10-Q 1 lbas20131130b_10q.htm FORM 10-Q lbas20131130b_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-Q

 

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended November 30, 2013.

 

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from      to         

 

Commission File Number 333-139395

 

LOCATION BASED TECHNOLOGIES, INC.

(Name of registrant as specified in its charter)

 

Nevada

20-4854758

(State of incorporation)

(I.R.S. Employer Identification No.)

 

49 Discovery, Suite 260, Irvine, California 92618

(Address of principal executive offices)

 

888-600-1044

(Registrant’s telephone number)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated file, 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.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer      (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

As of January 10, 2014, there were 213,810,220 shares of the registrant’s $.001 par value common stock issued and outstanding.

 

 
 

 

 

TABLE OF CONTENTS

 

 

 

  

  

PAGE

  

  

  

PART I

FINANCIAL INFORMATION

3

  

  

  

ITEM 1.

CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

3

  

  

  

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

30

  

  

  

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

37

  

  

  

ITEM 4.

CONTROLS AND PROCEDURES

37

  

  

  

PART II

OTHER INFORMATION

38

  

  

  

ITEM 1.

LEGAL PROCEEDINGS

38

  

  

  

ITEM 1.A.

RISK FACTORS

38

  

  

  

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

38

  

  

  

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

38

  

  

  

ITEM 5.

OTHER INFORMATION

39

  

  

  

ITEM 6.

EXHIBITS

39

  

  

  

SIGNATURES

40

  

 
 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

November 30, 2013 and August 31, 2013

(Unaudited)

 
   

November 30,

   

August 31,

 
   

2013

   

2013

 
                 

ASSETS

               
                 

CURRENT ASSETS

               

Cash and cash equivalents

  $ 97,211     $ 680,914  

Accounts receivable, net of allowances

    128,134       77,584  

Inventory, net of reserves

    800,900       788,470  

Prepaid expenses and other assets

    73,338       47,976  

Deferred financing costs

    8,000       25,827  
                 

Total current assets

    1,107,583       1,620,771  
                 

Property and equipment, net of accumulated depreciation

    114,587       110,813  
                 

OTHER ASSETS

               

Intangible assets, net of accumulated amortization

    692,065       715,732  

Inventory, net of reserves

    893,401       893,401  

Deposits

    30,000       30,000  
                 

Total other assets

    1,615,466       1,639,133  
                 

TOTAL ASSETS

  $ 2,837,636     $ 3,370,717  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
3

 

 

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

November 30, 2013 and August 31, 2013

(Unaudited)

 

   

November 30,

   

August 31,

 
   

2013

   

2013

 
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               
                 

CURRENT LIABILITIES

               

Accounts payable and accrued expenses

  $ 1,840,252     $ 1,699,114  

Deferred compensation

    146,231       267,730  

Deferred revenue

    22,472       25,371  

Line of credit and accrued interest

    -       1,009,042  

Advances from officer and accrued interest

    176       29,219  

Convertible notes payable and accrued interest, net of unamortized discounts

    1,384,310       3,585,225  

Related party convertible notes payable and accrued interest, net of unamortized discounts

    1,118,568       1,049,590  

Current portion of term loans

    633,667       -  

Derivative liabilities

    -       745,148  
                 

Total current liabilities

    5,145,676       8,410,439  
                 

Convertible notes payable

    1,077,775       -  

Related party convertible notes payable and accrued interest, net of unamortized discounts

    2,584,449       1,719,036  

Term loans

    1,462,533       -  
                 

TOTAL LIABILITIES

    10,270,433       10,129,475  
                 

Commitments and contingencies

    -       -  
                 

STOCKHOLDERS' DEFICIT

               

Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued or outstanding

    -       -  

Common stock, $0.001 par value; 300,000,000 shares authorized; 212,050,845 and 211,917,511 shares issued and outstanding at November 30, 2013 and August 31, 2013, respectively

    212,051       211,917  

Additional paid-in capital

    49,592,293       49,388,375  

Prepaid services paid in common stock

    (127,086 )     (294,585 )

Accumulated deficit

    (57,110,055 )     (56,064,465 )
                 

Total stockholders' deficit

    (7,432,797 )     (6,758,758 )
                 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

  $ 2,837,636     $ 3,370,717  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
4

 

 

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended November 30, 2013 and 2012

(Unaudited)

 

   

For the three months ended

 
   

November 30,

   

November 30,

 
   

2013

   

2012

 
                 

Net revenue

               

Devices

  $ 243,391     $ 127,856  

Services

    165,413       80,699  
                 

Total net revenue

    408,804       208,555  
                 

Cost of revenue

               

Devices

    143,817       131,259  

Services

    237,990       177,781  
                 

Total cost of revenue

    381,807       309,040  
                 

Gross loss

    26,997       (100,485 )
                 

Operating expenses

               

General and administrative

    728,634       607,360  

Officer compensation

    246,687       229,670  

Professional fees

    374,493       404,928  

Rent

    19,203       19,527  

Research and development

    89,758       42,364  

Salaries and wages

    48,579       150,720  

Loss on asset impairment

    -       455,916  
                 

Total operating expenses

    1,507,354       1,910,485  
                 

Net operating loss

    (1,480,357 )     (2,010,970 )
                 

Other income (expense)

               

Financing costs

    (148,880 )     (81,000 )

Amortization of beneficial conversion feature

    (32,647 )     (61,233 )

Amortization of deferred financing costs

    (17,827 )     (81,966 )

Amortization of debt discount

    (98,906 )     -  

Loss on change in fair value of derivative liabilities

    -       (1,144,647 )

Interest expense, net

    (153,290 )     (44,872 )

Gain on debt settlement

    886,548       -  

Gain on asset disposal

    569       -  

Foreign currency loss, net

    -       (16 )
                 

Total other income (expense)

    435,567       (1,413,734 )
                 

Net loss before income taxes

    (1,044,790 )     (3,424,704 )
                 

Provision for income taxes

    800       800  
                 

Net Loss

  $ (1,045,590 )   $ (3,425,504 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
5

 

 

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended November 30, 2013 and 2012

(Unaudited)

 

   

For the three months ended

 
   

November 30,

   

November 30,

 
   

2013

   

2012

 
                 

Basic and Diluted - Earnings (loss) Per Share

  $ (0.00 )   $ (0.02 )
                 

Basic and Diluted - Weighted Average Number of Shares Outstanding

    212,015,680       199,734,700  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
6

 

 

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended November 30, 2013 and 2012

(Unaudited) 

 

   

For the three months ended

 
   

November 30,

   

November 30,

 
   

2013

   

2012

 

Cash Flows from Operating Activities

               

Net loss

  $ (1,045,590 )   $ (3,425,504 )

Adjustment to reconcile net loss to net cash used in operating activities:

               

Loss on change in fair value of derivative liabilities

    -       1,144,647  

Gain on sale of trademark

    (569 )     -  

Gain on debt settlement

    (886,548 )     -  

Loss on asset impairment

    -       455,916  

Provision for doubtful accounts and sales returns

    8,000       (15,875 )

Depreciation and amortization

    30,927       26,640  

Amortization of beneficial conversion feature

    32,647       61,233  

Amortization of deferred financing costs

    17,827       81,966  

Amortization of prepaid services paid in common stock

    167,499       153,125  

Amortization of debt discount

    98,905       -  

Common stock issued for services and financing costs

    17,500       49,500  

Warrants issued for services and financing costs

    -       99,873  

Stock options issued for services

    20,630       81,855  

Changes in operating assets and liabilities:

               

(Increase) decrease in accounts receivable

    (58,550 )     112,349  

(Increase) decrease in inventory

    (12,430 )     57,164  

(Increase) decrease in prepaid expenses and other assets

    (25,362 )     (10,664 )

Increase (decrease) in accounts payable and accrued expenses

    141,138       290,608  

Increase (decrease) in accrued officer compensation

    (65,999 )     93,950  

Increase (decrease) in deferred revenue

    (2,899 )     (5,163 )

Increase (decrease) in accrued interest

    118,461       28,261  
                 

Net cash used in operating activities

    (1,444,413 )     (720,119 )
                 

Cash Flows from Investing Activities

               

Purchase of property and equipment

    (17,965 )     (120,000 )

Proceeds from sale of trademark

    7,500       -  
                 

Net cash used in investing activities

    (10,465 )     (120,000 )
                 

Cash Flows from Financing Activities

               

Advances / (repayments) from officers, net

    (28,825 )     -  

Payments for deferred financing costs

    -       (6,000 )

Proceeds from convertible notes payable

    -       250,000  

Proceeds from related party convertible notes payable

    900,000       350,000  
                 

Net cash provided by financing activities

    871,175       594,000  
                 

Net decrease in cash and cash equivalents

    (583,703 )     (246,119 )
                 

Cash and cash equivalents, beginning of year

    680,914       376,554  
                 

Cash and cash equivalents, end of year

  $ 97,211     $ 130,435  
                 

Non-Cash Financing Activities:

               

Conversion of accrued compensation into convertible notes payable

  $ 55,500     $ -  

Issuance of warrants for financing costs classified as debt discount

  $ 165,922     $ -  

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 
7

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

The Company designs, develops, and sells personal, pet, and vehicle locator devices and services including PocketFinder® People, PocketFinder® Pets and PocketFinder® Vehicles. The PocketFinder® is a small, completely wireless, location device that enables a user to locate a person, pet, vehicle or valuable item at any time from almost anywhere using Global Positioning System (“GPS”) and General Packet Radio Service (“GPRS”) technologies. The Company is located in Irvine, California.

 

Organization

 

Location Based Technologies, Inc. (formerly known as Springbank Resources, Inc.) (the “Company,” “our,” “we” or “LBT”) was incorporated under the laws of the State of Nevada on April 10, 2006.

 

Location Based Technologies, Corp. (formerly known as PocketFinder, Inc.) was incorporated under the laws of the State of California on September 16, 2005. On July 7, 2006, it established PocketFinder, LLC (“LLC”), a California Limited Liability Company. On May 29, 2007, PocketFinder, Inc. filed amended articles with the Secretary of State to change its name to Location Based Technologies, Corp., and in October 2007 was merged into LBT.

 

On September 30, 2009, the Company formed Location Based Technologies, Ltd. (“LBT, Ltd.”), an England and Wales private limited company, to establish a presence in Europe. LBT, Ltd. is a wholly owned subsidiary of the Company.

 

Consolidation Policy

 

The accompanying consolidated financial statements include the accounts and operations of the Company and its wholly owned subsidiary, Location Based Technologies, Ltd. Intercompany balances and transactions have been eliminated in consolidation. 

 

 
8

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Basis of Presentation

 

The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to financial statements included in the annual report on Form 10-K of Location Based Technologies, Inc. for the year ended August 31, 2013. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended November 30, 2013, are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated financial statements and the related notes should be read in conjunction with the Company’s audited financial statements for the year ended August 31, 2013, included in the Company’s report on Form 10-K.

 

Going Concern

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred net losses since inception, and as of November 30, 2013, had an accumulated deficit of $57,110,055 and negative working capital of $4,038,093. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Management recognizes that the Company must generate additional resources to enable it to continue operations. Management intends to raise additional financing through debt and equity financing or through other means that it deems necessary, with a view to moving forward and sustaining prolonged growth in its strategy phases. However, no assurance can be given that the Company will be successful in raising additional capital. Further, even if the Company raises additional capital, there can be no assurance that the Company will achieve profitability or positive cash flow. If management is unable to raise additional capital and expected significant revenues do not result in positive cash flow, the Company will not be able to meet its obligations and may have to cease operations.

 

 
9

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.            NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts or balances to conform to the presentation adopted in the current period.

 

Cash and Cash Equivalents

 

For purposes of the balance sheets and statements of cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.

 

Concentration of Credit Risk

 

Cash and Cash Equivalents – The cash and cash equivalent balances at November 30, 2013 and August 31, 2013 were principally held by two institutions which insured our aggregated accounts with the Federal Deposit Insurance Corporation ("FDIC") up to $250,000 per insured banking institution. At times, the Company has maintained bank balances which have exceeded FDIC limits. The Company has not experienced any losses with respect to its cash balances.

 

Revenue and Accounts Receivable For the three months ended November 30, 2013, revenue from the Company’s largest customer amounted to $111,577 or 27% of total net revenue. Accounts receivable from this customer amounted to $82,439 or 56% of total accounts receivable at November 30, 2013.

 

For the three months ended November 30, 2012, revenue from two of the Company’s largest customers amounted to $43,011 or 21% of total net revenue. Accounts receivable from these customers amounted to $100,957 or 94% of total accounts receivable at November 30, 2012.

 

 
10

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of November 30, 2013 and August 31, 2013, the allowance for doubtful accounts amounted to $3,000.

 

Allowance for Sales returns

 

An allowance for sales returns is recorded as a reduction to revenue and based on management’s judgment using historical experience and expectation of future conditions. As of November 30, 2013 and August 31, 2013, the allowance for sales returns amounted to $16,500 and $8,500, respectively.

 

Inventory

 

Inventories are valued at the lower of cost (first-in, first-out) or market and primarily consisted of components and finished goods for the Company’s PocketFinder® products. Packaging costs are expensed as incurred. The Company provides for a lower-of-cost-or-market ("LCM") adjustment against gross inventory values. The Company recorded an inventory valuation reserve for LCM inventory adjustments amounting to $1,076,486 as of November 30, 2013. In addition, the components inventory, net of the LCM valuation reserve, totaling $893,401 is classified as a noncurrent asset at November 30, 2013 (see Note 2).

 

Fair Value of Financial Instruments

 

Pursuant to FASB ASC 820 – Fair Value Measurement and Disclosures, the Company is required to estimate the fair value of all financial instruments included on its balance sheet. The carrying value of cash, accounts receivable, inventory, accounts payable and notes payable approximate their fair value due to the short period to maturity of these instruments.

 

 
11

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method and with useful lives used in computing depreciation ranging from 1 to 5 years. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized.

 

Long-Lived Assets

 

The Company accounts for its long-lived assets in accordance with FASB ASC 360 – Impairment or Disposal of Long-Lived Assets that requires long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value. During the three months ended November 30, 2012, the Company recorded an impairment of certain patents amounting to $455,916. There was no such impairment recognized during the three months ended November 30, 2013.

 

Intangible Assets – Patents and Trademarks

 

The Company capitalizes internally developed assets related to certain costs associated with patents and trademarks. These costs include legal and registration fees needed to apply for and secure patents. The intangible assets acquired from other enterprises or individuals in an “arms length” transaction are recorded at cost. As of November 30, 2013 and August 31, 2013, the Company capitalized $742,945 for patent related expenditures. As of November 30, 2013 and August 31, 2013, the Company capitalized $52,539 and $59,470 for trademark related expenditures, respectively. Accumulated amortization of intangible assets was $103,420 and $86,683 at November 30, 2013 and August 31, 2013, respectively.

 

 
12

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


  

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Intangible Assets – Patents and Trademarks (Continued)

 

Patents are subject to amortization upon issuance by the United States Patent and Trademark Office. Intangible assets are amortized in accordance with FASB ASC 350 – Intangibles – Goodwill and Other, using the straight-line method over the shorter of their estimated useful lives or remaining legal life. Amortization expense totaled $16,737 and $16,792 for the three months ended November 30, 2013 and 2012, respectively.

 

Deferred Revenue

 

Deferred revenue is a liability related to revenue producing activity for which revenue has not yet been recognized. As of November 30, 2013 and August 31, 2013, deferred revenue amounted to $22,472 and $25,371, respectively, and consisted of prepaid service revenue from subscribers.

 

 

Beneficial Conversion Feature of Convertible Notes Payable

 

The Company accounts for the beneficial conversion feature of convertible notes payable when the conversion rate is below market value. Pursuant to FASB ASC 470-20 – Debt With Conversion and Other Options, the estimated fair value of the beneficial conversion feature is recorded in the financial statements as a discount from the face amount of the notes. Such discounts are amortized over the term of the notes or conversion of the notes, if sooner. The Company recognized amortization expense related to the beneficial conversion features on convertible notes payable totaling $32,647 and $61,233 during the three months ended November 30, 2013 and 2012, respectively.

 

Derivative Liabilities

 

The Company accounts for its warrants and embedded conversion features in its convertible debentures in accordance FASB ASC 815-10 – Derivatives and Hedging, which requires a periodic valuation of their fair value and a corresponding recognition of liabilities associated with such derivatives, and FASB ASC 815-40 – Contracts in Entity’s Own Equity. The recognition of derivative liabilities related to the issuance of convertible debt is applied first to the proceeds of such issuance as a debt discount, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized as “Loss on Valuation of Derivative” in other expense. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as “Gain (Loss) on Change in Fair Value of Derivative Liability” in other income (expense).

 

 
13

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Derivative Liabilities (Continued)

 

The Company determined that the conversion feature of two promissory notes met the criteria of an embedded derivative, and therefore the conversion feature of these notes needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion feature was estimated at the default date when the notes became convertible using the Black-Scholes model. In connection with the JMJ debt settlement, the derivative liabilities were eliminated and included in the gain on debt settlement. For the three months ended November 30, 2012, the Company recorded a loss for the change in fair value of the derivative liabilities in the amount of $1,144,647 due to the fluctuation in the current market prices.

 

Revenue Recognition

 

Revenues are recognized in accordance with FASB ASC 605 – Revenue Recognition, when (a) persuasive evidence of an arrangement exists, (b) the products or services have been provided to the customer, (c) the fee is fixed or determinable, and (d) collectability is reasonably assured. In instances where the customer, at its discretion, has the right to reject the product or services prior to final acceptance, revenue is deferred until such acceptance occurs.

 

Device Sales Revenue – Revenue from the sales of PocketFinder® products is recognized upon shipment to website customers and upon delivery to distributors net of an allowance for estimated returns. The allowance for sales returns is estimated based on management’s judgment using historical experience and expectation of future conditions.

 

 

Service Revenue – Service revenue consists of monthly service fees initiated by the customer upon activation of a PocketFinder® device. Services fees are billed and collected in advance of the service provided for that month. Service revenue is recognized upon billing the customer.

 

Shipping Costs

 

Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are included in cost of sales.

 

 
14

 

  

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Advertising Costs

 

Advertising costs are expensed as incurred. For the three months ended November 30, 2013 and 2012, the Company incurred $485,391 and $268,025 of advertising costs, respectively.

 

Research and Development

 

Research and development costs are clearly identified and are expensed as incurred in accordance with FASB ASC 730 – Research and Development.

 

Stock Based Compensation 

 

The Company measures and recognizes compensation expense associated with its grant of equity-based awards in accordance with FASB ASC 718, Compensation – Stock Compensation. ASC 718 requires that companies measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements over the vesting period.

 

In accordance with ASC 718, the Company estimates the grant-date fair value of its stock options using the Black-Scholes option-pricing model, which takes into account assumptions regarding an expected dividend yield, a risk-free interest rate, an expected volatility factor for the market price of the Company’s common stock and an expected term of the stock options. The fair value of stock options granted is amortized on a straight-line basis over the vesting periods. For the three months ended November 30, 2013 and 2012, stock-based compensation expense associated with stock options totaled $20,630 and $81,855, respectively.

 

 
15

 

  

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740 – Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements’ carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. The Company has included its $800 minimum California state income tax in its provision for income taxes for the three months ended November 30, 2013 and 2012.

 

Earnings/ Loss Per Share

 

The Company computes basic earnings (loss) per share using the weighted average number of common shares outstanding during the period in accordance with FASB ASC 260 – Earnings Per Share, which specifies the compilation, presentation, and disclosure requirements for income per share for entities with publicly held common stock or instruments which are potentially common stock.

 

Diluted earnings (loss) per share are computed using the weighted average number of common shares outstanding and the dilutive potential common shares outstanding during the period. The following potential common shares are excluded from diluted loss per share as their effect would be anti-dilutive.

 

   

November 30,

2013

   

August 31,

2013

 
                 

Warrants

    17,256,715       15,456,715  

Stock options

    3,525,000       3,475,000  

Convertible notes payable

    30,252,642       25,300,352  

Dilutive potential common shares

    51,034,357       44,232,067  

 

 
16

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

2.             INVENTORY

 

Inventory at November 30, 2013 and August 31, 2013 consisted of the following:

 

   

November 30,

2013

   

August 31,

2013

 

Current:

               

Finished goods

  $ 1,299,383     $ 1,286,953  

Inventory valuation reserve for finished goods

    (498,483 )     (498,483 )

Inventories, current

  $ 800,900     $ 788,470  
                 

Noncurrent:

               

Device components

  $ 1,471,404     $ 1,471,404  

Inventory valuation reserve for components

    (578,003 )     (578,003 )

Inventories, noncurrent

  $ 893,401     $ 893,401  

 

In the first quarter of 2012, the Company purchased a substantial amount of inventory components to produce PocketFinder® devices. Management analyzed its inventories based on existing purchase orders and current potential orders for future delivery and determined we may not realize all of the inventory components within the next year. Inventories totaling $893,401 which may not be realized within a 12-month period have been reclassified as long-term as of November 30, 2013 and August 31, 2013.

 

  

3.             PROPERTY AND EQUIPMENT

 

Property and equipment at November 30, 2013 and August 31, 2013 consisted of the following:

 

   

November 30,

2013

   

August 31,

2013

 
                 

Machinery and equipment

  $ 108,319     $ 106,354  

Computer software (mobile apps)

    82,999       66,999  

Computer software (internal)

    51,263       51,263  

Computer and video equipment

    19,756       19,756  

Office furniture

    24,526       24,526  
                 
      286,863       268,898  

Less: accumulated depreciation

    (172,276 )     (158,085 )
                 

Total property and equipment

  $ 114,587     $ 110,813  

 

 
17

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

3.             PROPERTY AND EQUIPMENT (Continued)

 

Depreciation expense for the three months ended November 30, 2013 and 2012 amounted to $14,191 and $9,848, respectively.

 

 

4.             INTANGIBLE ASSETS

 

Intangible assets at November 30, 2013 and August 31, 2013 consisted of the following:

 

   

November 30,

2013

   

August 31,

2013

 
                 

Patents

  $ 742,945     $ 742,945  

Trademarks

    52,539       59,470  
                 
      795,484       802,415  

Less: accumulated amortization

    (103,420 )     (86,683 )
                 

Total intangible assets

  $ 692,064     $ 715,732  

 

Amortization expense for the three months ended November 30, 2013 and 2012 amounted to $16,737 and $16,792, respectively.

 

As of November 30, 2013, Company estimates amortization expense approximating $67,000 each year for the next five years and $364,000 thereafter. 

 

 
18

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


  

5.             RELATED PARTY TRANSACTIONS

 

Advances from Officer

 

From time to time, the Company’s officers advance funding to the Company to cover operating expenses. Cash advances from officers accrue interest at the rate of 8% per annum and have no formal repayment terms.

 

During the three months ended November 30, 2013, there were advances from our Co-President totaling $100,000 and $128,825 of repayments. There were no outstanding advances and related accrued interest amounted to $176 as of November 30, 2013.

 

Accounts Payable

 

Amounts payable to related parties totaled $175,000 and $100,000 as of November 30, 2013 and August 31, 2013, respectively.

 

West Coast Customs

 

In July 2012, an officer of the Company entered into a Subscription Agreement with West Coast Customs ("WCC") to acquire an approximate 1.5% ownership of WCC. The Company and WCC are under a Manufacturing and Trademark License Agreement for co-branding of the PocketFinder® products.

 

 
19

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


  

6.             CONVERTIBLE NOTES PAYABLE

   

November 30,

2013

   

August 31,

2013

 

Convertible Notes Payable

               
                 

Note payable to JMJ Financial in the amount of $555,000 due on September 16, 2012. “V warrants” to purchase 869,565 shares of the Company’s common stock valued at $200,000 were issued in connection with the note. The note was converted into a term loan. See Note 7.

  $ _     $ 555,000  
                 

Note payable to JMJ Financial in the amount of $550,000 due on November 1, 2012. “W warrants” to purchase 1,086,957 shares of the Company’s common stock and valued at $250,000 were issued in connection with the note. The note was converted into a term loan. See Note 7.

    _       550,000  
                 

Note payable in the amount of $300,000 due on December 28, 2013 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.30 per share.

    300,000       300,000  
                 

Note payable in the amount of $1,000,000 due on December 30, 2014 at an interest rate of 8% per annum and convertible into shares of the Company’s common stock at $0.20 per share. In connection with the extension of the due date on December 10, 2013, 4,000,000 shares of the Company’s stock valued at $240,000 were awarded.

    1,000,000       1,000,000  
                 

Three notes payable in the amount of $102,500 due on January 9, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.30 per share. In connection with the extension of the due date, 205,000 shares of the Company’s stock valued at $30,750 were awarded in July 2013.

    102,500       102,500  

 

 
20

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

6.             CONVERTIBLE NOTES PAYABLE (Continued)

   

November 30,

2013

   

August 31,

2013

 

Convertible Notes Payable (Continued)

               
                 

Two notes payable in the amount of $150,000 due on January 13, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.30 per share. In connection with the extension of the due date, 300,000 shares of the Company’s stock valued at $45,000 were awarded during 2013.

  $ 150,000     $ 150,000  
                 

Note payable in the amount of $41,000 due on February 5, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share.

    41,000       41,000  
                 

Note payable in the amount of $75,000 due on March 19, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 150,000 shares of the Company’s common stock valued at $24,617 were issued in connection with the note.

    75,000       75,000  
                 

Note payable in the amount of $500,000 due on March 25, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 1,000,000 shares of the Company’s common stock valued at $164,022 were issued in connection with the note.

    500,000       500,000  
                 

Two notes payable in the amount of $50,000 due on April 10, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share.

    50,000       50,000  

 

 
21

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


  

6.             CONVERTIBLE NOTES PAYABLE (Continued)

 

   

November 30,

2013

   

August 31,

2013

 

Convertible Notes Payable (Continued)

               
                 

Note payable in the amount of $100,000 due on April 15, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 200,000 shares of the Company’s common stock valued at $30,731 were issued in connection with the note.

  $ 100,000     $ 100,000  
                 

Total convertible notes payable

    2,318,500       3,423,500  
                 

Unamortized debt and beneficial conversion feature discounts

    (64,460 )     (126,102 )
                 

Accrued interest

    208,045       287,827  
                 

Total convertible notes payable, net and accrued interest

    2,462,085       3,585,225  
                 

Less current portion

    (1,384,310 )     (3,585,225
                 

Long-term convertible notes payable, net and accrued interest

  $ 1,077,775     $ -  

 

 
22

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


  

6.            CONVERTIBLE NOTES PAYABLE (Continued)

   

November 30,

2013

   

August 31,

2013

 

Related Party Convertible Notes Payable

               
                 

Six notes payable in the amount of $996,987 due on March 13, 2014 at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.20 per share.

  $ 996,987     $ 996,987  
                 

Four notes payable in the amount of $28,750 due on demand at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.17 per share.

    28,750       28,750  
                 

Four notes payable in the amount of $55,500 due on demand at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.13 per share.

    55,500       -  
                 

Seven notes payable in the amount of $2,500,000 due on September 30, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 400,000 and “BB warrants” to purchase 2,000,000 shares of the Company’s common stock valued at $324,585 were issued in connection with the extension of the notes during 2013.

    2,500,000       1,900,000  
                 

Note payable in the amount of $300,000 due on November 6, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “CC warrants” to purchase 600,000 shares of the Company’s common stock valued at $118,757 were issued in connection with the note.

    300,000       -  
                 

Total related party convertible notes payable

    3,881,237       2,925,737  
                 

Unamortized debt and beneficial conversion feature discounts

    (350,839 )     (254,827 )
                 

Accrued interest

    172,619       97,716  
                 

Total related party convertible notes payable, net and accrued interest

    3,703,017       2,768,626  

  

 
23

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

6.             CONVERTIBLE NOTES PAYABLE (Continued)                

 

   

November 30,

2013

   

August 31,

2013

 

Related Party Convertible Notes Payable (Continued)

               
                 

Less current portion

    (1,118,568 )     (1,049,590 )
                 

Long-term related party convertible notes payable, net and accrued interest

  $ 2,584,449     $ 1,719,036  

 

As of November 30, 2013, the principal maturities of the convertible notes payable and related party convertible notes payable are as follows:

 

For the Years Ending:

       
         

November 30, 2014

  $ 3,399,737  

November 30, 2015

    2,800,000  
         

Total

  $ 6,199,737  

 

7.             LINE OF CREDIT AND TERM LOANS

 

SVB Line of Credit

 

On January 5, 2011, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Silicon Valley Bank for a $1,000,000 non-formula line of credit. The principal amount outstanding under the credit line accrues interest at a floating per annum rate equal to the greater of (i) the Prime Rate, plus 2.5% or (ii) 6.5% and is to be paid monthly. The Company must maintain certain financial covenants under the Loan Agreement. The personal guarantor for the credit line is a director and stockholder of the Company.

 

On November 20, 2013, the Company entered into a Fifth Amendment to Loan and Security Agreement with Silicon Valley Bank to convert the line of credit into a term loan to be repaid by April 1, 2016 with interest only payments from December 2013 to April 2014, followed by twenty-four equal installments of principal plus monthly accrued interest.

 

As of November 30, 2013, the outstanding balance on the term loan and accrued interest totaled $1,000,000 and $0, respectively. As of August 31, 2013, the outstanding balance on the line of credit and accrued interest totaled $1,000,000 and $9,042, respectively.  

 

 
24

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

7.             LINE OF CREDIT AND TERM LOAN (Continued)

 

JMJ Notes Payable

 

On December 12, 2013 the Company and JMJ executed a comprehensive Release and Settlement Agreement (“Settlement”) which pertains to all claims and counter-claims previously filed by both Parties. The Settlement will require the company to repay $1,096,200 principal and interest on the outstanding notes to be $324,000 in cash payments and $772,200 in common stock. Under the payment terms of the Settlement, $1,105,000 previously classified as convertible notes were reclassified as a term loan as of November 30, 2013. As a result, the Company recorded a gain on debt settlement consisting of $132,600 of abated interest, $8,800 in principal reduction and $745,148 from the elimination of derivative liabilities associated with the conversion features.

 

As of November 30, 2013, the principal maturities of the SVB and JMJ term loans are as follows:

 

For the Years Ending:

       
         

November 30, 2014

  $ 633,667  

November 30, 2015

    1,254,200  

November 30, 2016

    208,333  
         
Total term loans     2,096,200  
         

Less current portion of term loans

    (633,667 )
         

Long-term term loans

  $ 1,462,533  

 

 

8.             COMMITMENTS AND CONTINGENCIES

 

Operating Leases 

 

On May 11, 2011, the Company entered into a lease agreement to lease approximately 4,700 square feet of general office space in Irvine, California, for base rent ranging from $6,199 to $7,193 per month over the 48 month lease term. The lease term is from July 1, 2011 through June 30, 2015.

 

Total rental expense on operating leases for the three months ended November 30, 2013 and 2012 totaled $19,203 and $19,527, respectively.

 

As of November 30, 2013, the future minimum lease payments are as follows:

 

For the Years Ending:

       
         

November 30, 2014

  $ 83,663  

November 30, 2015

    50,351  
         

Total

  $ 134,014  

  

 
25

 

 

 LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

9.             EQUITY

 

Common Stock 

 

The Company issued 83,334 shares of common stock to consultants in exchange for various advisory services during the three months ended November 30, 2013. The shares were valued at $10,000, which represents the fair market value of the shares provided on the award date.

 

The Company issued 50,000 shares of common stock in connection with a note payable extension during the three months ended November 30, 2013. The shares were valued at $7,500, which represents the fair market value of the note payable extension costs on the award date.

 

Warrants

 

Warrants to purchase up to 17,256,715 shares of the Company’s common stock are outstanding at November 30, 2013.

 

   

Number of

Shares

   

Exercise

Price

 

Expiration

                   

Outstanding warrants as of August 31, 2013

    15,456,715            
                   

Warrants granted:

                 

BB warrants

    1,200,000     $ 0.20  

August 29, 2016

CC warrants

    600,000     $ 0.20  

November 6, 2016

                   

Outstanding warrants as of November 30, 2013

    17,256,715            

 

The weighted average exercise price of outstanding warrants was $0.21 at November 30, 2013, with expiration dates ranging from December 16, 2014 to November 6, 2016.

 

 

 
26

 

 

 LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

9.             EQUITY (Continued)

 

Stock Options

 

On January 12, 2012, the board of directors adopted the Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”). The aggregate number of shares of common stock that may be issued under the 2007 Plan is 20,000,000 and such shares are reserved for issuance out of the authorized but previously unissued shares. Employees, service providers and non-employee directors of the Company and its affiliates are eligible to receive non-statutory stock options, incentive stock options, restricted stock and stock appreciation rights. The 2007 Plan will continue until the earlier of the termination of the 2007 Plan by the board of directors or ten years after the effective date. There were 18,500,000 incentive stock options granted under the 2007 Plan as of November 30, 2013.

 

On August 30, 2007, the Company granted options outside of the 2007 Plan to three of the Company’s officers to purchase 6,000,000 common shares each for a total of 18,000,000 common shares at $0.33 per share that vest upon the achievement of certain milestones. The options expire 10 years from the vested date. As of November 30, 2013, there were no options that were vested and presently exercisable.

 

On January 12, 2012, the Company granted options under the 2007 Plan to three of the Company’s officers to purchase 4,000,000 common shares each for a total of 12,000,000 common shares at $0.31 per share that vest upon the achievement of certain milestones. The options expire on January 12, 2017. As of November 30, 2013, there were 1,500,000 options that were vested and presently exercisable. No options were exercised as of November 30, 2013.

 

On March 15, 2012, the Company granted options under the 2007 Plan to three officers and one employee of the Company to purchase 6,500,000 common shares at $0.31 per share per share that vest upon the achievement of certain milestones. The options expire on March 15, 2017. As of November 30, 2013, there were 2,025,000 options that were vested and presently exercisable. No options were exercised as of November 30, 2013.

 

 
27

 

 

 LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

10.          PROVISION FOR INCOME TAXES

 

Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences arise from the difference between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and tax rates on the date of enactment.

 

The Company did not provide any current or deferred U.S. federal income taxes or benefits for any of the periods presented because the Company has experienced operating losses since inception. The Company provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn sufficient income to realize the deferred tax assets during the carry forward period.

 

The components of the Company’s deferred tax asset as of November 30, 2013 and August 31, 2013 are as follows:

   

November 30,

2013

   

August 31,

2013

 

Net operating loss carry forward and deductible temporary differences

  $ 18,794,000     $ 19,904,000  

Valuation allowance

    (18,794,000)       (19,904,000)  
                 

Net deferred tax asset

  $ -     $ -  

 

A reconciliation of the combined federal and state statutory income taxes rate and the effective rate is as follows:  

   

November 30,

2013

   

August 31,

2013

 

Federal tax at statutory rate

    34.00%       34.00%  

State income tax net of federal benefit

    5.83%       5.83%  

Valuation allowance

    (39.83%)       (39.83%)  
                 
      -       -  

  

 
28

 

 

 LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2013


 

10.           PROVISION FOR INCOME TAXES (Continued)

 

As of November 30, 2013 and August 31, 2013, the Company had federal and state net operating loss carryforwards of approximately $47,186,000 and $48,074,000, respectively, which can be used to offset future federal income tax. The federal and state net operating loss carryforwards expire at various dates through 2032. Deferred tax assets resulting from the net operating losses are reduced by a valuation allowance, when, in the opinion of management, utilization is not reasonably assured. These carryforwards may be limited upon a change in ownership or consummation of a business combination under IRC Sections 381 and 382.

 

As of November 30, 2013 and 2012, no accrued interest and penalties are recorded relating to uncertain tax positions. Any such interest and penalties would be included in interest expense as a component of pre-tax net income or loss. The Company's tax filings are no longer open to examination by the Internal Revenue Service for tax years prior to 2009 and by state taxing authorities for tax years prior to 2008.

 

 

11.           SUBSEQUENT EVENTS

 

On December 5, 2013, the Company issued 1,759,375 shares of common stock to consultants in exchange for various advisory services during the three months ended November 30, 2013. The shares were valued at $143,670, which represents the fair market value of the shares provided on the award date.

 

On December 20, 2013, the Company entered into an unsecured promissory note agreement with a board member for $100,000 due on March 31, 2014. The note bears interest at 10% per annum and may be converted into common stock of the Company at the rate of $0.15 per share. In addition, the note holder will receive 100,000 shares of common stock.

 

On December 20, 2013, the Company entered into a secured promissory note agreement with a board member for $100,000 due on December 20, 2015. The note bears interest at 10% per annum and may be converted into common stock of the Company at the rate of $0.15 per share. In addition, each note holder will receive a three year warrant to purchase 200,000 shares of common stock at $0.15.

 

On December 10, 2013, the Company entered into an Amendment to extend the due date on a $1,000,000 promissory note to December 30, 2014. In connection with the note extension, 4,000,000 shares of common stock valued at $240,000 were awarded and 500,000 shares of common stock valued at $30,000 were awarded under the related incentive organizer agreement. 

 

 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

This report contains certain forward-looking statements of our intentions, hopes, beliefs, expectations, strategies, and predictions with respect to future activities or other future events or conditions within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are usually identified by the use of words such as “believe,” “will,” “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “should,” “could,” or similar expressions. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Part I, Item 1A. “Risk Factors” and other sections of this report, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements, express or implied by these forward-looking statements.

 

Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and any amendments to this report. We will not update these statements unless the securities laws require us to do so. Accordingly, you should not rely on forward-looking statements because they are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements.

 


 

Overview.  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 was 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 shares of common stock are currently traded in the over-the-counter market and our stock price is reported on the OTC Bulletin Board under the symbol “LBAS.”

 

Unless otherwise stated, all references to “we,” “us,” “our,” the “company” and similar designations refer to Location Based Technologies, Inc.

 

Location Based Technologies®, PocketFinder® and PocketFinder Pets® are registered trademarks, and PocketFinder Network™, PocketFinder People™, PocketFinder Vehicle™, PocketFinder Luggage™, PocketFinder Mobile™, LBT-886™, “Powered by LBT”™ and VehicleFleetFinder™ are trademarks, of the company.  With respect to this report, we reserve all rights to the foregoing trademarks regardless of whether they carry the “®” or “™” designation.

 

Our Business.  The Company designs, develops, and sells Consumer and Commercial GPS tracking solutions based on the worldwide GSM network. Consumer products are primarily intended to be used by people who need to locate portable assets, vehicles, pets, and other people who are unable to use a cell phone to communicate their location (such as children, seniors or people with special needs).  Commercial products are marketed to businesses of all sizes and governmental organizations that need to track vehicles, mobile equipment, portable assets and workers.

 

Consumer products are sold under the PocketFinder brand and include: PocketFinder, PocketFinder Pet and PocketFinder Vehicle.  All PocketFinder products deliver information to users regarding device location, longitude, latitude, altitude, heading or direction, speed and 60 days of location history.  Users can also set alerts that will trigger an email, text or push notification to notify them when their device exceeds a pre-determined parameter such as speed, battery life or geo-fence.  

 

PocketFinder and PocketFinder Pet are small (roughly 2 inches in diameter), rugged and waterproof location devices that are ideal for tracking or locating any mobile asset, person, pet or valuable item at any time from almost anywhere. These devices use the Assisted Global Positioning System (“A-GPS”) network to acquire location data and transmit that data through the General Packet Radio Service (“GPRS”). The battery life of a PocketFinder and PocketFinder Pet will typically last between 2-29 days, depending upon environmental and usage factors.

 

 
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The PocketFinder Vehicle locator is intended to be hardwired to a battery powered asset such as a vehicle, watercraft or mobile generator. The device is rugged, spark-proof and water resistant and enables a user to locate and track a mobile asset at any time from almost anywhere using the A-GPS and GPRS technologies.

 

PocketFinder and PocketFinder Vehicle users can view all of the devices on their account by logging on via the web at www.pocketfinder.com or our PocketFinder App, which is native to the iPhone, iPad and Android phone.

   

Commercial products are sold under the LBT brand and include the LBT-886 (“886”) and the LBT Vehicle Tracker. The LBT-886 is a compact, rugged, long-lasting location device that enables a user to locate and track any person or mobile asset at any time from almost anywhere using A-GPS and GPRS technologies.  Battery life of the LBT-886 typically ranges from 21 days to 3 months depending upon environmental and usage factors. We have received FCC and IC approval for the LBT-886 and we recently received network approval from AT&T.

 

The LBT Vehicle Tracker has similar form-factor as the PocketFinder Vehicle device with the additional capability to accommodate a 3 to 7 wire harness. The wiring harness can increase the device’s functionality by adding capabilities such as temperature, light and humidity monitoring, engine on/off monitoring and engine kill capability or lone worker Emergency Alert features.  

 

Commercial customers can access their account by logging on through our LBT corporate website (www.locationbasedtech.com) which is optimized for web browsing, or through our App, which is native to the iPhone, iPad and Android phone.  The commercial user-interface features enhanced back end services that include additional reporting features and zone capabilities.

 

We generate revenue by selling our products and charging customers an ongoing service fee, for which we offer monthly and annual subscription plans.  Currently, PocketFinder customers in the US and Canada pay a monthly service fee of $12.95 per month with no contract, while commercial customers in the US and Canada typically pay $15.95 per month with no service contract.

 

All of our devices are made in the USA and come standard with an AT&T SIM card, which enables them to roam internationally on the AT&T network in the following countries:  Mexico, Argentina, Australia, Brazil, Caribbean, Chile, China, Colombia, India, Japan, New Zealand, Singapore, Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.  Roaming charges can be up to $29.95 per month.

 

Devices can also be manufactured with SIM cards provided by EE or Telefonica (through the Aeris platform).  Monthly service rates will vary from region to region depending on the fee charged by the local network carrier; however, in nearly all instances the monthly fees will be less than $29.95. We typically source SIM cards based on the carrier which can provide the best coverage at the most competitive price for a given region.

 

Research and Development.  Our goal is to always be a leader in the location based technologies market.  Our ongoing research and development is intended to either improve our existing products and services or create new products and services. 

 

In an ongoing effort to improve the user’s experience we are constantly upgrading our device software and our system’s back end. Our software development efforts are intended to result in additional features on our end user interface and increased device functionality through our back end.  The software updates for all of our products are delivered over the air, which allows every customer to receive the latest version of our firmware simply by charging their device.

 

Our current hardware development is primarily focused on enhancing the indoor tracking capability of a new 3G PocketFinder device, a miniaturized dual Iridium/GSM device and a personnel or Lone Worker tracking device with a panic button, all of which are in the final stages of building prototypes, testing and certification before market entry. Having a 3G consumer device will enable us to sell PocketFinder and PocketFinder Pet devices into territories that predominately operate on the 3G network, like Canada and Australia. New Wi-Fi capability will significantly improve indoor location accuracy and greatly reduce “false alert” reports that result from relying on GPS capability only. Additionally, we were recently informed that AT&T’s 2G network will be terminated at some point in the future, so having a 3G device will prepare us for the eventual transition. Both the lone worker and dual Iridium/GSM device are designed to exploit sales channels such as the US military, lone worker programs and large corporations with employees in dangerous areas. Our involvement in the airline cargo and container application has also resulted in the development of a fully “submersible” waterproof LBT-886 variant that will meet application requirements. These projects were also undertaken pursuant to customer requests.

 

In addition to creating new products, we will also work to customize products to better fit specific vertical market needs and requirements.  For example, we are currently working on a light, temperature and humidity sensor which can be attached to our LBT-886 device. This project was also undertaken pursuant to a customer request.

 

 
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We will continue to invest heavily in our research and development efforts for the foreseeable future.  

 

 

Consumer Sales Channels.  In the US, our PocketFinder family of products can be found at the following online locations: Amazon.com, Newegg.com, Walmart.com, Bestbuy.com/Future Shop (Canada), Crutchfield.com, our www.pocketfinder.com website and numerous affiliate marketing websites.  Additionally, our new PocketFinder 886 Vehicle device has received network certification and we intend to make the device available for purchase at AT&T’s retail and online stores this calendar year.

 

Internationally, our devices are being sold in Mexico, the United Kingdom (the, “UK”) other European Union countries, Colombia and Ecuador.  In the UK, we have partnered with EE (the largest mobile-to-mobile telecommunications company in the UK) to sell our PocketFinder devices in their flagship stores.  EE recently decided to expand the relationship and sell our PocketFinder and PocketFinder Pet devices on their online store. Recent reports show Europe at the forefront of the M2M revolution with revenues from M2M services expected to grow at a compound annual rate of 33% between 2011 and 2016 in a selection of European markets, including Germany, France, Poland, Russia, Sweden and the UK. These are the findings of new research from Frost & Sullivan, which predicts that the number of SIM connections will rise to 75 million in 2016, with the UK emerging as the biggest market and Germany a close second. The market-research company also reports that Europe’s mobile network operators are looking to expand their M2M portfolios to profit from applications rather than just connectivity.

 

In Asia, Apple has invited us to sell PocketFinder devices in their Singapore, China, Hong Kong, Australia and New Zealand stores and Online. We expect to begin sales in Singapore this coming fiscal quarter.

 

Commercial Sales Channels.   Our recent increase in commercial product sales are primarily attributable to increased marketing efforts and re-orders from existing customers. In October 2012, we received a purchase order from AT&T for our LBT-886 devices which was fulfilled in March and April of 2013. This initial order for devices is being used internally by AT&T to keep track of some of their emergency response mobile assets.  Our relationship with AT&T has the potential to significantly expand over the next 24 months as AT&T looks to place tracking units on more of its mobile assets. We believe that in calendar year 2014, AT&T may place a significant order for additional devices.

 

The Company recently entered into a relationship with a distributor in Australia that is primarily focused on commercial sales opportunities.  The distributor may distribute to the territories of Australia, New Zealand, Malaysia and the Philippines.

 

In February of 2013, the military concluded its testing of the LBT-886 and the device received final military approval.  We were negatively impacted by the sequester, however now that the sequester has ended, we believe the military intends to resume evaluating our products for a potential order in 2014.

 

We have also been working closely with the Department of Energy (the, “DOE”) on a project which would require us to integrate their advanced weather tracking system, called Verde, onto our GPS platform. The intent is to market and sell our products and a Verde-enhanced service to utility companies in US, Canada, Mexico and parts of Central America, particularly in areas that are impacted by natural disasters. The DOE has agreed to work with us in a joint sales and marketing effort to proliferate the Verde system (though our devices and service) to the country’s power, water, gas and phone companies. We anticipate that we could begin the marketing efforts in the first calendar quarter of 2014.

 

Our Personal Locator Services.  Our products are currently being sold through various brick-and-mortar and online retailers and through our website.  We provide customer service and support in the United States through existing, award winning call centers owned by Affinitas.  In the consumer market we are selling into multiple vertical market segments including the following:

 

 

Parents of young children (primarily 5 to 12 years of age) who do not own a cell phone;

 

 

Small, mid-sized, and enterprise class business owners;

 

 

First time family drivers or for added security in heavy snow states;

 

 

Elder care and special needs support and applications such as Autism, Down Syndrome, Dementia, and Alzheimer’s;

 

 

Pet care and location capability; and

 

 

Asset tracking and location capability: cars, trucks, snowmobiles, fleet management, luggage, boats, RVs, and other high-valued assets.

 

Our Intellectual Property Investment.  We continue to invest in intellectual property that consists of apparatus patents and applications and system and method patents and applications.  We have filed claims that cover many aspects of the PocketFinder, its operating system and user interface.  Our intellectual property portfolio includes 35 issued US patents, 10 pending US patents, 7 pending foreign patents, 6 PCT filings, 16 registered trademarks and 4 Madrid protocol trademark cases. 

    

 
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We own the Internet domain name www.pocketfinder.com and www.locationbasedtech.com as well as the names of numerous other related domains 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 along with its proprietary “friendly user interface” software system.  We deliver rugged, compact products with near real time location-based information over its proprietary server architecture.  Our products optimize the way businesses utilize mobile assets, save money and connect with key personnel; similarly, families utilizing our products in our ever increasingly mobile society are now able to easily stay connected with one another while on the go and from wherever they are.  We have the ability to add our customer’s existing location devices onto our superior location platform in order to simplify the customers need to manage all location-based devices and assets through one easy tool.

   

Our marketing initiatives will 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 derived from the following sources:

 

 

Potential licensing fees;

 

 

Organizations that will self-brand LBT’s services for specialized niche markets (“white label”);

 

 

Asset and personal locator device sales to commercial customers and through retailers;

 

 

Personal locator device sales through affinity groups and through our website;

 

 

Consumer and commercial tracking device accessory sales; and

 

 

Monthly recurring service fees.

 

Our Growth Strategy.  Our objective is to become a premier provider of personal and asset location services in the Location Based Services consumer and commercial markets.  We intend to gain market share in the consumer segment by partnering with large retail partners like Apple, EE and AT&T, and allowing them to sell our devices through their retail channels around the world.  We will continue our own retail efforts, but we believe we will reach the largest consumer audience by leveraging the size, financial strength, infrastructure and brand recognition of our elite partners.

 

We subdivide the commercial market into three categories: small/midsize businesses, enterprise businesses and governmental organizations including the US military.  We will attempt to gain market share in the small/midsize business segment through telesales efforts and through upselling our existing PocketFinder customers.  The enterprise businesses and military segments are far more difficult to penetrate because they tend to require long sales cycles and rigorous testing but, once approved, tend to be long-term partners.  To date, most of the large companies and organizations we are working with have approached us. We expect that as we continue to gain traction with large, reputable institutions, their peers will continue to seek us out.

 

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.

  

 
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Our competitors include, but are not limited to: Geospatial Platform Providers, Application Developers, Garmin’s GTU-10, Tagg, Amber Alert, Spark Nano, LiveView GPS, eZoom, iTrack, 5 Star, Meitrack, iTrack GPS Locator, Lo-Jack, SpotLight, and commercial providers such as Fleetmatics, NetworkFleet, and Qualcomm.  Some competitors may be better financed, have superior technology 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 $100 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 are NOM and NYCE certified and ready to begin sales in Mexico.  We do not believe that we are subject to any environmental laws and regulations of the United States and the states in which we operate.     

 

Employees and Outsourced Assistance.  We have 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, Mr. Gregory Gaines, our Chief Marketing and Sales Officer, Mr. Gregory Harrison, our General Counsel, and Dave Morse, Jr., as VP of Customer Service, currently work full time for the Company.  Our CFO, Mr. Glenn Davidson, is currently serving part-time.  Since its inception, LBT has used an extended workforce concept which includes outsourcing partners and vendors, and using a contingent workforce (consultants, part-time /interim executives and temporary workers) and strategic partners to stay competitive in the marketplace. We do not see this as a trend. We will continue to use this model for the foreseeable future.

 

Our Website.  Our corporate websites, www.locationbasedtech.com and www.pocketfinder.com, provide a description of our corporate business along with our contact information including address, telephone number and e-mail address or product information and sales, respectively.  Our PocketFinder website also provides prospective consumer customers with relevant information about our products, pricing and payment options, pre-ordering capability, frequently asked questions.  See www.locationbasedtech.com to access Business Solutions and our corporate investor relations information.  Information contained on our websites is not a part of this report.  

 

RESULTS OF OPERATIONS

 

For the quarter ended November 30, 2013 compared to the quarter ended November 30, 2012.

 

Revenue.  For the quarter ended November 30, 2013, we generated $408,804 of net revenue compared to $208,555 of net revenue for the quarter ended November 30, 2012.  Net revenue for the quarter ended November 30, 2013, consisted of $243,391 from the sales of PocketFinder devices compared to $127,856 for the quarter ended November 30, 2012 and $165,413 from monthly subscription service income compared to $80,699 for the quarter ended November 30, 2012. The 96% increase in total revenue is the result of more devices being sold.

 

Cost of Revenue.  For the quarter ended November 30, 2013, cost of revenue totaled $381,807 resulting in a gross margin of $26,997 compared to cost of revenue totaling $309,040 resulting in a negative gross margin of $100,485 for the quarter ended November 30, 2012.  The Company realized an improvement in the gross margin as there were no write-downs of inventory during the current quarter.

  

Operating Expenses.  For the quarter ended November 30, 2013, our total operating expenses were $1,507,354 compared to total operating expenses of $1,910,485 for the quarter ended November 30, 2012.  Operating expenses decreased by $403,131 or 21% in 2013 from 2012.  The decrease in operating expenses is primarily attributed to the following fluctuations:

 

 

A $121,274 increase in general and administrative expenses to $728,634 for the quarter ended November 30, 2013, compared to $607,360 for the quarter ended November 30, 2012.  The increase in general and administrative expenses in 2013 compared to 2012 is primarily due to an increase in advertising and marketing fees to market our products;

 

 

A $17,017 increase in officer compensation to $246,687 for the quarter ended November 30, 2013, compared to $229,670 for the quarter ended November 30, 2012 due to the reclassification of an employee to an officer for a portion of the year;

  

 
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Professional fees were reduced by $30,435 to $374,493 for quarter ended November 30, 2013 compared to $404,928 for quarter ended November 30, 2012. This was primarily due to a reduction in warrants being issued in connection with professional fees in 2013 than in 2012;

 

 

An $47,394 increase in research and development costs to $89,758 for the quarter ended November 30, 2013 compared to $42,364 for the quarter ended November 30, 2012 due to additional research and development invested to meet new customer requests;

 

 

A $102,141 decrease in salaries and wages to $48,579 for the quarter ended November 30, 2013, compared to $150,720 for the quarter ended November 30, 2012. A portion of the reduction was due to the reduction of two employees in 2013 and the remainder was due to a reclassification of an employee to an officer; and

 

 

The recognition of an asset impairment on certain patents totaling $455,916 during the three months ended November 30, 2012; whereby, there was no such impairment recognized during the three months ended November 30, 2013.

 

Other Income/Expenses.  For the quarter ended November 30, 2013, we reported net other income totaling $435,567 which consisted of financing costs, amortization of beneficial conversion feature, deferred financing costs and debt discount, gain on debt settlement, interest expense and gain on asset disposal compared to net other expenses totaling $1,413,734 for the quarter ended November 30, 2012.  The $1,849,301 decrease in net other expenses is primarily due to the following:

 

 

A $67,880 increase in financing costs to $148,880 for the quarter ended November 30, 2013, compared to $81,000 for the quarter ended November 30, 2012 due to extending the guarantor agreement that resulted in $65,000 of common stock being issued in connection with the guarantor extension;

 

 

A $28,586 decrease in the amortization of beneficial conversion features on notes payable to $32,647 for the quarter ended November 30, 2013, compared to $61,233 for the quarter ended November 30, 2012 as there were several convertible notes from 2012 that contained beneficial conversion features which fully amortized prior to 2013;

 

 

A $64,139 decrease in the amortization of deferred financing costs to $17,827 for the quarter ended November 30, 2013, compared to $81,966 for the quarter ended November 30, 2012 as there was were fewer notes payable issued with common stock resulting in reduced deferred financing costs in 2013 than in 2012;

 

 

A $98,906 increase in the amortization of debt discounts associated with the issuance of warrants on convertible notes payable to $98,906 for the quarter ended November 30, 2013. There were no such warrant issuances during the quarter ended November 30, 2012;

 

 

A $1,144,647 loss on the fair value of derivative liabilities was recognized during the three months ended November 30, 2012; whereby, there was no such loss for the three months ended November 30, 2013 as the JMJ debt was settled during the current quarter;

 

 

The recognition of a $886,548 gain in connection with the JMJ debt settlement was recognized during the three months ended November 30, 2013; whereby, there no such debt settlement during the three months ended November 30, 2012; and

 

 

A $108,418 increase in interest expense to $153,290 for the quarter ended November 30, 2013, compared to $44,872 for the quarter ended November 30, 2012 as there was approximately $7.9 million in notes payable at November 30, 2013 as compared to $3.5 million in notes payable at November 30, 2012.

 

Net Loss.  For the quarter ended November 30, 2013, we reported a net loss of $1,045,590 compared to a net loss of $3,425,504 for the quarter ended November 30, 2012, due to fluctuations in operating and other expenses as previously discussed.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We had cash and cash equivalents of $97,211 as of November 30, 2013, compared to $680,914 as of August 31, 2013.  

 

As of November 30, 2013, current assets totaled $1,107,583 compared to $1,620,771 as of August 31, 2013 and consisted of cash, accounts receivable, inventory, deferred financing costs, prepaid expenses and other assets. The decrease at November 30, 2013, from August 31, 2013 is primarily due to a decrease in cash.

 

As of November 30, 2013, current liabilities totaled $5,145,676 compared to $8,410,439 as of August 31, 2013 and consisted of accounts payable and accrued expenses, deferred compensation, line of credit, convertible notes payable, accrued interest and derivative liabilities. The decrease at November 30, 2013, is due to the conversion of the $1,000,000 line of credit into a non-current term loan, the elimination of the derivative liability associated with the JMJ debt settlement and the reclassification of a $1,000,000 convertible note payable as long-term.

  

 
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As at November 30, 2013, the Company had a working capital deficit of $4,038,093 compared with a working capital deficit of $6,789,668 as of August 31, 2013.  

 

Cash Flows from Operating Activities. During the quarter ended November 30, 2013, the Company used $1,444,413 of cash used for operating activities compared with $720,119 for the quarter ended November 30, 2012.  The increase in the cash used for operating activities was primarily attributed to the $886,000 adjustment for the gain on debt settlement to reconcile the net loss to net cash used in operating activities during the quarter ended November 30, 2013.

 

Cash Flows From Investing Activities. During the quarter ended November 30, 2013, the Company used $10,465 of cash for investing compared with $120,000 for the quarter ended November 30, 2012.  The decrease in the cash used for investing operating activities was attributed to fewer capital expenditures during the quarter ended November 30, 2013 compared to the quarter ended November 30, 2012. 

 

Cash Flows from Financing Activities. During the quarter ended November 30, 2013, the Company received $900,000 in cash from financing activities related to the issuance of convertible promissory notes. During the quarter ended November 30, 2012, the Company received $600,000 from the issuance of promissory notes. Current convertible notes payable totaling $4,504,737 are unsecured, bear interest at 5%-10% per annum, and are to be repaid out of future operating cash flow. Long-term convertible promissory notes totaling $2,800,000 are secured, bear interest at 10% per annum with due dates ranging from September 30, 2015 to November 6, 2015 and are to be repaid out of future operating cash flow.

 

Going Concern. We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive acquisitions and activities.  For these reasons, our auditors stated in their report on our audited financial statements that they have substantial doubt that we will be able to continue as a going concern without further financing.

 

CASH REQUIREMENTS

 

We are a wireless technology company focused on the marketing and sales of the PocketFinder family of products for retail and commercial distribution.  Since our inception, we have generated significant losses.  As of November 30, 2013, we had an accumulated deficit of $57,110,055 and we expect to incur continual losses until sometime in calendar year 2014. 

 

As of November 30, 2013, we had $97,211 in cash and cash-equivalents.  Over the next several quarters we expect to invest a significant amount to develop our sales and marketing programs associated with the commercialization and branding of the PocketFinder family of products.  We also expect to fund any necessary general overhead requirements.

  

We expect to have to obtain additional financing in the coming months for overhead costs, general and administrative expenses and for related purposes such as packaging, shipping, and direct sales and marketing costs.  Our 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 further the commercialization of the PocketFinder family of products;

 

  

The costs of outsourced manufacturing;

 

  

The costs of commercialization activities, including product marketing, sales and distribution, and customer service and support;

 

  

Our revenues, if any, from successful commercialization of the PocketFinder devices and the PocketFinder Network platform services; and

 

  

Other general and administrative expenses associated with running the day to day operations of our Company.

 

Product Research and Development

 

We plan to continue to develop new product enhancements to our existing product on the market including PocketFinder People and PocketFinder Vehicles.  New 3G devices will meet the requirements of pending GSM network changes in multiple countries, including the US, and the dual GSM/Iridium device will open new government and commercial shipping markets.

 

 
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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 are based on a strategic outsourcing model, thereby negating the need for significant amounts of plant and equipment, or significant numbers of employees.  We currently have eight employees and do not anticipate hiring any significant number of additional employees during the next 12 months.

  

Off-Balance Sheet Arrangements

 

As of November 30, 2013, we had no off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures   

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our management carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act").  Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of November 30, 2013, due to the material weaknesses resulting from a lack of segregation of duties in our accounting department.

 

Changes in Internal Control Over Financial Reporting

 

In December 2013, our part-time CFO, Kenneth Fronk, resigned to pursue a full-time opportunity and was replaced by our current part-time CFO, Glenn Davidson. Other than the change in our CFO, there were no changes in internal controls over financial reporting that occurred during the three months ended November 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

On December 12, 2013 the Company and JMJ executed a comprehensive Release and Settlement and Agreement (the, “Settlement”) which pertains to all claims and counter-claims previously filed by both Parties. The Settlement will require the company to repay $1,096,200 of principal and interest on the outstanding notes. The terms of the Settlement are confidential.

 

Previously, on December 6, 2012, the Company had filed a lawsuit against Justin Keener d/b/a JMJ Financial (“JMJ”) relating to a promissory note entered into between the Company and JMJ on March 16, 2012. The Company sought a declaratory judgment that the note – including all principal and interest purportedly owed thereunder – violates applicable usury laws and thus is unenforceable.  The Company also sought damages for alleged violations of Florida Statute 517.301.  Thereafter on December 6, 2012, JMJ had filed a Complaint against the Company alleging breach of contract for two promissory notes entered into between JMJ and the Company, the first on March 16, 2012 and the second on May 1, 2012.

 

ITEM 1.A.  RISK FACTORS

 

Not applicable.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Common Stock Issuances for Services Provided

 

On December 5, 2013, the Company issued 1,759,375 shares of common stock to consultants in exchange for various advisory services valued at $143,670 on the award date.

 

Common Stock Issuances for Debt Extension

 

On January 2, 2014, the Company issued 4,000,000 shares of common stock in connection with a debt extension valued at $240,000 on the award date.

 

Warrant issuance for Note Payable Issuances

 

On September 19, 2013, the Company awarded “Series BB” warrants to a related party note holder to purchase 1,200,000 common shares at $0.20 per share in connection with debt issuances and expires on August 29, 2016.

 

On November 6, 2013, the Company awarded “Series CC” warrants to a related party note holder to purchase 600,000 common shares at $0.20 per share in connection with debt issuances and expires on November 6, 2016.

 

On December 20, 2013, the Company awarded “Series DD” warrants to a related party note holder to purchase 200,000 common shares at $0.15 per share in connection with a debt issuance and expires on December 20, 2016.

 

Exemption From Registration. The shares of Common Stock and Warrants referenced in Part II, Item 2 above were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933, as amended, (“Securities Act”), and/or Regulation D, as promulgated by the U.S. Securities and Exchange Commission under the Securities Act, based upon the following: (a) each of the persons to whom the shares of Common Stock and Warrants were issued (each such person, an “Investor”) confirmed to the Company that it or he is an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and has such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities, (b) there was no public offering or general solicitation with respect to the offering of such shares, (c) each Investor was provided with certain disclosure materials and all other information requested with respect to the Company, (d) each Investor acknowledged that all securities being purchased were being purchased for investment intent and were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act and (e) a legend has been, or will be, placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 
38

 

 

ITEM 5.  OTHER INFORMATION

 

None. 

 

ITEM 6.  EXHIBITS

 

Exhibit

No.*

Document Description

 

3.1

 

Articles of Incorporation of Springbank Resources, Inc. (now known as Location Based Technologies, Inc.) (incorporated by reference from Exhibit 3.1 to the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-139395) filed December 15, 2006).

3.1A

Amended Articles of Incorporation, dated October 20, 2008 (incorporated by reference from Exhibit 3.1A to the Registrant’s Form 10-KSB filed December 12, 2008).

3.2

Amended and Restated By-Laws of Location Based Technologies, Inc. (incorporated by reference from the Registrant’s Current Report on Form 8-K filed January 4, 2008).

 

10.52

Form of “CC” Warrant Agreement. †

10.53

Secured Convertible Promissory Note Amendment 2 between the Company and Bridge Loans, LLC dated December 10, 2013. †

10.54

Secured Convertible Promissory Note between the Company and Greggory Haugen dated December 20, 2013. †

10.55

Secured Convertible Promissory Note between the Company and Charles Smith dated December 20, 2013. †

10.56

Form of “DD” Warrant Agreement. †

 

21.1

Subsidiary of the Registrant †

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

 

101.INS   XBRL Instance Document **

101.SCH  XBRL Taxonomy Extension Schema Document **

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document **

101.DEF  XBRL Taxonomy Extension Definition Linkbase Document **

101.LAB XBRL Taxonomy Extension Label Linkbase Document **

101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document **

     


     

*

Management contract or compensatory plan

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections

Filed herewith

  

 
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SIGNATURES

 

  

 

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

 

 

 

  

LOCATION BASED TECHNOLOGIES, INC.

  

  

  

  

  

Dated:  January 14, 2014

By:

/s/ David M. Morse

  

  

  

David M. Morse

  

  

  

Co- President and Chief Executive Officer

  

 

 

 

Dated:  January 14, 2014

By:

/s/ Glenn Davidson

  

  

  

Glenn Davidson

  

  

  

Chief Financial Officer

  

 

 

40