured at University of California at Berkeley, University of California at Davis, University of California at Los Angeles and Massachusetts Institute of Technology.  He has also served as Chair for the University of California’s Board focused on Mathematics, Engineering, and Science Achievement (MESA).
 
Mr. Scalisi has served as Co-President, Chief Development Officer and a director since October 11, 2007.  Prior to becoming our Co-President and Chief Development Officer, Mr. Scalisi was an officer of our predecessor company, PocketFinder, Inc. from 2004 to 2007.  As a co-founder, Mr. Scalisi designed the first generation PocketFinder device.  With vast of knowledge of the communications industry, including expertise in patents and trademarks, Mr. Scalisi is responsible for filing intellectual property applications, architecting the PocketFinder design team (interactive voice recognition (“IVR”), mapping interface, man-machine user interface and hardware design) and participates in the negotiation of contracts.  Mr. Scalisi is married to Mrs. Mejia.

Prior to becoming involved with the PocketFinder® device, Mr. Scalisi was employed by ESP Networks from February 2000 to November 2004 doing wireless development for a restricted use cellular phone with an automated pager system.

Mr. Scalisi has received 26 domestic issued patents along with four international patents.  He is currently working on 16 additional patent applications filed over the past several years.  He attended Fullerton College.
 
 
29

 
 
Mrs. Mejia  has served as Chief Operating Officer, Secretary and a director since October 11, 2007.  As a co-founder, Mrs. Mejia is responsible for running the day-to-day operations and oversees the Accounting and Marketing departments.  Mrs. Mejia is married to Mr. Scalisi.
 
Mrs. Mejia developed the PocketFinder concept after realizing that a true need exists to “see” your children even when you can’t be with them.  With co-founder Joseph Scalisi, Mrs. Mejia took the concept of using a GSM/GPRS tracking platform, combining it with a mapping service and creating a revolutionary tracking system.  Thus the PocketFinder system was born.
 
Prior to becoming our Chief Operating Officer in 2007, Mrs. Mejia was the Chief Operating Officer for our predecessor company, PocketFinder, Inc. from 2004 to 2007.  Previously, she worked for ESP Networks from December 2000 through November 2004.  Prior to December 2000, Mrs. Mejia worked with venture capital firms to help raise funds for the technology sector.  She also consulted with a wireless manufacturing company to assist with the launch of a new wireless device.  Prior to this, Mrs. Mejia worked with Deloitte and Touche, LLP where she specialized in the technology and telecommunications field.  Previously, Mrs. Mejia acted as the head researcher and assistant to the Chairman at MESA Research, whose clients included AT&T, Motorola, Nortel, 3Com and Phillips.  She has a Bachelor of Arts degree in Sociology from California State University, Dominguez Hills.
 
Other Persons Expected to Make Significant Contributions
 
David Butler, through our agreement with Aero Technology UK Ltd., provides us with wireless product development consulting services.  For more than six years, he has been the Managing Director of Aero Technology UK Ltd., a British company, providing international wireless communications expertise to its clients.
 
Roger Anderson provides us with encryption, data compression and IVR consulting services.  For more than six years, he has been the President or Manager of Call Knowing, LLC, providing encryption, data compression and IVR expertise to its clients.
 
Tina Florance, CPA, provides us with accounting and financial advisory services.  She oversees our accounting group and is responsible for all of our SEC filing and reporting requirements.
 
Any compensation received by our officers, directors and management personnel will be determined from time to time by our board of directors.  Our officers, directors, and management personnel will be reimbursed for any out-of-pocket expenses incurred on our behalf.

Corporate Governance

None of our directors is considered to be “independent” under generally recognized stock exchange requirements or the federal securities laws.  Our board of directors does not have an audit committee, a compensation committee or a nominating committee.  These functions are undertaken by the entire board.  Our Chief Executive Officer also serves as the Chairman of the Board, which we believe is an appropriate leadership structure given the present size and composition of our board of directors.  We intend to add independent directors, create board committees, adopt additional policies regarding internal controls and disclosure controls and procedures and implement other structural changes.   

During the fiscal year ended August 31, 2010, our board of directors held four meetings in person and acted by written consent on 43 occasions.  Each of our directors attended at least 75% of the total number of meetings of the board.

Since the board of directors at present consists of the executive officers, we have not adopted any formal process for security holders to send communications to the board of directors or procedures by which our stockholders can recommend nominees for election to our board of directors.  Similarly, we have no policy regarding our directors attending annual meetings of stockholders.

 
30

 
 
Limitations of Liability and Indemnification
 
Our articles of incorporation eliminate the personal liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors.  However, the liability of directors to us or our stockholders for monetary damages is not limited for (i) any breach of a director’s duty of loyalty, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) any transaction from which a director derives an improper personal benefit and (iv) other acts specified by Nevada law.  This limitation does not affect the availability of equitable remedies, such as injunctive relief or rescission.  Our bylaws require us to indemnify our directors and officers to the fullest extent permitted by Nevada law.
 
Under our bylaws we are required to advance, prior to the final disposition of any proceeding, all expenses incurred by any director or officer in connection with that proceeding on receipt of an undertaking by that director or officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under our bylaws or otherwise.
 
Nevada law permits us to indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant or respondent in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the person:
 
 
Ÿ
conducted himself or herself in good faith,

 
Ÿ
reasonably believed, in the case of conduct in his or her official capacity as our director or officer, that his or her conduct was in our best interests, and, in all other cases, that his or her conduct was at least not opposed to our best interests,

 
Ÿ
in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful, and
 
 
Ÿ
in the case of directors and officers, did not commit a breach of his or her fiduciary duties involving intentional misconduct, fraud or a knowing violation of law.
 
These persons may be indemnified against expenses, including attorneys' fees, judgments, fines, including excise taxes, and amounts paid in settlement, actually and reasonably incurred, by the person in connection with the proceeding.  If the person is found liable to the corporation, no indemnification shall be made unless the court in which the action was brought (or another court of competent jurisdiction) determines that the person is fairly and reasonably entitled to indemnity in an amount that the court deems proper.
 
Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.  In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
Executive Compensation
 
Summary Compensation Table.  The table set forth below summarizes the compensation payable to our executive officers during the years ended August 31, 2010 and 2009 for services in all capacities.  Those listed in the table received no cash bonuses, option awards, nonequity incentive plan compensation or nonqualified deferred compensation earnings during those two fiscal years.

 
31

 
 
SUMMARY COMPENSATION TABLE
 
Name and Principal Position
 
Fiscal Year
Ended 8/31
 
Salary
($)
 
Stock
Awards
($)
 
Total
($)
David M. Morse (1)
 
2010
    180,000 (4)           180,000 (4)
   
2009
    128,750 (4)     432,000       560,750 (4)
Joseph F. Scalisi(2)
 
2010
    180,000 (5)             180,000 (5)
   
2009
    128,750 (5)     432,000       560,750 (5)
Desiree Mejia(3)
 
2010
    180,000 (6)             180,000 (6)
   
2009
    128,750 (6)     432,000       560,750 (6)
__________________
(1)
Co-President, Chief Executive Officer and Chairman of the Board
(2)
Co-President, Chief Development Officer and Director
(3)
Chief Operating Officer, Secretary and Director
(4)
In fiscal 2010, $22,500 was paid and $157,500 was accrued for future payment.  In fiscal 2009, $61,250 was paid and $67,500 was accrued for future payment.
(5)
In fiscal 2010, $7,500 was paid and $172,500 was accrued for future payment.  In fiscal 2009, $41,250 was paid and $87,500 was accrued for future payment.
(6)
In fiscal 2010, $7,500 was paid and $172,500 was accrued for future payment.  In fiscal 2009, $41,250 was paid and $87,500 was accrued for future payment.

Outstanding Equity Awards.  The table below summarizes the outstanding equity awards to our executive officers as of August 31, 2010.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
 
Number of Securities Underlying Unexercised Options (#) Exercisable
   
Number of Securities Underlying Unexercised Options (#) Unexercisable
 
Option
Exercise
Price ($)
 
Option
Expiration
Date
David Morse
    -0-       2,000,000 (1)  
$1.00 / share
      (1)
Joseph Scalisi
    -0-       2,000,000 (1)  
$1.00 / share
      (1)
Desiree Mejia
    -0-       2,000,000 (1)  
$1.00 / share
      (1)
_______________
(1)
Each officer holds an option to purchase up to 2,000,000 shares of common stock at $1.00 per share.  Options to purchase 1,000,000 shares each are exercisable when we achieve a total of 100,000 customers, and the remaining options to purchase 1,000,000 shares each are exercisable when we achieve a total of 250,000 customers.  None of such options is presently exercisable.  The options expire ten years from the date a performance goal is achieved and vest on a change in control.

Compensatory Plans.  On September 10, 2007, the directors and shareholders of Old LBT adopted a 2007 Stock Incentive Plan.  The plan was assumed by us when we acquired Old LBT, and it was subsequently ratified by Messrs. Morse and Scalisi and Mrs. Mejia, as our controlling stockholders.  The plan reserves 2,250,000 shares for issuance pursuant to options, grants of restricted stock or other stock-based awards.  The plan is administered by the board of directors which has the power, pursuant to the plan, to delegate the administration of the plan to a committee of the board.  A total of 1,461,734 shares have been issued under the plan, leaving 788,266 shares available for issuance in the future.  There are no other arrangements or plans in which we provide pension, retirement or similar benefits for our officers or directors.
 
Compensation of Directors.  All of our directors are also employees and receive no extra compensation for their service on our board of directors.
 
 
32

 
 
Employment Contracts.  Our officers, David Morse, Joseph Scalisi and Desiree Mejia, are each employed pursuant to written employment agreements with identical terms.  The agreements each expire on October 11, 2012, provided that they are automatically extended for additional one-year periods unless either party provides written notice to the contrary at least 60 days prior to the end of the term then in effect.  Each officer is entitled to a base salary of $10,000 per month and to adjustments to his or her base salary based on certain performance standards.  The base salary was increased in two increments of $2,500 to $15,000 per month upon the Federal Communications Commission approval of the PocketFinder device and receiving revenues from the initial sales of our products.  Additional increases in increments of $5,000 or $10,000 per month are based on attaining certain numbers of subscribers and for successfully achieving cash flow in each country outside the U.S.  He or she may participate in any general bonus plan established by the board of directors and is entitled to participate in our stock incentive plan on such terms as the board deems appropriate from time to time.  He or she will also be entitled to participate in any and all benefits and perquisites as are generally provided for the benefit of executive employees.  The agreements terminate on death, incapacity (after 180 days), resignation and cause as defined.  If terminated without cause, he or she is entitled to base salary at least equal to the salary, including bonuses and commissions, of our highest paid employee, and medical benefits, through the end of the employment term or, if such termination occurs in the last year of the employment term, for a period of two years after the date of termination.  If during that period any events occur that would have resulted in increasing his or her base salary.
 
 
33

 

RELATED PARTY TRANSACTIONS
 
The following are the related party transactions in which we have engaged since September 1, 2008.

On August 15, 2008, we entered into a consulting agreement with Richard Mejia, Jr. for business and financial advisory services related to fund raising, corporate governance and SEC filings.  The agreement expired February 15, 2009.  Mr. Mejia was entitled to receive an hourly amount for his services that could be paid in a combination of cash and/or equity with the cash portion not to exceed 50%.  Mr. Mejia, is a retired partner of Ernst & Young LLP and is the father of Desiree Mejia, our Chief Operating Officer, Secretary and a Director.
 
On September 3, 2008, we entered into an unsecured promissory note agreement with Joseph Scalisi, our Co-President and a stockholder, for $950,000.  Under the terms of the promissory note agreement, the principal and any unpaid interest were to be repaid by March 3, 2009, six months from the date of issuance.  The note provided for interest at 8% per annum and could be repaid at any time before the repayment date, in part or in full, without penalty.
 
On January 26, 2009, we entered into an unsecured promissory note agreement with Joseph Scalisi, our Co-President and a stockholder, for $350,000.  Under the terms of the promissory note agreement, the principal and any unpaid interest were to be repaid by April 26, 2009, three months from the date of issuance.  The note provided for interest at 8% per annum and could be repaid at any time before the repayment date, in part or in full, without penalty.

In addition to the loans we received from Joseph Scalisi as discussed above, David Morse, Joseph Scalisi and Desiree Mejia have from time to time advanced funds to cover our operating expenses.  Beginning in December 1, 2008, cash advances from officers accrued interest at the rate of 8% per annum. These advances from officers have no formal repayment terms.  For the years ended August 31, 2009, and 2010, cash advances from officers totaling $582,000 and $947,297, respectively, were provided to us to cover operating expenses.  During the nine months ended May 31, 2011, new advances from officers totaled $1,000, repayments totaled $137,224 and the increase in accrued interest totaled $52,331, resulting in advances from officers and related accrued interest amounting to $811,073 and $98,866, respectively, at May 31, 2011.

On May 1, 2009, our board of directors approved the issuance of 4,279,021 shares of common stock to Joseph Scalisi in exchange for the outstanding notes payable and advances from Mr. Scalisi and related accrued interest totaling $2,838,417.  Notes payable and accrued interest totaling $639,328 were converted into 963,812 shares of common stock and advances from officers and accrued interest totaling $2,199,089 were converted into 3,315,209 shares of common stock.  The common stock was priced at approximately $0.66 per share, which represents an average of the closing stock price for the ten business days prior to the grant date.  The shares were issued on May 15, 2009.

On May 14, 2009, our board of directors approved the issuance of 1,671,814 shares of common stock to David Morse, our Chief Executive Officer, Co-President and a stockholder, in exchange for outstanding advances from Mr. Morse totaling $1,377,574.  The common stock was priced at approximately $0.82 per share, which represents an average of the closing stock price for the ten business days prior to the grant date.  The shares were issued on May 19, 2009.

On May 14, 2009, our board of directors approved the issuance of 300,000 shares of common stock to each of our officers, David Morse, Joseph Scalisi and Desiree Mejia.  The shares were issued in accordance with the officers’ executive employment agreements whereby upon receiving Federal Communications Commission approval of the Personal Locator device, each officer was entitled to receive a bonus of 300,000 shares.  The shares were issued on May 15, 2009 and valued at $1,296,000, which represents the fair market value of the services provided on the date of issuance.

From inception to August 31, 2010, each of David Morse, Joseph Scalisi and Desiree Mejia were paid salaries or other compensation totaling $1,145,750 (of which $455,000 was accrued for future payment), $1,145,750 (of which $280,000 was accrued for future payment) and $1,145,750 (of which $278,403 was accrued for future payment), respectively.

 
34

 
 
On July 6, 2011,  we issued 4,318,750 shares of common stock to Joseph Scalisi in exchange for the conversion of $500,000 of advances and $363,750 of accrued compensation.

A relative of the Chief Operating Officer provides bookkeeping and accounting services to us for $2,500 per month.  During the nine months ended May 31, 2011, bookkeeping and accounting fees for this party amounted to $22,500.

On March 30, 2011, we entered into a letter of intent with the son of David Morse, our Chief Executive Officer and Co-President, ultimately to act as Vice President of Customer Service.  Under the terms of the letter of intent, he is entitled to receive compensation of $10,000 per month and 250,000 shares of our common stock as a signing bonus.  The common stock was valued at $42,500 on the award date.
 
 
35

 
 
PRINCIPAL STOCKHOLDERS
 
The following table sets forth information regarding the number of shares of our common stock beneficially owned on August 23, 2011 by:
 
·  
Each person, or group of affiliated persons, who is known to us to be the beneficial owner of more than 5% of our outstanding common stock;
·  
Each of our executive officers and directors; and
·  
All of our directors and executive officers as a group.

For this table, beneficial ownership of our common stock is determined in accordance with the rules of the Securities and Exchange Commission and includes any shares of common stock over which a person exercises sole or shared voting or investment power, or of which a person has a right to acquire ownership through the exercise of an option, warrant or right or the conversion of a security at any time within 60 days of August 23, 2011.  Subject to any applicable community property laws, the persons or entities named in the table below have sole voting and investment power with respect to all shares indicated as beneficially owned by them.  Unless otherwise indicated, the address of the beneficial owners is 49 Discovery, Suite 260, Irvine, California 92618.
 
   
Shares of Common Stock
Beneficially Owned(1)
 
Name of Beneficial Owner
 
Number
   
Percent
 
David M. Morse
Co-President, Chief Executive Officer and Chairman of the Board
    18,766,103       9.9 %
Joseph F. Scalisi(2)
Co-President, Chief Development Officer and Director
    21,919,767       11.6 %
Desiree Mejia(2)
Chief Operating Officer, Principal Financial Officer, Secretary and Director
    13,291,666       7.0 %
All executive officers and directors as a group
    53,977,536       28.5 %
__________________
(1)
Applicable percentage ownership is based on 189,647,890 shares of common stock outstanding as of August 23, 2011, provided that any shares of common stock not outstanding which are subject to options, warrants, rights or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding shares owned by such person, but are not deemed to be outstanding for the purpose of computing  the percentage owned by any other person.
(2) Mr. Scalisi and Mrs. Mejia are married and, by virtue of community property laws or otherwise, each may have an interest in the shares reported by the other
 
 
36

 
 
SELLING STOCKHOLDERS
 
We are registering shares of common stock owned by the selling stockholders and shares of common stock that may be acquired by them upon exercise of warrants they own.  Except as noted below, no selling stockholder has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates other than as a result of the ownership of our securities.  In addition, and except as noted below, none of the selling stockholders are or were affiliated with registered broker-dealers.  With respect to those selling stockholders noted below who are or were affiliated with registered broker-dealers, each has represented to us that the shares being registered for resale were purchased in the ordinary course of business and, at the time of purchase, such selling stockholder had no agreements or understandings, directly or indirectly, with any person to distribute the shares.
 
The following table provides certain information with respect to the selling stockholders’ beneficial ownership of our common stock as of August 23, 2011, the total number of shares they may sell under this prospectus from time to time, and the number of shares they will own thereafter assuming no other acquisitions or dispositions of our common stock.  For the table below, beneficial ownership of our common stock is determined in accordance with the rules of the Securities and Exchange Commission and includes any shares of common stock over which a selling stockholder exercises sole or shared voting or investment power, or of which a selling stockholder has a right to acquire ownership at any time within 60 days of August 23, 2011.  The selling stockholders can offer all, some or none of their shares, thus we have no way of determining the number they will hold after this offering.  We have therefore prepared the table below on the assumption that the selling stockholders will sell all shares covered by this prospectus.

Selling
Stockholder (1)
 
Shares Held
Before the
Offering
   
Shares
Being
Offered
   
Shares Held
After the
Offering
   
Percentage Owned After
the Offering (2)
 
Jeffrey D. Leu
    8,500,000 (3)     4,500,000       4,000,000       2.12 %
Greggory S. Haugen (4)
    7,525,000       500,000       7,025,000       3.70 %
Haugen Children 2006 Trust
    3,600,000 (5)     3,600,000       0       0  
Northstar Investments, Inc.
    3,259,283 (6)     2,250,000       1,009,283       *  
Whitebox Multi-Strategy Partners, LP (7)
    3,250,000       3,250,000       0       0  
Terrence L. McGovern
    3,250,000       250,000       3,000,000       1.58 %
Killer Whale Holdings, LLC (8)
    2,525,000       2,250,000       275,000       *  
Emial Douglas †
    2,325,000       2,325,000       0       0  
Double E Services, Inc.
    2,250,000 (9)     750,000       1,500,000       *  
Thomas S. Gerbig
    2,000,000       2,000,000       0       0  
Amir L. Ecker (10)
    1,750,000       1,750,000       0       0  
Netgain Financial Inc.
    1,500,000 (11)     750,000       750,000       *  
Lacuna Hedge Fund LLLP (12)
    1,250,000       1,250,000       0       0  
Walter W. Cruttenden
    1,250,000       1,250,000       0       0  
ACT Capital Partners, L.P. (13)
    1,250,000       1,250,000       0       0  
Polestar Select LP (14)
    1,200,000       1,200,000       0       0  
Richard J. Chenitz
    1,066,000 (15)     500,000       566,000       *  
Sandor Capital Master Fund, LP (16)
    1,000,000       1,000,000       0       0  
George Karutz
    1,000,000       1,000,000       0       0  
Richard Mackey
    800,000       800,000       0       0  
David Caspers
    769,932 (17)     100,000       669,932       *  
Jeffery A. Lindeman
    750,000       750,000       0       0  
Craig Schnupp †
    750,000       750,000       0       0  
Sean & Lisa Matus
    727,500       727,500       0       0  
Kazum Partners, Ltd. (18)
    690,000       500,000       190,000       *  
Raymond Douglas
    625,000       625,000       0       0  
Robert G. Allison (19)
    575,000       575,000       0       0  
David & Jill Brattain †
    575,000       575,000       0       0  
Robert J. Evans
    514,200       514,200       0       0  
Craig-Hallum Capital Group LLC
    500,000 (20)     500,000       0       0  
Robert Scott
    500,000       500,000       0       0  
 
 
37

 
 
 
 
 
Stockholder (1)
  Shares Held
Before the
Offering
    Shares
Being
Offered
    Shares Held
After the
Offering
    Percentage Owned After
the Offering (2)
 
Aiello Family Trust (21)
    500,000       500,000       0       0  
Bruce Evans & Kathryn Evans
    500,000       500,000       0       0  
London Family Trust (22)
    500,000       500,000       0       0  
MAZ Partners LP (23)
    500,000       500,000       0       0  
Verbier Investments, L.P. (24)
    500,000       500,000       0       0  
James J. Tiampo
    500,000       500,000       0       0  
David Kuennen
    500,000       500,000       0       0  
Whitebox L/S Equity Partners, LP (25)
    500,000       500,000       0       0  
Larry Zilverberg
    500,000       500,000       0       0  
William Ford
    500,000       500,000       0       0  
Michael Glazer
    412,477 (26)     20,408       392,069       *  
Nob Hill Capital Partners, LP (21)
    400,000       400,000       0       0  
AGA III Investments, Inc. (27)
    375,000       375,000       0       0  
Wayne & Tammie Boyd
    350,000       350,000       0       0  
H. Grady Terrill †
    325,000       325,000       0       0  
SVB Financial Group
    300,000 (28)     300,000       0       0  
ThinkEquity LLC
    300,000 (29)     300,000       0       0  
Donald A. Daeke †
    300,000       300,000       0       0  
Robin Babcock
    256,279 (30)     68,671       187,608       *  
William F. Hartfiel III (31)
    250,000       250,000       0       0  
Brian Garner Swift (32)
    250,000       250,000       0       0  
Crusader Investments LLC (33)
    250,000       250,000       0       0  
James H. Zavoral Jr. (34)
    250,000       250,000       0       0  
Michael D. Ferrell †
    250,000       250,000       0       0  
Anne Barrett †
    250,000       250,000       0       0  
Chris B. Stephan
    250,000       250,000       0       0  
Shirley J. Jones †
    250,000       250,000       0       0  
Poseidon Capital, LLC (35)
    250,000       250,000       0       0  
Patrick Doolittle
    250,000       250,000       0       0  
Donald Andruik
    250,000       250,000       0       0  
Kenneth S. & Lori A. Curren
    250,000       250,000       0       0  
Carol Jean Sibilly
    250,000       250,000       0       0  
James S. Kenney †
    250,000       250,000       0       0  
William & Janet Stanton †
    225,000       225,000       0       0  
Jonathan Levy
    200,000 (36)     200,000       0       0  
J. Michael & B. Sherry Edge †
    200,000       200,000       0       0  
Timothy Klein and Stephanie Klein (37)
    200,000       200,000       0       0  
Sylvia Martinez †
    200,000       200,000       0       0  
Greg Maselli
    185,000 (38)     100,000       85,000       *  
Ted and Alana Ownby †
    180,000       180,000       0       0  
Gary A. Bergren (19)
    175,000       175,000       0       0  
Laura O. Jacobs †
    175,000       175,000       0       0  
Donald & Nancy Boecker †
    150,000       150,000       0       0  
Amanda and Edward Alexander Fly †
    150,000       150,000       0       0  
Paul Bhangoo
    149,850       149,850       0       0  
Joel D. White †
    125,000       125,000       0       0  
Doug Mzyk †
    125,000       125,000       0       0  
Sally S. Hoedebecke †
    125,000       125,000       0       0  
Michael Ray Compton †
    125,000       125,000       0       0  
Jay Barnes
    125,000       125,000       0       0  
EB Resources Limited (39)
    125,000       125,000       0       0  
Shirley J. Jones & Amanda Jones Fly
    125,000       125,000       0       0  
Nob Hill Capital Partners, LP III (21)
    100,000       100,000       0       0  
John Alenius †
    100,000       100,000       0       0  
 
 
38

 
 
Stockholder (1)   Shares Held
Before the
Offering
    Shares
Being
Offered
    Shares Held
After the
Offering
    Percentage Owned After
the Offering (2)
 
Thad Zak †
    100,000       100,000       0       0  
Karen M. Allen
    100,000       100,000       0       0  
Mary S. Bryant
    100,000       100,000       0       0  
David Doty
    100,000       100,000       0       0  
Andrzej & Elzbieta Krawczyk †
    100,000       100,000       0       0  
Edith Alice Jereb †
    100,000       100,000       0       0  
Paul Bradley Tuggle †
    100,000       100,000       0       0  
George & Estefana Shively Jr. †
    100,000       100,000       0       0  
Robert Kasody
    100,000 (40)     100,000       0       0  
Robert L. Cooper †
    90,000       90,000       0       0  
Allison Barrett †
    90,000       90,000       0       0  
Roland Cavazos
    90,000       90,000       0       0  
Marion Loving
    90,000       90,000       0       0  
Bruce Flieller †
    77,500       77,500       0       0  
Eric Zeitler †
    75,000       75,000       0       0  
Tommy L. Twomey †
    75,000       75,000       0       0  
Jaret Dale Walker †
    75,000       75,000       0       0  
Scott Breen †
    75,000       75,000       0       0  
Robert H. Cooper †
    75,000       75,000       0       0  
James E. Smith †
    75,000       75,000       0       0  
Gay Lamey †
    75,000       75,000       0       0  
Matthew Bell
    75,000       75,000       0       0  
Paul J. Dee
    75,000       75,000       0       0  
Darrell J. Compton †
    75,000       75,000       0       0  
Kelly and Araseli Compton
    75,000       75,000       0       0  
Sherrie L. Helms
    75,000       75,000       0       0  
Richard and Kathleen J. Moench
    75,000       75,000       0       0  
Juan Lazos †
    75,000       75,000       0       0  
Patricia A. Zeitler †
    75,000       75,000       0       0  
John M. Robertson †
    75,000       75,000       0       0  
Carrie S. Tidwell †
    75,000       75,000       0       0  
Judy Trevino †
    75,000       75,000       0       0  
James C. Melton †
    75,000       75,000       0       0  
Steve C. Steckbeck †
    70,000       70,000       0       0  
Randle & Evelyn Allen †
    70,000       70,000       0       0  
Brett Hardy Balthrope
    69,000       50,000       19,000       *  
Darrell G. Compton †
    67,500       67,500       0       0  
Kyle Nohavitza †
    57,500       57,500       0       0  
Patricia Martinez
    50,000       50,000       0       0  
Beverette H. Fly †
    50,000       50,000       0       0  
Trent & Patricia McDaniel
    50,000       50,000       0       0  
Frank Perekovich †
    50,000       50,000       0       0  
Donald Perekovich †
    50,000       50,000       0       0  
Kevin Albrecht †
    50,000       50,000       0       0  
Ian Burnett †
    50,000       50,000       0       0  
Andrew Ross Williams †
    50,000       50,000       0       0  
Todd Zimmerman †
    50,000       50,000       0       0  
Mathew Zimmerman †
    50,000       50,000       0       0  
Joe F. Handley †
    50,000       50,000       0       0  
Robert Patrick Hernandez †
    50,000       50,000       0       0  
Kenneth Malone †
    50,000       50,000       0       0  
Jeffrey Boyd Wilkinson †
    50,000       50,000       0       0  
Irvin E. Zeitler †
    50,000       50,000       0       0  
Hillary A. Boyd
    50,000       50,000       0       0  
 
 
39

 
 
 
Stockholder (1)
   Shares Held
Before the
Offering
     Shares
Being
Offered
     Shares Held
After the
Offering
     Percentage Owned After
the Offering (2)
 
Davis G. Gomez
    50,000       50,000       0       0  
Heriberto Martinez
    50,000       50,000       0       0  
Vicente Quintero
    50,000       50,000       0       0  
William H. Sutcliffe
    50,000       50,000       0       0  
Michael Tavitas, Jr.
    50,000       50,000       0       0  
Ifeanyi & Cheryl Udensi
    50,000       50,000       0       0  
Beth Balzar
    50,000       50,000       0       0  
Denise A. Berger
    50,000       50,000       0       0  
Kathleen Marie Born
    50,000       50,000       0       0  
Toby C. & Melinda K. Gerhart
    50,000       50,000       0       0  
W. L. Golightly
    50,000       50,000       0       0  
David W. Nettel †
    50,000       50,000       0       0  
Roland Lamar Pettit †
    50,000       50,000       0       0  
Kyle Matthew Pippin  †
    50,000       50,000       0       0  
Danny Cheng
    11,500 (41)     10,000       1,500       *  
Sergio Pinon
    5,000 (42)     5,000       0       0  
Other Holders as a Group
    1,800,950 (43)     1,800,950       0       0  
________________________________
 * Indicates less than 1%.
  Indicates account managed by Alamo Investment Advisors, LLC d/b/a Alamo Asset Advisors.
(1)
Inclusion is not an admission of beneficial ownership.
(2)
Based on 189,647,890 shares outstanding on August 23, 2011.
(3)
Includes 4,000,000 shares issuable on conversion of debt.
(4)
Greggory S. Haugen has personally guaranteed our obligations under the Loan and Security Agreement with Silicon Valley Bank and has made a number of personal loans to us.  In connection with these arrangements, we entered into several agreements with Mr. Haugen under which, among other things, we granted him board observation rights, certain registration rights, the right to approve our use of funds drawn under the Loan and Security Agreement, and a security interest in all of our assets, junior only to the security interest of Silicon Valley Bank.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
(5)
Covers shares issuable on exercise of warrants.  David Alampi, as trustee, has voting and investment power over the securities held by the Haugen Children 2006 Trust.
(6)
Includes 2,250,000 shares issuable on exercise of warrants.
(7)
Andrew J. Redleaf, as managing member of Whitebox Advisors, LLC, the general partner of Whitebox Multi-Strategy Partners, LP, has voting and investment power over the securities held by Whitebox Multi-Strategy Partners, LP.  Andrew J. Redleaf and Whitebox Advisors, LLC expressly disclaim their beneficial ownership of securities held by Whitebox Multi-Strategy Partners, LP, except to the extent of their pecuniary interest therein.  Whitebox Multi-Strategy Partners, LP is affiliated with Whitebox L/S Equity Partners, LP, which holds 500,000 shares.
(8)
Mark Anderson is the president of Killer Whale Holdings, LLC and has voting and investment power over the securities held by Killer Whale Holdings, LLC.  Mr. Anderson also holds 275,000 shares individually.
(9)
Includes 750,000 shares issuable on exercise of warrants.
(10)
Mr. Ecker is employed by Philadelphia Brokerage, a registered broker-dealer.
(11)
Includes 750,000 shares issuable on exercise of warrants.  Brian C. Quinn, as chief executive officer, has voting and investment power over the securities held by Netgain Financial Inc.
(12)
Rawleigh Ralls and Rich O’Leary share voting and investment control over the securities held by Lacuna Hedge Fund LLLP.
(13)
Amir L. Ecker and Carol G. Frankenfeld, the general partners of ACT Capital Partners, L.P., share voting and investment control over the securities held by ACT Capital Partners, L.P.  Amir L. Ecker and Carol G. Frankenfeld are employed by Philadelphia Brokerage, a registered broker-dealer.  In addition, Mr. Ecker personally holds 1,750,000 shares.
(14)
Rajiv Sharma has voting and investment power over the securities held by Polestar Select LP.  Mr. Sharma is the manager of Polestar Capital LLC, the general partner of Polestar Select LP.
 
 
40

 
 
(15)
Includes 500,000 shares issuable on conversion of debt.
(16)
John S. Lemak is the managing member of Sandor Capital Master Fund, LP and has voting and investment power over the securities held by Sandor Capital Master Fund, LP.  Mr. Lemak is affiliated with WFG Investments, Inc., a registered broker-dealer.
(17)
Includes 100,000 shares issuable on exercise of warrants.
(18)
William D. Balthrope has voting and investment power over the securities held by Kazum Partners, Ltd.
(19)
Account managed by Perkins Capital Management, Inc.
(20)
Craig-Hallum Capital Group LLC is a registered broker-dealer and served as one of the placement agents for the July 2011 private placement.  Covers shares issuable on exercise of warrants issued to Craig-Hallum Capital Group LLC as partial compensation for services as placement agent.  Craig-Hallum Capital Group LLC is wholly owned by Craig-Hallum Holdings LLC, the managing members of which are John Flood, Bradley Baker, Kevin Harris, Richard Rinkoff and Patricia Bartholomew.
(21)  
Stephen R. Mittel, as trustee, has voting and investment power over the securities held by the Aiello Family Trust.  Mr. Mittel, as general partner, also has voting and investment power over the securities held by Nob Hill Capital Partners, L.P. and Nob Hill Capital Partners, LP III.
(22)
Robert S. London is trustee of the London Family Trust.
(23)
Walter Schenker has voting and investment power over the securities held by MAZ Partners LP.  Mr. Schenker is principal of MAZ Capital Advisor, the general partner of MAZ Partners LP.
(24)
James J. Tiampo is managing partner of Verbier Investments, L.P. and has voting and investment power over the securities held by Verbier Investments, L.P.  In addition, Mr. Tiampo personally holds 500,000 shares.
(25)
Andrew J. Redleaf, as managing member of Whitebox Advisors, LLC, has voting and investment power over the securities held by Whitebox L/S Equity Partners, L.P.  Whitebox Advisors, LLC is the managing member of Whitebox L/S Equity Advisors, LLC, which is the general partner of Whitebox L/S Equity Partners, L.P.  Andrew J. Redleaf and Whitebox Advisors, LLC expressly disclaim their beneficial ownership of securities held by Whitebox L/S Equity Partners, L.P., except to the extent of their pecuniary interest therein.  Whitebox L/S Equity Partners, LP is affiliated with Whitebox Multi-Strategy Partners, LP, which holds 3,250,000 shares.
(26)
Includes 20,408 shares issuable on exercise of warrants.
(27)
Alfred G. Allen, as president, and has voting and investment power over the securities held by AGA III Investments, Inc.
(28)
Covers shares issuable on exercise of warrants.  SVB Financial Group is an affiliate of Silicon Valley Bank, which has extended a line of credit to the Company.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
(29)
ThinkEquity LLC is a registered broker-dealer and served as one of the placement agents for the July 2011 private placement.  Covers shares issuable on exercise of warrants issued to ThinkEquity LLC as partial compensation for services as placement agent.
(30)
Includes 68,671 shares issuable on exercise of warrants.
(31)
Mr. Hartfiel is director of investment banking at Craig-Hallum Capital Group LLC, a registered broker-dealer that served as one of the placement agents for the July 2011 private placement.
(32)
Mr. Swift is the chief executive officer of Security Research Associates, a registered broker-dealer.
(33)
John J. Connors is manager of Crusader Investments LLC and has voting and investment power over the securities held by Crusader Investments LLC.
(34)
Mr. Zavoral is an equity salesperson at Craig-Hallum Capital Group LLC, a registered broker-dealer that served as one of the placement agents for the July 2011 private placement.
(35)
Joel Altman, as managing member, has voting and investment power over the securities held by Poseidon Capital, LLC.
(36)
Jonathan Levy is a managing director of ThinkEquity LLC, a registered broker-dealer that served as one of the placement agents for the July 2011 private placement.  Covers shares issuable on exercise of warrants issued to Jonathan Levy as partial compensation for services as placement agent
(37)
Mr. Klein is a managing director of Craig-Hallum Capital Group LLC, a registered broker-dealer that served as one of the placement agents for the July 2011 private placement.
(38)
Includes 100,000 shares issuable on exercise of warrants.
(39)
Eugene L. Berger, as president, has voting and investment power over the securities held by EB Resources Limited.
(40)
Covers shares issuable on exercise of warrants.
(41)
Includes 10,000 shares issuable on exercise of warrants.
(42)
Covers shares issuable on exercise of warrants.
(43)
Aggregate holdings of this group are less than 1% of the outstanding shares of our common stock prior to this offering.
 
 
41

 
 
DESCRIPTION OF SECURITIES
 
Common Stock

We are authorized to issue 300,000,000 shares of common stock ($.001 par value), of which 189,647,890 were issued and outstanding as of August 23, 2011.  Each holder of our common stock is entitled to a pro rata share of cash distributions made to stockholders, including dividend payments.  The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by stockholders.  There is no cumulative voting with respect to the election of our directors or any other matter.  Therefore, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors.  The holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors from funds legally available therefore.  Cash dividends are at the sole discretion of our board of directors.  In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock.  Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.
 
Preferred Stock

We are also authorized to issue 10,000,000 shares of preferred stock ($.001 par value), none of which have been issued.  Shares of preferred stock may be issued from time to time in one or more series as may be determined by our board of directors.  The voting powers and preferences, the relative rights of each such series and the qualifications, limitations and restrictions of each series will be established by the board of directors.  Our directors may issue preferred stock with multiple votes per share and dividend and liquidation rights which would have priority over any dividends or distributions in liquidation with respect to the holders of our common stock.  The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to stockholders generally, and could have the effect of limiting stockholder participation in transactions such as mergers or tender offers if these transactions are not favored by our management.

Nevada Control Share and Business Combination Laws
 
Though not now, we may become subject to Nevada’s control share law.  A corporation is subject to Nevada’s control share law if it has more than 200 stockholders of record, at least 100 of whom have addresses in Nevada appearing on the stock ledger of the corporation, and it does business in Nevada directly or through an affiliated corporation.  The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more.  The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others.
 
The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders.  The control share law contemplates that voting rights will be considered only once by the other stockholders.  Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares.  The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law.
 
If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights is entitled to demand fair value for such stockholder’s shares.
 
 
42

 
 
Nevada’s control share law may have the effect of discouraging takeovers of the company.
 
In addition to the control share law, Nevada has a business combination law which prohibits combinations under certain circumstances between Nevada corporations that have 200 or more stockholders of record and “interested stockholders” for three years after the “interested stockholder” first becomes an “interested stockholder,” unless the combination or the transaction by which the person first became an “interested stockholder” is approved by the corporation’s board of directors before the person first became an “interested stockholder.”  Combinations with “interested stockholders” occurring more than three years after the person first became an “interested stockholder” must meet certain specified conditions.  For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation.  The term “combination” is broadly defined and includes, among other things, mergers, consolidations, sales of assets, liquidations, dissolutions, recapitalizations and reclassifications of securities.
 
The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of the company from doing so if they cannot obtain the approval of our board of directors.
 
Transfer Agent

The transfer agent and registrar for our common stock is Transhare Corporation, 4626 South Broadway, Englewood, CO 80113, toll free phone (888) 662-1113, e-mail info@transhare.com.