UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K  

 

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the fiscal year ended August 31, 2014

 

☐     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 or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

49 Discovery, Ste. 260, Irvine, California 92618

(Address of principal executive offices)

 

888-600-1044

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Act:
Title of each class:	Name of each exchange on which registered:
None	None
Securities registered under Section 12(g) of the Act:
None

 

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  

☐Yes   ☒ No

 

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ☐Yes   ☒ No

 

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 S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

  

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

 

The aggregate market value of the voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold on the OTC Bulletin Board as of the last business day of the registrant’s most recently completed second fiscal quarter (February 28, 2014) was $16,557,061.  This value is estimated solely for purposes of this cover page.

 

As of November 26, 2014, there were 255,112,822 shares of registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

 

		PAGE
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
Item 4.	Mine Safety Disclosures	13
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 8.	Financial Statements and Supplementary Data	21
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
Item 9A.	Controls and Procedures	53
Item 9B.	Other Information	54
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	55
Item 11.	Executive Compensation	58
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60
Item 13.	Certain Relationships and Related Transactions, and Director Independence	61
Item 14.	Principal Accounting Fees and Services	62
PART IV
Item 15.	Exhibits, Financial Statement Schedules	63
SIGNATURES		64

 

  

PART I

 

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. 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 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. 

---

 

ITEM 1. BUSINESS

 

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 is doing business in one of the fastest growing and dynamic industries that exists today - the Internet-of-Things (“IoT”). The Internet has changed so many aspects of our lives and the marriage of GPS location devices with Internet and mobile Internet access for easy to use data display is bringing exciting new capabilities to businesses and families. LBT designs, develops, and sells commercial and consumer wearable GPS tracking solutions that enhance the way people and things stay connected within our highly mobile society. LBT’s products and services provide data intended to enhance safety, security, connectivity, operational savings, and coordination of mobile assets and enhanced managerial or parental decisions. Our devices operate on the worldwide GSM network and therefore work around most of the wireless world. Consumer products are primarily intended to be used to track any portable asset (powered or unpowered), vehicles, pets, and people. Unlike a cell phone, the GPS functionality, or the phone, cannot be turned off. Commercial products are marketed to businesses of all sizes and governmental organizations that need to track vehicles, mobile equipment, portable assets and workers. In late calendar year 2014 select businesses will be able to add advanced storm and weather tracking capability integrated from the Department of Energy’s VERDE system.

 

Consumer products are sold under the PocketFinder brand and include: PocketFinder, PocketFinder Luggage, PocketFinder Pet and PocketFinder Vehicle. All PocketFinder products display user information 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 entry/exit of a geo-zone.

 

 

PocketFinder and PocketFinder Personal/Pet or luggage devices are small (roughly 2 inches in diameter), rugged and waterproof devices that are ideal for tracking or locating any mobile asset (person, pet or valuable item) at any time from almost anywhere outdoors. These devices use the Assisted Global Positioning System (“A-GPS”) network to acquire location data and transmit that data through the global GSM wireless network.

 

The PocketFinder Vehicle tracker is intended to be hardwired to any powered asset (vehicle, watercraft or mobile generator). The device is rugged, spark-proof and water resistant and enables the user to locate and track a mobile asset at any time from almost anywhere outdoors.

 

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.

 

LBT’s IoT Commercial products are streamlining and lowering the cost of business processes and logistics, increasing worker safety, security and management oversight. Devices sold under the LBT brand 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 people or any mobile asset at any time from almost anywhere with GSM wireless coverage. Battery life of the LBT-886 typically ranges from 21 days to 3 months, depending upon environmental and usage factors.

 

The LBT GPS Vehicle Tracker provides all tracking features and offers additional capabilities. Its 7 wire harness can increase the device’s functionality by adding capabilities such as temperature, light and humidity monitoring, engine on/off monitoring and “starter interrupt” engine capability or lone worker Emergency Alert features.

 

Commercial customers can access their account by logging in 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 through product sales and monthly subscription service fees. Currently, PocketFinder consumers 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.

 

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 and on their roaming partners’ networks. Roaming charges can be up to $29.95 per month.

 

Devices can also be supplied 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 and a miniaturized dual Iridium/GSM device both of which are close to the final stages of building prototypes, testing and certification before market entry. Having a 3G consumer device will enable us to sell PocketFinder Personal Locator 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. This will be particularly beneficial to the child and pet markets.

 

We will continue to invest 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, Walmart.com, Bestbuy.com/Future Shop (Canada), Crutchfield.com, our www.pocketfinder.com website and numerous affiliate marketing websites. LBT has recently entered into an agreement with a global distributor in the US that will significantly expand our retail footprint. The company expects this expansion to increase its US retail sales revenues by approximately $1,400,000 by June, 2015.

 

 

A new and innovative Auto Dealership Program is ready for market entry with at least three dealerships piloting our vehicle tracking device and EUI at the end of November, 2014. Device revenues and service fees are expected to be at or near $1,700,000 as this program continues to expand through June 2015.

 

Internationally, our devices are being sold and marketed in Mexico, United Kingdom (“UK”), other European Union countries, Colombia and Ecuador. The Company has recently entered an agreement with a leading distributor in Mexico with plans to generate device and service revenues in the $1,100,000 range by June, 2015. In the UK, LBT has partnered with EE (the largest mobile-to-mobile telecommunications company in the UK). Recent reports show Europe at the forefront of M2M (“Machine-to-Machine”) or the adoption of “Internet-of-things” applications with revenues from M2M services market wide expected to grow at a compounded annual rate of 33% through 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 increase to 75 million in 2016, with the UK emerging as the biggest market and Germany a close second. LBT is currently negotiating with an interested European distributor, but has not yet signed an agreement.

 

 Commercial Sales Channels.  Our relationship with AT&T has the potential to continue to grow over the coming year. Related to the utility market, we signed an exclusive contract with the Department of Energy (the, “DOE”) for a project that has allowed us to integrate an Oak Ridge National Laboratory technology that provides real-time status of the electric grid and critical energy sectors along with real-time severe weather condition tracking. The system, called VERDE (Visualizing Energy Resources Dynamically on the Earth), enables decision-makers to respond swiftly to major power disruptions and other utility interruptions. VERDE, which combines the display capabilities of Google Earth with analysis and modeling components, significantly enhances situational awareness and speeds recovery times from power outages. We have completed integration of the system and will soon begin sales of the feature to public utilities (power, water and telecom) through a reseller partner in Tennessee. The Company will evaluate expansion of this new capability for “fit” to specific commercial and other first responder agencies throughout the United States.

 

LBT expects to jointly initiate first-phase launch of commercial business in Australia with Pacific-Asia partner, Finda, through the Australian Warranty Network service provider. Finda is gaining acceptance of LBT devices in multiple applications for both Consumer and Commercial customers in Australia and New Zealand.

 

Our Intellectual Property Investment.  LBT retained the well-established Washington D.C. firm of Hunton & Williams to assist in the generation of additional revenues through licensing our intellectual property and potential sale of LBT’s patents. 

 

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 our devices, its operating system and user interface. Our intellectual property portfolio includes 38 issued US patents, 3 pending US patents, 2 issued foreign patents, 3 pending foreign patents, 6 PCT filings, 16 registered trademarks and 4 Madrid protocol trademark cases.

 

We own the Internet domain name www.pocketfinder.com and www.locationbasedtech.com as well as the names of 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 our 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.

   

Our 2015 marketing initiatives will include:

 

●

Expanding our retail outreach through industry leading distributors in the US, Canada, Mexico and Europe;

 

●

Partnering with US based new and used car dealers through our innovative Auto Dealer Program; and,

 

●

Bringing a new 3G wearable device to market with enhanced Wi-Fi capability to deliver higher reliability location information for the people and pet markets.

  

Our Revenue Sources.  We expect our revenues to be derived from the following sources:

 

●

Software licensing fees;

 

●

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

 

 

●

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

 

●

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

 

●

Monthly subscription 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 subdivide the commercial market into three categories: small/midsize businesses, (including the strategic utility company market), enterprise businesses and governmental organizations (including the US military). We will attempt to gain market share in the small/midsize business segment through channel sales efforts. 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 good 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. The exclusive contract integrating DOE’s VERDE feed positions us with a significant differentiator in the utility market throughout the US and Canada.

 

Our Competition.  Even though there has been tremendous growth in tracking Apps for mobile phones, personal location (wearables) and property tracking devices are beginning to significantly penetrate the marketplace. In fact, growth for asset tracking solutions is projected to be very strong over the next five years.

 

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. Morse, our President and Chief Executive Officer, Dan Hogan, our VP of Marketing, and Dave Morse, Jr., as VP of Customer Service, currently work full time for the Company. Ms. Tina Florance, Controller, and Mr. Gregory Andrews, CFO, are contracted with the Company. Mr. Scalisi, our Chief Development Officer, has recently been sharing his time with other ventures that may continue over the coming year. Ms. Mejia, our Chief Operating Officer, continues to devote her time and attention to the business and affairs of the Company and to faithfully and efficiently perform all responsibilities and duties commensurate with her position as COO and continues to serve as a director of the Company without additional compensation. Ms. Mejia also serves as the CEO and director of another privately held corporation. LBT’s Board has determined that her obligations to the outside organization do not conflict with her duties or responsibilities at LBT. The Board further determined that the outside business is not competitive with LBT, nor is it a corporate opportunity that LBT intends to pursue. 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 with an eye to reduce corporate overhead and expenses.

 

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.   

 

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock is highly speculative and involves a high degree of risk.  Any potential investor should carefully consider the risks and uncertainties described below before purchasing any shares of our common stock.  The risks described below are those we currently believe may materially affect us.  If any of them occur, our business, financial condition, operating results or cash flows could be materially and adversely affected.  As a result, the trading price for our stock could decline, and you might lose all or part of your investment.

 

Risks Related to Our Business

 

We have had operating losses since formation and expect to incur net losses for the near term.

 

We reported a net loss of $5,147,444 for the fiscal year ended August 31, 2014, and a net loss of $11,049,350 for the fiscal year ended August 31, 2013.  We anticipate that we will lose money in the near term and we may not be able to achieve profitable operations.  We cannot be certain that our business will be successful or that we will generate significant revenues and become profitable.

 

We may not be successful in developing our new products and services.

 

We are a technology and telecommunications company whose purpose is to develop market and provide new wireless communications products and systems which combine the features of GPS with pocket pagers with cellular telephones.  The market for telecommunications products and services is characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards.  These market characteristics are exacerbated by the emerging nature of this market and the fact that many companies are expected to introduce continually new and innovative products and services.  Our success will depend partially on our ability to introduce new products, services and technologies continually and on a timely basis and to continue to improve the performance, features and reliability of our products and services in response to both evolving demands of prospective customers and competitive products.

  

There can be no assurance that any of our new or proposed products or services will maintain the market acceptance already established.  Our failure to design, develop, test, market and introduce new and enhanced products, technologies and services successfully so as to achieve market acceptance could have a material adverse effect upon our business, operating results and financial condition.

 

There can be no assurance that we will not experience difficulties that could delay or prevent the successful development, introduction or marketing of new or enhanced products and services, or that our new products and services will adequately satisfy the requirements of prospective customers and achieve significant acceptance by those customers.  Because of certain market characteristics, including technological change, changing customer needs, frequent new product and service introductions and evolving industry standards, the continued introduction of new products and services is critical.  Delays in the introduction of new products and services may result in customer dissatisfaction and may delay or cause a loss of revenue.  There can be no assurance that we will be successful in developing new products or services or improving existing products and services that respond to technological changes or evolving industry standards.

 

In addition, new or enhanced products and services introduced by us may contain undetected errors that require significant design modifications.  This could result in a loss of customer confidence which could adversely affect the use of our products, which in turn could have a material adverse effect upon our business, results of operations or financial condition.  If we are unable to develop and introduce new or improved products or services in a timely manner in response to changing market conditions or customer requirements, our business, operating results and financial condition will be materially and adversely affected.

 

We have no experience or history of earnings.

 

We are dependent on our ability to market and sell our products and services for future earnings.  Thus far, we have been unable to sell enough devices and services to generate positive earnings.  We continue to be reliant on debt and equity financing to run our business. The continued development of our products and services, as well as the operation of our business, involves significant risks, which a combination of experience, knowledge and careful evaluation may not be able to overcome.  There can be no assurance that unanticipated problems will not occur which would result in material delays in our sales, marketing and product development or that our efforts in these areas will result in successful commercialization.  

 

An investment in our common stock is highly speculative and no assurance can be given that the stockholders will realize any return on their investment or that they will not lose their entire investment.

 

 

Our future financial results are uncertain and we can expect fluctuations in revenue.

 

We rely heavily on distributors, retail organizations, affinity groups and telecommunications carriers to sell our products.  If any of these relationships change or are disrupted, we could lose a significant portion of our revenues and/or anticipated revenues.

 

Our results of operations may vary from period to period because of a variety of factors, including our R&D costs, sales and marketing costs, the cost of engineering and certifying new products, the cost of improving our current services and building new services,  cost increases resulting from third-party service providers, cost increases from  product manufacturers or component suppliers, production interruptions, the availability of industry service providers, changes in marketing and sales expenditures, acceptance of our websites, competitive pricing pressures, the consumer interest in or products and general economic and industry conditions that affect customer demand and preferences.

 

As with any relatively new business enterprise operating in a specialized and intensely competitive market, we are subject to many business risks which include, but are not limited to, unforeseen marketing, promotional and development expenses, unforeseen negative publicity, competition, product liability and lack of operating experience.  Many of the risks may be unforeseeable or beyond our control.  There can be no assurance that we will successfully implement our business plan in a timely or effective manner, or generate sufficient interest in the PocketFinder products or services, or that we will be able to market and sell enough products and services to generate sufficient revenues to continue as a going concern.

 

There are risks of international sales and operations.

 

We are generating revenue from the sale of our products and services to customers located outside the United States.  As such, a portion of our sales and operations could be subject to tariffs and other import-export barriers, currency exchange risks and exchange controls, foreign product standards, potentially adverse tax consequences and the possibility of difficulty in accounts receivable collection. We may also incur difficulty in collecting payment from some international clients. There can be no assurance that any of these factors will not have a material effect on our business, financial condition and results of operations.

  

Although we will monitor our exposure to currency fluctuations, there can be no assurance that exchange rate fluctuations will not have an adverse effect on our results of operations or financial condition.  In the future, we could be required to sell our products and services in other currencies, which would make the management of currency fluctuations more difficult and expose our business to greater risks in this regard.

 

Our products may be subject to numerous foreign government standards and regulations that are continually being amended.  Although we will endeavor to satisfy foreign technical and regulatory standards, there can be no assurance that we will be able to comply with foreign government standards and regulations, or changes thereto, or that it will be cost effective for us to redesign our products to comply with such standards or regulations.  Our inability to design or redesign products to comply with foreign standards could have a material adverse effect on our business, financial condition and results of operations.

 

In addition to the uncertainty as to our ability to generate revenues from foreign operations, there are certain risks inherent in doing business internationally, such as unexpected changes in regulatory requirements, export restrictions, trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, software piracy or difficulty in enforcing intellectual property rights, seasonal reductions in business activity in certain other parts of the world and potentially adverse tax consequences, which could adversely impact the success of our international operations.  There can be no assurance that one or more of such factors will not have a material adverse effect on our potential future international operations and, consequently, on our business, operating results and financial condition.

  

Because of the global nature of the telecommunications business, it is possible that, although transmissions by us originate primarily in the State of California, the governments of other states and foreign countries might attempt to regulate our transmissions or prosecute us for violations of their laws.  There can be no assurance that violations of local laws will not be alleged or changed by state or foreign governments, that we might not unintentionally violate such laws, or that such laws will not be modified, or new laws enacted, in the future.  Any of the foregoing developments could have a material adverse effect on our business, results of operations and financial condition.

 

We may have substantial future cash requirements but no assured financing source to meet such requirements.

 

In the audit report on our financial statements for our fiscal years ended August 31, 2014 and 2013 our auditors stated that our recurring losses and working capital deficit raise substantial doubt about our ability to continue as a going concern.  We will continue to require a substantial amount of funds for working capital for general and administrative purposes, as well as research and development.  Our future capital requirements will depend on many factors, including continued progress in our research and development programs, the magnitude of these programs, the time and costs involved in obtaining any required regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents, successful completion of technological, manufacturing and market requirements, changes in existing research relationships, establishing collaborative arrangements, defending potential lawsuits, sales and marketing initiatives, ongoing legal work required to remain compliant with our state and federal filing requirements, and the cost of finalizing licensing agreements to produce licensing revenues.

 

 

We believe additional financing will be available when needed to finance all of our working capital needs, but we cannot be assured the terms will be favorable to us or our stockholders – particularly in light of current economic conditions and the availability of credit and other sources of capital.  We may raise any necessary funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements.  To the extent we raise additional capital by issuing equity securities, our stockholders will experience dilution.  If we raise funds through debt financings, we may become subject to restrictive covenants.  To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to relinquish some rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us.

 

If adequate funds are not available, we may be required to delay, scale-back or eliminate our research and development programs or obtain funds through collaborative partners or others that may require us to relinquish rights to certain of our potential products that we would not otherwise relinquish. There can be no assurance that additional financing will be available on acceptable terms or at all, if and when required. 

  

We depend on key management for the success of our business.

 

Our success is largely dependent on the skills, experience and efforts of our senior management team and other key personnel.  In particular, our success depends on the continued efforts of our Chief Executive Officer, David Morse, our Chief Operating Officer, Desiree Mejia and our Chief Technology Officer, Joseph Scalisi, as well as other key employees.  The loss of the services of any of these key employees could materially harm our business, financial condition, future results and cash flow.  We do not maintain “key person” life insurance policies on any of our officers or employees. Although to date we have been successful in retaining the services of senior management and have entered into employment agreements with them, members of our senior management may terminate their employment agreements without cause and with various notice periods.  We may also not be able to locate or employ on acceptable terms qualified replacements for our senior management or key employees if their services were no longer available.

 

Loss of the services of a few key employees could harm our operations.

 

We depend on key employees and sales personnel.  The loss of certain personnel could diminish our ability to develop products and services and maintain relationships with customers and potential customers.  The loss of certain technical personnel could harm our ability to meet development and implementation schedules.  The loss of key sales personnel could have a negative effect on sales to certain current customers.  Although most of our significant employees are bound by confidentiality and non-competition agreements, the enforceability of such agreements cannot be assured.  Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel.  If we fail to attract or retain highly qualified technical and managerial personnel in the future, our business could be disrupted.

 

Our awards of stock options to employees may not have their intended effect.

 

A portion of our total compensation program for our executive officers and key personnel has historically included the award of options to buy our common stock or the common stock of our subsidiaries.  If the price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract critical personnel.  In addition, any changes made to our stock option policies, or to any other of our compensation practices, which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and motivate existing personnel and recruit new personnel.

 

Compliance with changing regulation of corporate governance, public disclosure and financial accounting standards may result in additional expenses and affect our reported results of operations.

 

Keeping informed of, and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and accounting standards, including the Sarbanes-Oxley Act, Dodd-Frank Act, as well as new and proposed SEC regulations and accounting standards, has required an increased amount of management attention and external resources.  Compliance with such requirements may result in increased general and administrative expenses and an increased allocation of management time and attention to compliance activities.

 

We may in the future become involved in litigation that may materially adversely affect us.

 

From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings.  Such matters can be time-consuming, divert management’s attention and resources and cause us to incur significant expenses.  Furthermore, because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operations or financial condition.

 

 

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products and services if these claims are successful.  We also may incur significant expenses in affirmatively protecting our intellectual property rights.

 

In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries and we believe that the industries that certain of our subsidiaries operate have a significant amount of patent activity.  Third parties may claim that the technology or intellectual property that we incorporate into or use to develop, manufacture or provide our current and future products, systems or services infringe, induce or contribute to the infringement of their intellectual property rights, and we may be found to infringe, induce or contribute to the infringement of those intellectual property rights and may be required to obtain a license to use those rights.  We may also be required to engage in costly efforts to design our products, systems and services around the intellectual property rights of others.  The intellectual property rights of others may cover some of our technology, products, systems and services.  In addition, the scope and validity of any particular third party patent may be subject to significant uncertainty.

 

Litigation regarding patents or other intellectual property rights is costly and time consuming, and could divert the attention of our management and key personnel from our business operations.  The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks.  Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or to indemnify our customers.  However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all.  Any inability on our part to obtain needed licenses could delay or prevent the development, manufacture and sale of our products, systems or services.  We may also be subject to significant damages or injunctions against development, manufacture and sale of our products, systems or services.  We also may be required to incur significant time and expense in pursuing claims against companies we believe are infringing or have misappropriated our intellectual property rights.

 

We are a relatively small company with limited resources compared to some of its current and potential competitors, which may hinder its ability to compete effectively.

 

Some of our current and potential competitors have longer operating histories, significantly greater resources and broader name recognition than it does.  As a result, these competitors may have greater credibility with our existing and potential customers.  They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products which would allow them to respond more quickly to new or emerging technologies or changes in customer requirements.

 

We are dependent on third-party providers and consultants for development, marketing and other services.

 

We are dependent upon various consultants for one or more significant services required for our products, which services will be provided to our business pursuant to agreements with such providers.  Inasmuch as the capacity for certain services by certain consultants may be limited, our inability, for economic or other reasons, to continue to receive services from existing providers in a timely manner or to obtain similar products or services from additional providers in a timely manner could have a material adverse effect on our business.

 

We do not have manufacturing capability.  To meet our product cost goals, we will rely on our manufacturer to order components for our products and manufacture our products.  Any problems experienced in the ordering of components or manufacturing our products could negatively affect our operations.

 

We have entered a contractual agreement with CalComp USA, a leading manufacturer of mobile electronic devices, for manufacturing support.  Any significant problem in this company or its suppliers could result in a delay or interruption in the supply of materials to us until that supplier cures the problem or until we locate an alternative source of supply.  Any delay or interruption would likely lead to a delay or interruption in production and could negatively affect our operations.  Changes in purchasing patterns may affect revenue timing, production schedules, inventory costs, inventory practices and new product development and introduction.

 

If product liability lawsuits are successfully brought against us, we may incur substantial damages and demand for the potential products may be eliminated or reduced.

 

Faulty operation of our devices could result in product liability claims.  Regardless of their merit or eventual outcome, product liability claims may result in:

 

●

decreased demand for our devices or withdrawal from the market;

●

injury to our reputation and significant media attention;

●

costs of litigation; and

●

substantial monetary awards to plaintiffs.

  

We have arranged to procure product liability insurance in the amount of $6,000,000.  Although this meets retailer requirements for product liability coverage, this coverage may not be sufficient to fully protect us against product liability claims.  We intend to expand our product liability insurance coverage as sales of our products expand.  Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against product liability claims could prevent or limit the commercialization of our products and expose us to liability in excess of our coverage.

 

 

If we fail to adequately protect our intellectual property rights, our competitors may be able to take advantage of our research and development efforts to develop competing devices.

 

Our intellectual property rights cover certain products and methods of manufacturing and using these products.  Our commercial success will depend in part on our success in obtaining patent protection for our key products or processes.  Our patent position, like that of other technology companies, is highly uncertain.  One uncertainty is that the United States Patent and Trademark Office (“USPTO”) may deny or require significant narrowing of claims made under our patent applications.

 

The USPTO, as well as patent offices in other jurisdictions, has often required that patent claims reciting technology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting their scope of protection.  Further, technology that is disclosed in patent applications is ordinarily published before it is patented.  As a result, if we are not able to get patent protection, we will not be able to protect that technology through trade secret protection.  Thus, if we fail to obtain patents having sufficient claim scope or fail to adequately protect our trade secrets, we may not be able to exclude competitors from using our key products or processes.

 

Even if the USPTO grants patents with commercially valuable claim scope, our ability to exclude competitors will subsequently depend on our successful assertion of these patents against third party infringers and our successful defense of these patents against possible validity challenges.  Our competitors, many of which have substantial resources and have made significant investments in competing technologies, may make, use or sell our proprietary products or processes despite our intellectual property.  Litigation may be necessary to enforce our issued patents or protect our trade secrets.  The prosecution of intellectual property lawsuits is costly and time-consuming, and the outcome of such lawsuits is uncertain.  An adverse determination in litigation could result in narrowing of our scope of protection or the loss of our intellectual property, thereby allowing competitors to design around or make use of our intellectual property and sell our products in some or all markets.  Thus, if any of our patents are invalidated or narrowed in litigation, we may not be able to exclude our competitors from using our key technologies.

 

Another risk regarding our ability to exclude competitors is that our issued patents or pending applications could be lost or narrowed if competitors with overlapping technologies provoke an interference proceeding (determination of first to invent) at the USPTO.  The defense and prosecution of interference proceedings are costly and time-consuming to pursue, and their outcome is uncertain.  Similarly, a third party may challenge the validity of one or more of our issued patents by presenting evidence of prior publications to the USPTO and requesting reexamination of such patents.  Thus, even if we are able to obtain patents that cover commercially significant innovations, one or more of our patents may be lost or substantially narrowed by the USPTO through an interference or reexamination proceeding.  Consequently, we may not be able to exclude our competitors from using our technologies.

  

Third party patents, or extensions of third party patents beyond their normal expiration dates, could prevent us from making, using or selling our preferred products and processes, or require us to take licenses or to defend against claims of patent infringement.

 

We may have a limited opportunity to operate freely.  Our commercial success will depend in part on our freedom to make, use and sell our products.  If third party patents have claims that cover any of these products, then we will not be free to operate as described in our business plan, without invalidating or obtaining licenses to such patents.  We may not be successful in identifying and invalidating prior claims of invention.  Similarly, a license may be unavailable or prohibitively expensive. In either case, we may have to redesign our products.  Such redesign efforts may take significant time and money and may fail to yield commercially feasible options.  If we are unable to develop products or processes that lie outside the scope of the third party’s patent claims, and we continue to operate, then we may be faced with claims of patent infringement, wherein the third party may seek to enjoin us from continuing to operate within our claim scope and seek monetary compensation for commercial damages resulting from our infringing activity.

 

The technology industry has been characterized by extensive patent litigation and companies have employed intellectual property litigation to gain a competitive advantage.

  

The defense of patent infringement suits is costly and time-consuming and their outcome is uncertain.  An adverse determination in litigation could subject us to significant liabilities, require us to obtain licenses from third parties, or restrict or prevent us from selling our products in certain markets.  Although patent and intellectual property disputes are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties.  Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all.  Thus, as discussed above, if third party patents cover any aspect of our products, then we may lack freedom to operate in accordance with our business plan.  Among such patents are various patents owned by third parties that cover the manufacture, sale and use of various forms of wireless technology.  If necessary, we believe we can avoid possible infringement of these patents by designing around them, obtaining licenses or delaying entry into certain markets, until expiration of the relevant patents.  Nevertheless, there remains some risk arising from these patents.

 

 

 We may not be able to obtain the licenses and consents from governmental agencies or other holders of intellectual property that are necessary for our business plan to be accomplished.

 

The utilization or other exploitation of the products and services developed by us may require us to obtain licenses or consents from government regulatory agencies or from other producers or other holders of patents, copyrights or other similar rights relating to our products and services.  In the event we are unable, if so required, to obtain any necessary license or consent on terms and conditions which we consider to be reasonable, we may be required to stop developing, utilizing, or exploiting products and services affected by government regulation or by patents, copyrights or similar rights.  In the event we are challenged by a government regulatory agency, or by the holders of patents, copyrights or other similar rights, there can be no assurance that we will have the financial or other resources to defend any resulting legal action, which could be significant.

  

We may rely on certain proprietary technologies, trade secrets and know-how that are not patentable.  Although we may take steps to protect our unpatented trade secrets, technology and proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors, there can be no assurance that (i) these agreements will not be breached, (ii) we would have adequate remedies for any breach; or (iii) our proprietary trade secrets and know-how will not otherwise become known or be independently developed or discovered by competitors.  There is also no assurance that our actions will be sufficient to prevent imitation or duplication of either of our products and services by others or prevent others from claiming violations of their trade secrets and proprietary rights.

 

Rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements which characterize the telecommunications industry would adversely affect our financial condition if we are not able to respond with upgrades or changes that are acceptable to the market.

 

Our future success will depend upon our ability to enhance the technologies and to develop and introduce new products and technologies that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance.  We may determine that, in order to remain competitive, it is in our best interests to introduce new products and technologies and to cease exploitation of the technologies.  It is doubtful that we would be able to maintain operations should changes render the technologies obsolete or should we determine that the technologies are not exploitable.

 

Our financial success will depend on continued growth in use of wireless telecommunications products, as well as the ability of the wireless networks we plan to use to withstand natural and other disasters.

 

Our future success is at least partially dependent upon continued growth in the use of wireless telecommunications products.  Our products and services may not prove to be viable commercial products for a number of reasons, including lack of acceptable functionality, potentially inadequate development of the necessary infrastructure or timely development and commercialization of performance improvements.  To the extent that our products experience significant growth in the number of users and use, there can be no assurance that our infrastructure will continue to be able to support the demands placed upon it by such potential growth or that the performance or reliability of our systems will not be adversely affected by this continued growth.  If use of our products does not increase, or if our infrastructure does not effectively support growth that may occur, our business, operating results and financial condition may be materially and adversely affected.

 

Our systems may fail due to natural disasters, telecommunications failures and other events, any of which would limit the use of our products.  Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage our communications hardware and computer hardware operations for our products and services and cause interruptions in our services.  If any of these circumstances were to occur, our business could be harmed.  Our insurance policies may not adequately compensate us for any losses that may occur due to any failures of or interruptions in our systems.

  

An investor might lose its entire investment if we are unable to pay our obligations or are liquidated and dissolved.

 

As set forth under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” of this report, we remain obligated under a significant amount of notes payable, and Silicon Valley Bank has been granted security interests in our assets.  If we are unable to pay these or other obligations, the creditors could take action to enforce their rights, including foreclosing on their security interests, and we could be forced into liquidation and dissolution.  We are also delinquent on a number of our accounts payable.  Our creditors may be able to force us into involuntary bankruptcy.

 

In the event of our liquidation, the proceeds realized from the sale of our assets, if any, will be distributed to our stockholders only after satisfaction of claims of our creditors.  The ability of our stockholders to recover all or any portion of their purchase price for the shares in that event will depend on the amount of funds realized and the claims to be satisfied therefrom.

  

We will require additional cash to fully implement our business strategies, including cash for (i) payment of increased operating expense and (ii) additional implementation of those business strategies.  No assurance can be given, however, that we will have access to additional funds in the future, or that additional funds will be available on acceptable terms and conditions to satisfy our cash requirements to implement our business strategies.  Our inability to obtain acceptable financing could have a material adverse effect on our results of operations and financial condition.

 

 

Our production and operating costs may be greater than anticipated.

 

We have used reasonable efforts to assess and predict costs and expenses.  However, there can be no assurance that implementing our business plan may not require more employees, capital equipment, supplies or other expenditure items than management has predicted.  Similarly, the cost of compensating additional management, employees and consultants or other operating costs may be more than our estimates, which could result in sustained losses.

 

We may experience disruption to our servers or our product software which could cause us to lose customers.

 

In order to function properly our devices are required to interact with computer programs and software (our “Back End”), which is critical to our business.  We use all reasonable efforts to protect, maintain and insulate our Back End from any external danger. However, if there is a disruption to our Back End, due to a system failure, an act of God, a computer virus, a hacker or a failure to pay bills to our Back End vendors as they become due, we may experience a disruption in our Back End. Such a disruption could cause us to lose customers and therefore revenue.

 

Risks Related to Owning Our Common Stock

 

Our common stock is quoted on the OTC Market for trading, and we expect that the price of our common stock will fluctuate substantially.

 

Our stock will be available for trading on the OTC Market for the foreseeable future.  An active public trading market may not develop or, if developed, may not be sustained.  The market prices for securities of technology companies historically have been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.  The market price of our common stock will be affected by a number of factors, including:

 

●

product liability claims or other litigation;

●

the announcement of new products or product enhancements by us or our competitors;

●

quarterly variations in our or our competitors’ results of operations;

●

changes in earnings estimates or comments by securities analysts;

●

developments in our industry;

●

developments in patent or other proprietary rights;

●

general market conditions; and

●

future sales of common stock by existing stockholders.

  

If any of the above-listed risks occur, it could cause our stock price to fall dramatically and may expose us to class action securities lawsuits which, even if unsuccessful, would be costly to defend and a distraction to management.

 

As of August 31, 2014, 241,095,488 shares of our common stock were issued and outstanding.  As of that date we had 17,956,715 warrants outstanding and exercisable with a weighted average exercise price of $0.20, 40,564,500 convertible stock shares with a weighted average exercise price of $0.17 and 3,025,000 options outstanding and exercisable with a weighted average exercise price of $0.29 per share, which if exercised would result in the issuance of additional shares of our common stock.  In addition to the options noted above, at August 31, 2014, 33,575,000 options are outstanding, but have not yet vested and are not yet exercisable.

 

There is currently a limited market for our securities, and any trading market that exists in our securities may be highly illiquid and may not reflect the underlying value of our net assets or business prospects.

 

Our common stock is listed on the Over the Counter Market and there is currently a limited market for our securities and there can be no assurance that an active market will ever develop.  Investors are cautioned not to rely on the possibility that an active trading market may develop.

 

A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.  In August 2011, we filed a registration statement to register for sale by selling stockholders 50,000,000 shares of our common stock that were issued in a private placement and 8,754,079 shares of our common stock issuable upon exercise of outstanding warrants.  That registration statement was declared effective by the Securities and Exchange Commission (the “SEC”) on October 13, 2011, after which the shares could be sold in the public market.  Prior to that time we were not obligated to file periodic reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), but did so on a voluntary basis.  We made publicly available the “current public information” required of non-reporting issuers and therefore our stockholders could sell their common stock in compliance with Rule 144 of the SEC Inasmuch as we were considered a voluntary filer under the Exchange Act for purposes of Rule 144, a one-year holding period applied to stockholders interested in selling restricted shares of our stock pursuant to Rule 144.  Once the registration statement was declared effective by the SEC, we became obligated to file periodic reports under the Exchange Act.  Beginning 90 days following the registration statement being declared effective by the SEC, the applicable holding period under Rule 144 will be shortened to six months for stockholders interested in selling restricted shares of our stock pursuant to Rule 144.

  

 

We estimate that there are at least 82,000,000 shares of our common stock that are restricted and have been held over one year, which includes 47,356,000 shares held by our officers and directors that may be resold subject to applicable volume limitations.  As additional shares of our common stock become available for resale in the public market under Rule 144 or otherwise, the supply of our common stock will increase, which could decrease the per share price of our common stock.

 

Our principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

 

Our officers, directors and principal stockholders together control approximately 28.3% of our outstanding common stock.  These stockholders intend to act together, although they have not signed an agreement to do so.  If they act together, they may be able to exercise control over our management and affairs in all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions.  This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock.  This concentration of ownership may not be in the best interest of our other stockholders.

 

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

 

In connection with preparing our financial statements for our most recently completed fiscal year, our management evaluated the effectiveness of our internal control over financial reporting and concluded that there was a material weakness.  The material weakness arises from a lack of segregation of duties to provide effective controls.   Our failure to implement required new or improved controls could cause us to fail to meet our periodic reporting obligations, result in material misstatements in our financial statements and cause investors to lose confidence in us, any of which could adversely affect the price of our common stock.

  

We incur substantial costs as a result of being a public company.

 

As a public company, we incur significant legal, accounting and other expenses.  In addition, the Sarbanes-Oxley Act and the Frank-Dodd Act, as well as rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies.  We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly.  For example, as a result of being a public company, have created board committees and adopted additional policies regarding internal controls and disclosure controls and procedures.  In addition, we will incur additional costs associated with our public company reporting requirements.  These rules and regulations have made it difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.  As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.  We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

The application of the SEC’s “penny stock” rules to our common stock could limit trading activity in the market, and our stockholders may find it more difficult to sell their stock.

 

Our common stock is currently trading at less than $1.00 per share and is therefore subject to the SEC’s penny stock rules.  Before a broker-dealer can sell a penny stock, these rules require that it first approve the customer for the transaction and receive from the customer a written agreement to the transaction.  It must furnish the customer a document describing the risks of investing in penny stocks.  The broker-dealer must also tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade.  Finally, it must send monthly account statements showing the market value of each penny stock held in the customer’s account.  These disclosure requirements tend to make it more difficult for a broker-dealer to make a market in penny stocks, and could; therefore, reduce the level of trading activity in a stock that is subject to the penny stock rules.  Consequently, our stockholders may find it more difficult to sell their stock compared to other securities.

 

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

 

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

 

 

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

  

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

 

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

 

We are subject to certain provisions of Nevada law by virtue of being incorporated in that State.  This includes a control share law that focuses on the acquisition of a “controlling interest” in a corporation that has a specified presence in Nevada, which is currently not applicable to us, and a business combination law that restricts business combinations with an “interested stockholder” for a period of three years unless the transaction by which the person first became an “interested stockholder” was approved by the corporation’s board of directors.  The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of the company from doing so if they cannot obtain the approval of our board of directors.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.   PROPERTIES

 

On May 11, 2011, we entered into a lease agreement with the Irvine Company LLC to lease approximately 4,700 square feet of general office space located at 49 Discovery, Suite 260, Irvine, California 92618, for base rent ranging from $6,199 to $7,193 per month over a 48-month lease term commencing July 1, 2011 and ending June 30, 2015.

 

On August 18, 2014, the Company entered into a sublease agreement to lease the office space at 49 Discovery, Irvine, California for the remaining term of the lease. The sublease agreement entitles the subtenant the right to free rent during the first, sixth and eleventh months. At the same time, the Company entered into an agreement to sublease office space from SkyBell Technologies, Inc. for a $2,365 per month. The Company is entitled to free rent for the first, sixth and eleventh months and the sublease expires on July 31, 2015.  

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

 

Market Information.  Our common shares are currently traded on the OTC Bulletin Board under the symbol “LBAS.”

 

The following table sets forth the range of high and low trading prices for each quarter of the last two fiscal years.  The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.

 

Fiscal Quarter Ended		High ($)				Low ($)
November 30, 2012		$	0.27			$	0.12
February 28, 2013		$	0.33			$	0.16
May 31, 2013		$	0.20			$	0.13
August 31, 2013		$	0.18			$	0.11
November 30, 2013		$	0.15			$	0.07
February 28, 2014		$	0.11			$	0.05
May 31, 2014		$	0.07			$	0.02
August 31, 2014		$	0.04			$	0.01

 

Reports to Security Holders.  We are a reporting company pursuant to the Securities and Exchange Act of 1934.  As such, we will file annual, quarterly and current reports with the SEC.  We also intend to provide an annual report to our stockholders, which will include audited financial statements.

 

Holders of Common Stock.  As of November 26, 2014, we had approximately 161 registered holders of our common stock.  The number of registered holders does not include any estimate by us of the number of beneficial owners of our common stock held in street name or otherwise.

 

Recent Sales of Unregistered Securities.  

 

Common Stock Issuances for Services Provided

 

In July 2014, the Company issued 2,265,000 shares of common stock to three consultants in exchange for accounting and legal services. The shares were valued at $121,950, which represents the fair market value of the shares provided on the award date.

 

In July 2014, the Company issued 575,000 shares of common stock to four board members in conjunction with their annual board advisory services. The shares were valued at $53,038, which represents the fair market value of the shares provided on the award date.

 

In August 2014, the Company issued 1,267,716 shares of common stock to three consultants in exchange for legal services. The shares were valued at $55,577, which represents the fair market value of the shares provided on the award date.

 

Common Stock Issuances for Conversion of Debt

 

In July 2014, the Company issued 1,094,527 shares of common stock in connection with the conversion of notes payable valued at $22,000 on the award date.

 

In August 2014, the Company issued 4,833,333 shares of common stock in connection with the conversion of notes payable valued at $43,500 on the award date.

 

In September 2014, the Company issued 5,668,674 shares of common stock in connection with the conversion of notes payable valued at $39,000 on the award date.

 

In October 2014, the Company issued 5,362,637 shares of common stock in connection with the conversion of notes payable valued at $36,500 on the award date.

 

In November 2014, the Company issued 1,730,769 shares of common stock in connection with the conversion of notes payable valued at $9,000 on the award date.

 

Common Stock Issuances for Note Payable Extensions

 

In July 2014, the Company issued 1,419,760 shares of common stock in connection with seven note payable extensions. The shares were valued at $78,175, which represents the fair market value of the note payable extension costs on the award date.

 

 

In November 2014, the Company issues 1,255,224 shares of common stock in connection with a note payable extension. The shares were valued at $75,313, which represents the fair market value of the note payable extension costs on the award date.

 

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.

 

Re-Purchase of Equity Securities.  None

 

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

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

During the year ended August 31, 2014 the Company achieved several milestones. The following is summary of the key achievements:

 

	●	Total paid monthly users (defined as the total number of users that paid a minimum of $12.95 for a month of service) exceeded 72,000, an increase of 123% compared to the year ended August 31, 2013;
	●	Service income achieved break-even levels in Q3 2014, which will enable gross margins from service revenues to accelerate in future periods as most costs related to service revenues are fixed in nature;

●

Monthly service income exceeded $100,000 per month starting in July 2014;

●

Excluding the provision for inventory valuation reserves, the Company realized a 20% gross margin on device sales as compared to a negative 20% for the year ended August 31, 2013; and

●

Overall gross margins were positive for the first time in the Company’s history.

 

For the year ended August 31, 2014 compared to the year ended August 31, 2013.

 

Revenue.  For the year ended August 31, 2014, the Company generated $1,704,134 of net revenue compared to $1,918,025 of net revenue for the year ended August 31, 2013. The 11% decrease in total revenue was due to the following:

 

●

Device revenue – For the year ended August 31, 2014, we generated $731,772 of net device revenue compared to $1,485,239 for the year ended August 31, 2013. The 51% decrease in net device revenue consists of the following:

o

Decrease in year-over-year revenue of $855,757 due to the one-time sale of the LBT-886 commercial tracking devices to AT&T. Although we expect to receive additional orders from AT&T in 2015, no orders for LBT-886 devices were received during the year ended August 31, 2014. The Company will continue to sell the LBT-886 to other commercial customers;

o

Increase in revenue of $200,820 (+108%) for the year ended August 31, 2014 compared to the year ended August 31, 2013 from the sale of PocketFinder Personal devices. During the current year the Company sold 3,488 more devices, an increase of 275%, compared to the year ended August 31, 2013.The increase is due to the Company adding several new distributors and expanding sales internationally. The Company expects sales of the PocketFinder Personal devices to remain strong while adding one new global distributor in Q1 2015 and expanding into Mexico and the Cayman Islands; and

o

Decrease in revenue of $35,571 (-10%) for the year ended August 31, 2014 compared to the year ended August 31, 2013 from the sale of the PocketFinder Vehicle devices. During the year ended August 31, 2014, the Company sold 373 fewer units compared to the previous year. This decrease is due to the introduction of the new 3G PocketFinder Vehicle device in August 2014 that created some disruption of sales during the model transition. The Company expects sales of the PocketFinder Vehicle devices to improve with the addition of the 3G product, launch of the new Auto Dealer Program, expansion into Mexico and the Cayman Island and the addition of a new global distributor in Q1 2015.

●

Service revenue - – For the year ended August 31, 2014, we generated $972,362 of service revenue compared to $432,786 for the year ended August 31, 2013. The 125% increase in service revenues was due to the following:

o

Increase of approximately 39,900 (+123%) paid monthly users for the year ended August 31, 2014 compared to August 31, 2013. The Company converted to their new Zuora billing/collections software in Q3 2014 5`and expects the total number of paid monthly users to increase as a percentage of total active devices once additional system functions are activated in Q1 2015; and

o

Increase in the sale of full-service devices by 3,080 (+82%) in the year ended August 31, 2014 over the previous year as the Company shifted its sales and marketing efforts toward the sale of PocketFinder Vehicle and PocketFinder Personal devices which generate higher service revenues per device than the LBT-886 devices previously sold to AT&T.

 

Cost of Revenue.  For the year ended August 31, 2014, cost of revenue totaled $1,562,944 resulting in a positive gross margin of $141,190 compared to negative gross margin of $1,679,440 for the year ended August 31, 2013. The gross margin of 8% for the year ended August 31, 2014 improved from negative 88% in the year ended August 31, 2013, due to the following:

 

●

Devices – For the year ended August 31, 2014, cost of sales for devices was $636,408 compared to $2,823,055 for the year ended August 31, 2013. This positive gross margin on devices of 13% for the current year improved from negative 90% for the year ended August 31, 2013 due to the following:

o

Decrease in number of units sold from approximately 9,272 in the year ended August 31, 2013 compared to 6,988 units in the year ended August 31, 2014 as the Company shifted its focus to the sale of more full-service devices; and

o

Decrease in the amount of provision for inventory valuation reserves from $1,028,432 in the year ended August 31, 2013 compared to $53,316 for the year ended August 31, 2014. Excluding the effect of the provision for inventory valuation reserves, gross margin on devices would have been 20% and -21% for the years ended August 31, 2014 and 2013, respectively.

 

 

●

Services – For the year ended August 31, 2014, the cost of sales for services was $926,536 resulting in a 7% positive gross margin compared to a negative gross margin of $341,624.for the year ended August 31, 2013. The gross margin on services of 7% for the current year represents an improvement from negative 12% over the year ended August 31, 2013 due to the following:

o

Increase of approximately 39,900 (+123%) paid monthly users for the year ended August 31, 2014 compared to August 31, 2013 as the number of paid monthly users exceeded break-even levels in Q3 2014. The average number of paid monthly users per month during Q4 2014 was approximately 8,600 compared to approximately 3,600 during Q4 2013, representing a 141% increase;

o

Increase in the amount AT&T network access fees in the amount of $627,528 for the year ended August 31, 2014 compared to $422,230 for the year ended August 31, 2013. The increase of 49% was due to the increased number of active devices during 2014 over 2013. Despite an overall increase in total AT&T network access fees for the year ended August 31, 2014, the average total service and access fee per paid monthly user cost decreased from $13.00 in the year ended August 31, 2013 to $8.67 for the year ended August 31, 2014, representing a 33% reduction in per subscriber cost; and

o

Decrease in costs associated with the call center operations of $96,746 for the year ended August 31, 2014 compared to the year ended August 31, 2103. In Q2 2014 the Company terminated its outsourcing contract for its call center operations and brought operations of the call center in-house, resulting in a savings of approximately 32% for the year ended August 31, 2014 compared to the year ended August 31, 2013.

  

Operating Expenses.  For the year ended August 31, 2014, our total operating expenses were $3,977,800 compared to total operating expenses of $6,335,714 for the year ended August 31, 2013.  Operating expenses decreased by $2,357,914 or 37% in 2014 from 2013.  The decrease in operating expenses is primarily attributed to the following fluctuations:

 

●

A $102,865 decrease in general and administrative expenses to $1,667,113 for the year ended August 31, 2014, compared to $1,769,978 for the year ended August 31, 2013.  The decrease in general and administrative expenses in 2014 compared to 2013 is due to the following:

 

o

Increase of $51,421 in advertising fees related to NASCAR sponsorship in 2014;

o

Decrease of $33,600 in travel related to business development activities;

o

Decrease of $57,146 in computer expenses related to maintaining and updating our website and development of new apps for the PocketFinder; and

o

Decrease of $72,352 in licenses and fees as fewer certifications for new products were obtained.

 

●

A $427,758 decrease in officer compensation to $734,246 for the year ended August 31, 2014, compared to $1,162,004 for the year ended August 31, 2013 primarily due to the replacement of one officer (Chief Marketing Officer) with a non-officer and the outsourcing of the Chief Financial Officer duties in 2014 compared to 2013 ;

 

●

A $1,050,356 decrease in professional fees to $1,082,640 for the year ended August 31, 2014, compared to $2,132,996 for the year ended August 31, 2013 primarily due to a lower fees related to business development and capital raising efforts in 2014 compared to 2013;

 

●

A $365,226 decrease in research and development costs to $99,548 for the year ended August 31, 2014, compared to $464,774 for the year ended August 31, 2013;

 

●

A $44,126 increase in salaries and wages to $317,323 for the year ended August 31, 2014, compared to $273,197 for the year ended August 31, 2013 due to the addition of one position that was previously held by an officer, offset by a lower amount of stock options vesting in 2014 compared to 2013; and

 

●

A $455,916 loss on asset impairment due to the impairment of certain patents during the year ended August 31, 2013, whereby, there was no such loss during the year ended August 31, 2014.

 

Other Income/Expenses.  For the year ended August 31, 2014, we reported net other expenses totaling $1,310,034 that consisted of financing costs, amortization of beneficial conversion feature, deferred financing costs, debt discounts, loss on the fair value of derivative liabilities, net interest expense, loss on debt extinguishment, gain on asset disposals and foreign currency gains compared to net other expenses totaling $3,033,396 for the year ended August 31, 2013.  The $1,723,362 decrease in other income and expenses is primarily due to the following:

 

●

A $183,265 decrease in financing costs to $438,519 for the year ended August 31, 2014, compared to $621,784 for the year ended August 31, 2013 due to a decrease in capital raising advisory services;

 

●

A $244,340 decrease in the amortization of beneficial conversion features on notes payable to $61,388 for the year ended August 31, 2014, compared to $305,728 for the year ended August 31, 2013 as there were fewer convertible notes entered into in 2014 that contained beneficial conversion features than in 2013;

 

 

●

A $175,895 decrease in the amortization of deferred financing costs to $36,122 for the year ended August 31, 2014, compared to $212,007 for the year ended August 31, 2013 as there was were fewer notes payable issued with common stock resulting in deferred financing costs in 2014 than in 2013;

 

●

A $198,495 increase in the amortization of debt discounts associated with the issuance of warrants on convertible notes payable to $311,322 for the year ended August 31, 2014. There were fewer warrant issuances during the year ended August 31, 2013;

 

●

A $745,148 loss on the fair value of derivative liabilities was recognized during the year ended August 31, 2013; whereby, there was no such loss recognized during the year ended August 31, 2014 as the JMJ debt was settled during the first quarter of 2014;

 

●

A $410,148 increase in interest expense to $752,256 for the year ended August 31, 2014, compared to $342,108 for the year ended August 31, 2013 as there was approximately $10.0 million in notes payable at August 31, 2014 as compared to $7.4 million in notes payable at August 31, 2013;

 

●

The recognition of a $886,548 gain in connection with the JMJ debt settlement was recognized during the year ended August 31, 2014; whereby, there was no such debt settlement during the year ended August 31, 2013; and

 

●

A $190,106 decrease in the recognition of losses on debt extinguishment due to the amendment of certain promissory notes to $504,688 for the year ended August 31, 2014, compared to $694,794 for the year ended August 31, 2013 as there were fewer notes amended in 2014 than in 2013.

 

Net Loss.  For the year ended August 31, 2014, we reported a net loss of $5,147,444 compared to a net loss of $11,049,350 for the year ended August 31, 2013, due to fluctuations in operating and other expenses as previously discussed.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We had cash and cash equivalents of $146,200 as of August 31, 2014, compared to $680,914 as of August 31, 2013.  The decrease in cash as of August 31, 2014 is due to reduced proceeds from promissory notes during the final quarter of 2014.

 

As of August 31, 2014, current assets totaled $1,068,522 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 August 31, 2014, is primarily due to lower cash and cash equivalents.

 

As of August 31, 2014, current liabilities totaled $8,311,818 compared to $8,410,438 as of August 31, 2013 and consisted of accounts payable and accrued expenses, deferred compensation, term loans, convertible notes payable and accrued interest. The decrease at August 31, 2014, is primarily due to elimination of the derivative liabilities in conjunction with the JMJ Settlement, offset by additional borrowings under convertible notes.

 

As at August 31, 2014, the Company had a working capital deficit of $7,243,296 compared with a working capital deficit of $6,789,667 as of August 31, 2013.  The $453,629 increase in working capital deficit is due to an increase in convertible notes payable, elimination of the derivative liabilities and lower cash and cash equivalents.

 

Cash Flows from Operating Activities. During the year ended August 31, 2014, the Company incurred $2,645,647 of cash for operating activities compared with $3,602,783 for the year ended August 31, 2013.  The decrease in the cash used for operating activities was attributed to the overall decrease of operating costs incurred during the year ended August 31, 2014 compared to the year ended August 31, 2013. 

 

Cash Flows From Investing Activities. During the year ended August 31, 2014, the Company incurred $69,242 of cash for investing compared with $37,598 for the year ended August 31, 2013.  The increase in the cash used for investing operating activities was attributed to higher capital expenditures related to the new billing and collection system installed during the year ended August 31, 2014 compared to the year ended August 31, 2013. 

 

Cash Flows from Financing Activities. During the year ended August 31, 2014, the Company received $2,180,175 in cash from financing activities related to the issuance of convertible promissory notes and advances from an officer. During the year ended August 31, 2013, the Company received $3,488,825 from the issuance of convertible promissory notes and advances from an officer. Demand convertible notes payable totaling $1,142,987 are unsecured, bear interest at 5% per annum, and are to be repaid out of future operating cash flows. Current convertible term notes payable totaling $3,576,452 are unsecured, bear interest at 8%-36% per annum, and are to be repaid out of future operating cash flow. Long-term convertible term notes totaling $2,776,500 are secured, bear interest at 10% per annum with due dates ranging from September 30, 2015 to July 24, 2016 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 August 31, 2014, we had an accumulated deficit of $61,211,909 and we expect to incur continual losses until sometime in calendar year 2015.

 

As of August 31, 2014, we had $146,200 in cash and cash-equivalents.  Over the next several quarters we expect to invest significant amounts of funds 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.

  

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 six employees and do not anticipate hiring any significant number of additional employees during the next twelve months.

  

Off-Balance Sheet Arrangements

 

As of August 31, 2014, we had no off-balance sheet arrangements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

 

To the Board of Directors and Stockholders of
Location Based Technologies, Inc.

 

We have audited the accompanying consolidated balance sheets of Location Based Technologies, Inc. and its subsidiary (the “Company”) as of August 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Location Based Technologies, Inc. as of August 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company's operating losses raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

 

/s/Friedman LLP
East Hanover, New Jersey November 26, 2014

 

 

 

Location Based Technologies, Inc. 

CONSOLIDATED BALANCE SHEETS 

August 31, 2014 and 2013

 

		August 31,				August 31,
		2014				2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	146,200			$	680,914
Accounts receivable, net of allowances			78,422				77,584
Inventory, net of reserves			793,332				788,470
Prepaid expenses and other assets			45,062				47,976
Deferred financing costs			5,506				25,827
Total current assets			1,068,522				1,620,771
Property and equipment, net of accumulated depreciation			65,817				110,813
OTHER ASSETS
Intangible assets, net of accumulated amortization			596,977				715,732
Inventory, net of reserves			565,146				893,401
Deposits			30,000				30,000
Total other assets			1,192,123				1,639,133
TOTAL ASSETS		$	2,326,462			$	3,370,717

 

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

 

 

Location Based Technologies, Inc.

CONSOLIDATED BALANCE SHEETS 

August 31, 2014 and 2013 

 

		August 31,				August 31,
		2014				2013
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Convertible demand notes payable and accrued interest		$	30,163			$	-
Related party convertible demand notes payable and accrued interest			1,192,187				-
Accounts payable and accrued expenses			1,865,282				1,699,113
Deferred compensation			261,814				267,730
Deferred revenue			29,691				25,371
Line of credit and accrued interest			-				1,009,042
Advances from officer and accrued interest			106,872				29,219
Convertible term notes payable and accrued interest, net of unamortized discounts			3,100,361				3,585,225
Related party convertible term notes payable and accrued interest, net of unamortized discounts			106,986				1,049,590
Current portion of term loans and accrued interest			1,618,462				-
Derivative liabilities			-				745,148
Total current liabilities			8,311,818				8,410,438
Convertible term notes payable			843,787				-
Related party convertible term notes payable and accrued interest, net of unamortized discounts			2,820,106				1,719,036
Term loans			333,333				-
TOTAL LIABILITIES			12,309,044				10,129,474
Commitments and contingencies			-				-
STOCKHOLDERS' EQUITY (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; 241,095,488 and 211,917,511 shares issued and outstanding at August 31, 2014 and 2013, respectively			241,096				211,918
Additional paid-in capital			51,036,456				49,388,375
Prepaid services paid in common stock			(48,225	)			(294,585	)
Accumulated deficit			(61,211,909	)			(56,064,465	)
Total stockholders' equity (deficit)			(9,982,582	)			(6,758,757	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	2,326,462			$	3,370,717

 

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

 

 

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS 

For the years ended August 31, 2014 and 2013

 

		For the years ended
		August 31,				August 31,
		2014				2013
Net revenue
Devices		$	731,772			$	1,485,239
Services			972,362				432,786
Total net revenue			1,704,134				1,918,025
Cost of revenue
Devices			636,408				2,823,055
Services			926,536				774,410
Total cost of revenue			1,562,944				3,597,465
Gross profit (loss)			141,190				(1,679,440	)
Operating expenses
General and administrative			1,667,113				1,769,978
Officer compensation			734,246				1,162,004
Professional fees			1,082,640				2,132,996
Rent			76,930				76,849
Research and development			99,548				464,774
Salaries and wages			317,323				273,197
Loss on asset impairment			-				455,916
Total operating expenses			3,977,800				6,335,714
Net operating loss			(3,836,610	)			(8,015,154	)
Other income (expense)
Financing costs			(438,519	)			(621,784	)
Amortization of beneficial conversion feature			(61,388	)			(305,728	)
Amortization of deferred financing costs			(36,112	)			(212,007	)
Amortization of debt discount			(311,322	)			(112,827	)
Loss on change in fair value of derivative liabilities			-				(745,148	)
Interest income (expense), net			(752,256	)			(342,108	)
Gain on debt settlement			886,548				-
Loss on debt extinguishment			(504,688	)			(694,794	)
Gain (loss) on asset disposal			(91,445	)			631
Foreign currency gain (loss), net			(852	)			369
Total other income (expense)			(1,310,034	)			(3,033,396	)
Net loss before income taxes			(5,146,644	)			(11,048,550	)
Provision for income taxes			800				800
Net Loss		$	(5,147,444	)		$	(11,049,350	)

 

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

 

 

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended August 31, 2014 and 2013

 

		For the years ended
		August 31,				August 31,
		2013				2012
Basic and Diluted - Earnings (loss) Per Share		$	(0.02	)		$	(0.05	)
Basic and Diluted - Weighted Average Number of Shares Outstanding			222,026,331				205,103,546

 

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

 

 

Location Based Technologies, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the years ended August 31, 2014 and 2013

 

		Preferred Stock								Common Stock								Additional				Prepaid Services Paid-In								Total Stockholders
		Number								Number								Paid-In				Common				Accumulated				Equity
		of Shares				Amount				of Shares				Amount				Capital				Stock				Deficit				(Deficit)
Balance, August 31, 2012			-			$	-				197,861,157			$	135,461			$	45,226,793			$	(275,000	)		$	(45,015,115	)		$	72,139
Reclassification of common stock at par value															62,401				(62,401	)											-
Issuance of common stock for services			-				-				8,850,000				8,850				1,907,150				(1,173,333	)			-				742,667
Issuance of common stock in connection with debt issuances and extensions			-				-				1,855,000				1,855				328,895				-				-				330,750
Issuance of common stock for the conversion of debt and accounts payable			-				-				3,289,286				3,289				503,694				-				-				506,983
Issuance of common stock from the exercise of warrants			-				-				62,068				62				(62	)			-				-				-
Issuance of warrants for services			-				-				-				-				99,873				-				-				99,873
Issuance of warrants in connection with debt issuances and extensions			-				-				-				-				954,188				-				-				954,188
Issuance of stock options for services			-				-				-				-				256,823				-				-				256,823
Amortization of prepaid services paid-in common stock			-				-				-				-				-				1,153,748				-				1,153,748
Beneficial conversion discount of convertible notes payable			-				-				-				-				173,422				-				-				173,422
Net loss			-				-				-				-				-				-				(11,049,350	)			(11,049,350	)
Balance, August 31, 2013			-				-				211,917,511				211,918				49,388,375				(294,585	)			(56,064,465	)			(6,758,757	)
Issuance of common stock for services			-				-				5,300,425				5,300				313,935				(96,450	)			-				222,785
Issuance of common stock in connection with debt issuances and extensions			-				-				9,363,750				9,364				606,061				(104,000	)			-				511,425
Issuance of common stock for the conversion of debt and accounts payable			-				-				14,513,802				14,514				440,474				-				-				454,988
Issuance of warrants in connection with debt issuances			-				-				-				-				213,486				-				-				213,486
Issuance of stock options for services			-				-				-				-				74,125				-				-				74,125
Amortization of prepaid services paid-in common stock			-				-				-				-				-				446,810				-				446,810
Net loss			-				-				-				-				-				-				(5,147,444	)			(5,147,444	)
Balance, August 31, 2014			-			$	-				241,095,488			$	241,096			$	51,036,456			$	(48,225	)		$	(61,211,909	)		$	(9,982,582	)

 

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

 

 

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended August 31, 2014 and 2013

 

		For the years ended
		August 31,				August 31,
		2014				2013
Cash Flows from Operating Activities
Net loss		$	(5,147,444	)		$	(11,049,350	)
Adjustment to reconcile net loss to net cash used in operating activities:
Loss on change in fair value of derivative liabilities			-				745,148
Loss (gain) on asset disposals and impairment			91,445				455,285
Gain on debt settlement			(886,548	)			-
Loss on debt extinguishment			504,688				-
Provision for doubtful accounts and sales returns			42,500				(22,843	)
Provision for inventory reserve			53,316				1,028,432
Depreciation and amortization			141,548				127,358
Amortization of beneficial conversion feature			61,388				305,728
Amortization of deferred financing costs			36,112				212,007
Amortization of prepaid services paid in common stock			446,810				1,153,748
Amortization of debt discount			311,322				112,827
Common stock issued for services and financing costs			295,285				908,141
Warrants issued for services and financing costs			-				621,693
Stock options issued for services			74,125				256,823
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable			(43,338	)			133,532
(Increase) decrease in inventory			270,077				574,609
(Increase) decrease in prepaid expenses and other assets			2,914				79,605
Increase (decrease) in accounts payable and accrued expenses			399,615				655,384
Increase (decrease) in accrued officer compensation			111,334				296,009
Increase (decrease) in deferred revenue			4,320				8,832
Increase (decrease) in accrued interest			584,884				250,165
Net cash used in operating activities			(2,645,647	)			(3,146,867	)
Cash Flows from Investing Activities
Purchase of property and equipment			(76,742	)			(37,598	)
Proceeds from sale of trademark			7,500				-
Net cash used in investing activities			(69,242	)			(37,598	)
Cash Flows from Financing Activities
Advances / (repayments) from officers, net			76,175				28,825
Payments for deferred financing costs			-				(6,000	)
Payments on term loans			(22,500	)			-
Proceeds from convertible notes payable			650,000				1,791,000
Repayments on convertible notes payable			-				(25,000	)
Proceeds from related party convertible notes payable			1,476,500				1,800,000
Repayments on related party convertible notes payable			-				(100,000	)
Net cash provided by financing activities			2,180,175				3,488,825
Net increase (decrease) in cash and cash equivalents			(534,714	)			304,360
Cash and cash equivalents, beginning of year			680,914				376,554
Cash and cash equivalents, end of year		$	146,200			$	680,914

 

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

 

 

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended August 31, 2014 and 2013

  

		For the years ended
		August 31				August 31
		2014				2013
Supplemental disclosure of cash flow information:
Income taxes paid		$	800			$	800
Interest paid		$	165,784			$	2,462
Supplemental disclosure of noncash financing and investing activities:
Conversion of deferred compensation into convertible demand notes payable		$	117,250			$	1,025,737
Conversion of accounts payable into common stock		$	315,000			$	-
Issuance of common stock for deferred financing costs		$	438,925			$	-
Issuance of warrants for financing costs classified as debt discount		$	213,486			$	432,368
Issuance of common stock for conversion of debt		$	139,988			$	499,758
Issuance of beneficial conversion discount on convertible notes payable		$	-			$	173,422

 

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

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

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 August 31, 2014, had an accumulated deficit of $61,211,909 and negative working capital of $7,243,296. 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.

 

 

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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

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 August 31, 2014 and 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 year ended August 31, 2014, revenue from the Company’s largest customer amounted to $210,836 or 12% of total net revenue. Accounts receivable from this customer amounted to $28,698 or 21% of total accounts receivable at August 31, 2014.

 

For the year ended August 31, 2013, revenue from the Company’s largest customer amounted to $883,630 or 46% of total net revenue. Accounts receivable from this customer amounted to $2,578 or 3% of total accounts receivable at August 31, 2013.

 

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 August 31, 2014 and 2013, the allowance for doubtful accounts amounted to $27,000 and $3,000, respectively.

 

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 August 31, 2014 and 2013, the allowance for sales returns amounted to $27,000 and $8,500, respectively.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

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. Management estimates the current selling price of $58.00 as the realizable value of the inventory. For the year ended August 31, 2014, the Company increased the inventory valuation reserve by $53,316 to reflect the new lower selling price of the PocketFinder Personal inventory. Management estimated sales for the next 24 month period based on historical sales data and prospective sales trends and determined that all inventory is expected to be sold in the next two years. Management analyzed and tested certain components that could possibly become obsolete and determined that the useful life exceeded the two year estimate to sell the inventory. In addition, the components inventory, net of the LCM valuation reserve, totaling $565,146 is classified as a noncurrent asset at August 31, 2014 (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.

 

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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

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 years ended August 31, 2014 and 2013, the Company recorded an impairment of certain patents amounting to $43,014 and $455,916, respectively.

 

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 August 31, 2014 and 2013, the Company capitalized $699,931 and $742,945 for patent related expenditures, respectively. As of August 31, 2014 and 2013, the Company capitalized $52,539 and $59,470 for trademark related expenditures, respectively. Accumulated amortization of intangible assets was $155,493 and $86,683 at August 31, 2014 and 2013, respectively.

 

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 $68,810 and $66,190 for the years ended August 31, 2014 and 2013, respectively.

 

Deferred Revenue

 

Deferred revenue is a liability related to revenue producing activity for which revenue has not yet been recognized. As of August 31, 2014 and 2013, deferred revenue amounted to $29,691 and $25,371, respectively, and consisted of prepaid service revenue from subscribers.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

 

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 $50,693 and $305,728 during the years ended August 31, 2014 and 2013, respectively.

 

Derivative Liabilities

 

The embedded conversion options of the Company’s convertible notes payable described in Note 6 contain conversion features that qualify for embedded derivative classification. The warrants described in Note 9 also qualify for derivative classification. 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. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.

 

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 year ended August 31, 2013 the Company recorded a loss for the change in the fair value of the derivative liability in the amount of $745,148.

 

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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

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 the month the service is provided. Service revenue is recognized upon collecting the monthly service fee from 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.

 

Advertising Costs

 

Advertising costs are expensed as incurred. For the years ended August 31, 2014 and 2013, the Company incurred $508,402 and $456,981 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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

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 years ended August 31, 2014 and 2013, stock-based compensation expense associated with stock options totaled $74,125 and $256,823 respectively.

 

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 years ended August 31, 2014 and 2013.

 

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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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

 

		August 31,				August 31,
		2014				2013
Warrants			17,956,715				15,456,715
Stock options			3,025,000				3,475,000
Convertible notes payable			40,564,550				25,300,352
Dilutive potential common shares			61,546,265				44,232,067

 

    

2.

INVENTORY

 

Inventory at August 31, 2014 and 2013 consisted of the following:

 

		August 31,				August 31,
		2014				2013
Current:
Finished goods		$	1,016,876			$	1,286,953
Device Components			419,681				-
Inventory valuation reserve			(643,225	)			(498,483	)
Inventories, current		$	793,332			$	788,470
Noncurrent:
Device components		$	1,051,722			$	1,471,404
Inventory valuation reserve for components			(486,576	)			(578,003	)
Inventories, noncurrent		$	565,146			$	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. The Company expects that it will take approximately six months to sell finished goods inventory on hand at August 31, 2014. Following the sale of all finished goods inventory, components inventory will be utilized to manufacture additional devices that are expected to be sold in year 1 and 2. Inventories totaling $565,146 and $893,401 which may not be realized within a 12-month period have been reclassified as long-term as of August 31, 2014 and 2013, respectively.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

3.	PROPERTY AND EQUIPMENT

    

Property and equipment at August 31, 2014 and 2013 consisted of the following:

 

		August 31,				August 31,
		2014				2013
Machinery and equipment		$	139,821			$	106,354
Computer software (mobile apps)			82,999				66,999
Computer software (internal)			29,537				51,263
Computer and video equipment			19,757				19,756
Office furniture			24,526				24,526
			296,640				268,898
Less: accumulated depreciation			(230,823	)			(158,085	)
Total property and equipment		$	65,817			$	110,813

 

Depreciation expense for the years ended August 31, 2014 and 2013 amounted to $72,738 and $48,113, respectively.

 

 

4.	INTANGIBLE ASSETS

 

Intangible assets at August 31, 2014 and 2013 consisted of the following:

 

		August 31,				August 31,
		2014				2013
Patents		$	699,931			$	742,945
Trademarks			52,539				59,470
			752,470				802,415
Less: accumulated amortization			(155,493	)			(86,683	)
Total intangible assets		$	596,977			$	715,732

 

Amortization expense totaled $68,810 and $66,190 for the years ended August 31, 2014 and 2013, respectively.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

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4.	INTANGIBLE ASSETS (Continued)

 

As of August 31, 2014, Company estimates amortization expense approximating $70,000 each year for the next five years and $194,000 thereafter.

 

 

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 years ended August 31, 2014 and 2013, there were advances from our Co-President totaling $236,500 and $48,825, respectively; and repayments totaling $160,325 and $20,000, respectively. As of August 31, 2014, there was $105,000 of outstanding advances and $1,872 of related accrued interest.

 

SkyBell Technologies, Inc.

 

The Company occupies office space at a facility leased by SkyBell Technologies, Inc. (“SkyBell”). In addition, the Company outsources its customer service to SkyBell under a month to month contract that commenced in February 2014. SkyBell is owned and operated by Joseph Scalisi, Chief Development Officer, and Desiree Mejia, Chief Operating Officer. During the year ended August 31, 2014, the Company incurred $54,055 in costs related to these services.

 

Accounts Payable

 

Amounts payable to related parties totaled $471,979 and $105,000 as of August 31, 2014 and 2013, respectively.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

6.	CONVERTIBLE NOTES PAYABLE

 

		August 31,				August 31,
		2014				2013
Convertible Demand Notes Payable
Note payable in the amount of $28,500 due on demand at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.10 per share. In connection with the extension of the due date and consolidation of notes on March 14, 2014, 51,000 shares of the Company’s stock valued at $3,060 were awarded.		$	28,500			$	-
Total convertible demand notes payable			28,500				-
Accrued interest			1,663				-
Total convertible demand notes payable and accrued interest		$	30,163			$	-
Convertible Term 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 $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 $123,506 were issued in connection with the note. As of August 31, 2014 the note was not renewed and is due on demand.			500,000				500,000

 

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

6.	CONVERTIBLE NOTES PAYABLE

 

		August 31,				August 31,
		2014				2013
Convertible Term Notes Payable (Continued)
Note payable in the amount of $25,000 due on August 28, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.15 per share. “Z warrants” to purchase 50,000 shares of the Company’s common stock valued at $5,886 were issued in connection with the note. In connection with the extensions of the due date, the conversion price was lowered by 25%.		$	25,000			$	25,000
Four notes payable in the amount of $225,000 due on August 28, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.225 per share. In connection with the extensions of the due dates, 900,000 shares of the Company’s stock valued at $112,500 were awarded and the conversion price was lowered by 25%.			225,000				225,000
Note payable in the amount of $300,000 due on August 28, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.225 per share. In connection with the extensions of the due dates, 1,200,000 shares of the Company’s stock valued at $150,000 were awarded and the conversion price was lowered by 25%.			300,000				300,000
Two notes payable in the amount of $68,500, plus accrued interest of $7,952, were combined into a new note due on August 28, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. In connection with the combination of the notes and the extensions of due dates, 137,000 shares of the Company’s stock valued at $12,330 were awarded and the conversion price was lowered by 25%.			76,452				68,500
Note payable in the amount of $500,000 due on September 21, 2014 at an interest rate of 36% per annum. The note is collateralized by 20,000,000 shares of common stock and is personally guaranteed by Joseph Scalisi, Co-President.			500,000				-

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

6.	CONVERTIBLE NOTES PAYABLE (Continued)

 

		August 31,				August 31,
		2014				2013
Convertible Term Notes Payable (Continued)
Note payable in the amount of $25,000 due on October 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. “Z warrants” to purchase 50,000 shares of the Company’s common stock valued at $5,886 were issued in connection with the note. In connection with the extension of the due date, 50,000 shares of the Company’s stock valued at $2,450 were awarded in April 2014.		$	25,000			$	25,000
Note payable in the amount of $100,000 due on October 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 $23,507 were issued in connection with the note. In connection with the extension of the due date, 200,000 shares of the Company’s stock valued at $7,340 were awarded in April 2014.			100,000				100,000
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
Two notes payable in the amount of $600,000 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. “BB warrants” to purchase 1,000,000 shares of the Company’s common stock valued at $102,056 were issued in connection with the extension of the notes during 2013.			600,000				-
Two notes payable in the amount of $225,000 due on January 21, 2016 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 and “DD warrants” to purchase 300,000 shares of the Company’s common stock valued at $44,505 were issued in connection with the notes.			225,000				75,000

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

6.	CONVERTIBLE NOTES PAYABLE (Continued)

 

		August 31,				August 31,
		2014				2013
Convertible Term Notes Payable (Continued)
Total convertible term notes payable			3,576,452				3,423,500
Unamortized debt and beneficial conversion feature discounts			(69,843	)			(126,102	)
Accrued interest			437,539				287,827
Total convertible term notes payable, net and accrued interest			3,944,148				3,585,225
Less current portion			(3,100,361	)			(3,585,225	)
Long-term convertible term notes payable, net and accrued interest		$	843,787			$	-
Related Party Convertible Demand Notes Payable
Five notes payable in the amount of $1,114,587 due on demand at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.10 per share.		$	1,114,487			$	-
Total related party convertible demand notes payable			1,114,487				-
Accrued interest			77,700				-
Total related party convertible demand notes payable and accrued interest		$	1,192,187			$	-

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

6.	CONVERTIBLE NOTES PAYABLE (Continued)

 

		August 31,				August 31,
		2014				2013
Related Party Convertible Term Notes Payable
Note payable in the amount of $100,000 due on August 28, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.15 per share. In connection with the note, 100,000 shares of the Company’s stock valued at $6,000 were awarded in January 2014. In connection with the extension of the due date on March 31, 2014, 200,000 shares of the Company’s stock valued at $20,000 were awarded.		$	100,000			$	-
Five notes payable in the amount of $1,900,000 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 2,200,000 shares of the Company’s common stock valued at $267,950 were issued in connection with the extension of the notes during 2013.			1,900,000				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 $47,165 were issued in connection with the note.			300,000				-
Note payable in the amount of $100,000 due on December 20, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.15 per share. “DD warrants” to purchase 200,000 shares of the Company’s common stock valued at $10,085 were issued in connection with the note.			100,000				-
Note payable in the amount of $200,000 due on March 5, 2016 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “EE warrants” to purchase 200,000 shares of the Company’s common stock valued at $11,508 were issued in connection with the note.			200,000				-

 

 

 LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

6.	CONVERTIBLE NOTES PAYABLE (Continued)

 

		August 31,				August 31,
		2014				2013
Related Party Convertible Notes Payable (Continued)
Note payable in the amount of $176,500 due on July 24, 2016 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $.10 per share.		$	176,500			$	-
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
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
Total related party convertible notes payable			2,776,500				2,925,737
Unamortized debt and beneficial conversion feature discounts			(151,863	)			(254,827	)
Accrued interest			302,455				97,716
Total related party convertible notes payable, net and accrued interest			2,927,092				2,768,626
Less current portion			(106,986	)			(1,049,590	)
Long-term related party convertible notes payable, net and accrued interest		$	2,820,106			$	1,719,036

 

As of August 31, 2014, the principal maturities of the convertible notes payable and related party convertible notes payable are as follows:

 

For the Years Ending:
August 31, 2015		$	3,994,439
August 31, 2016			3,501,500
Total		$	7,495,939

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

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 (“SVB”) 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 SVB 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.

 

On May 30, 2014, the Company entered into a Sixth Amendment to the Loan and Security Agreement with SVB to defer the principal payments due on the first day of May, June and July until August 1, 2014. The deferred payments will be due in full on August 1, 2014.

 

On August 27, 2014, the Company entered into a Seventh Amendment to the Loan and Security Agreement with SVB to defer the principal payments due on August 1, 2014 until November 1, 2014.

 

In connection with the Loan Agreement, the Company entered into a Financing Agreement and Loan Guarantor Agreement with a board member to personally guarantee the Loan Agreement. As compensation for the guarantee under the Financing Agreement, warrants were issued to purchase 3,600,000 shares of common stock at an exercise price of $0.20 per share and payment of $25,000 per month (“guarantee fee”), payable in cash or shares of the Company’s common stock at the guarantor’s option. As of August 31, 2014, the Company’s accounts payable and accrued expenses included $403,000 in guarantee fees owed to the board member.

 

As of August 31, 2013, the outstanding balance on the line of credit and accrued interest totaled $1,000,000 and $9,042, respectively. As of August 31, 2014, the outstanding balance on the term loan and accrued interest totaled $1,000,000 and $18,084, respectively. Of the total amount of principal and interest due on the line of credit, $684,750 has been included in the current portion of term loans and accrued interest on the balance sheet as of August 31, 2014 and the balance of $333,333 in the non-current portion of term loans.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

 

7.	LINE OF CREDIT AND TERM LOANS (Continued)

 

JMJ Notes Payable

 

On December 12, 2013 the Company and JMJ Financial (“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 on the settlement date. 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 August 31, 2014, the outstanding balance on the notes payable and accrued interest totaled $933,712 and $0, respectively. The total amount has been included in the current portion of term loans and accrued interest on the balance sheet as of August 31, 2014.

 

8.	COMMITMENTS AND CONTINGENCIES

    

Operating Leases 

 

On May 11, 2011, the Company entered into an 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.

 

On August 18, 2014, the Company entered into a sublease agreement to lease the office space at 49 Discovery, Irvine, California for the remaining term of the lease. The sublease agreement entitles the subtenant the right to free rent during the first, sixth and eleventh months. At the same time, the Company entered into an agreement to sublease office space from SkyBell Technologies, Inc. for a $2,365 per month. The Company is entitled to free rent for the first, sixth and eleventh months and the sublease expires on July 31, 2015.

 

Total rental expense on the operating lease for the years ended August 31, 2014 and 2013 totaled $76,930 and $76,849, respectively.

 

The future minimum lease commitments, net of sublease income, for the year ended August 31, 2015 will be $15,331.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

9.

EQUITY

    

Common Stock 

 

The Company issued 8,850,000 shares of common stock to consultants in exchange for various advisory services during the year ended August 31, 2013. The shares were valued at $1,916,000, which represents the fair market value of the shares provided on the award date.

 

The Company issued 1,855,000 shares of common stock in connection with note payable issuances and maturity date extensions during the year ended August 31, 2013. The shares were valued at $330,750, which represents the fair market value of the shares issued on the award date.

 

The Company issued 3,289,286 shares of common stock for the conversion of debt and accounts payable amounting to $506,983 during the year ended August 31, 2013.

 

The Company issued 62,068 shares of common stock in connection with a cashless exercise of 200,000 “Series T” warrants at an exercise price of $0.20 per share during the year ended August 31, 2013.

 

The Company issued 5,300,425 shares of common stock to consultants in exchange for various advisory services during the year ended August 31, 2014. The shares were valued at $319,235, which represents the fair market value of the shares provided on the award date.

 

The Company issued 9,363,750 shares of common stock in connection with a note payable issuances and extensions during the year ended August, 2014. The shares were valued at $615,425, which represents the fair market value of the note payable extension costs on the award date.

 

The Company issued 14,513,802 shares of common stock for the conversion of debt and accounts payable amounting to $454,988 during the year ended August 31, 2014.

 

Prepaid Services Paid In Common Stock

 

During the year ended August 31, 2013, the Company issued 5,750,000 shares of common stock to various consultants for business development and sales representative services valued at $1,242,500 on the award date to be amortized from September 1, 2012 to December 31, 2013. During the year ended August 31, 2014, the Company issued 3,500,000 shares of common stock to various consultants for business development and legal services valued at $200,450 on the award date to be amortized from March 1, 2014 to February 20, 2015. Unamortized prepaid services paid in common stock related to such stock issuances amounted to $48,225 at August 31, 2014.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

9.	EQUITY (Continued)

 

Warrants

 

Warrants to purchase up to 17,956,715 shares of the Company’s common stock are outstanding at August 31, 2014.

 

		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
DD warrants			500,000			$	0.15		January 21, 2017
EE warrants			200,000			$	0.15		March 4, 2017
Outstanding warrants as of August 31, 2014			17,956,715

 

The weighted average exercise price of outstanding warrants was $0.20 at August 31, 2014, with expiration dates ranging from December 16, 2014 to October 15, 2017.

 

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 August 31, 2014.

 

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 August 31, 2014, there were no options that were vested and presently exercisable.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

9.	EQUITY (Continued)

 

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 August 31, 2014, there were 1,500,000 options that were vested and presently exercisable. No options were exercised as of August 31, 2014.

 

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 that vest upon the achievement of certain milestones. The options expire on March 15, 2017. As of August 31, 2014, there were 1,425,000 options that were vested and presently exercisable. No options were exercised as of August 31, 2014.

 

On February 1, 2014, the Company granted options under the 2007 Plan to one employee of the Company to purchase 2,100,000 common shares as follows: (1) 100,000 shares at $.10 per share that vested on August 1, 2014; (2) 1,000,000 common shares at $0.10 per share that vest on December 31, 2014 based upon certain sales milestones; and (3) 1,000,000 common shares at $0.15 per share that vest on December 31, 2015 based upon certain milestones. The options expire on January 31, 2017. As of August 31, 2014, there were 100,000 options that were vested and presently exercisable. No options were exercised as of August 31, 2014.

 

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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

10.	PROVISION FOR INCOME TAXES (Continued)

 

The components of the Company’s deferred tax asset as of August 31, 2014 and 2013 are as follows:

 

		August 31,				August 31,
		2014				2013
Net operating loss carry forward and deductible temporary differences		$	20,880,437			$	19,904,000
Valuation allowance			(20,880,437	)			(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:  

 

		August 31,				August 31,
		2014				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	%)
			-				-

 

As of August 31, 2014 and 2013, the Company had federal and state net operating loss carryforwards of approximately $52,375,312 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 2033. 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 August 31, 2014 and 2013, 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.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

11.	RECENT ACCOUNTING PRONOUNCEMENT

 

In May 2014, the FASB, jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue recognition. Provisions of this new standard are effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2016. Early application is not permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The Company is currently evaluating the potential effect on its consolidated financial position, results of operations and cash flows from adoption of this standard.

 

 

12.	SUBSEQUENT EVENTS

 

On September 4, 2014, the Company issued 2,168,674 shares of common stock for the conversion of debt in the amount of $18,000.

 

On September 5, 2014, the Company entered into a convertible promissory note for $450,000. The note bears interest at 10% per annum, may be converted into common stock of the Company at $0.10 per share, or 50% of the Company’s closing stock price at any time after April 15, 2015, upon written notice. The note is due on September 5, 2015 and is secured by certain intellectual property owned by the Company.

 

On September 11, 2014, the Company entered into a convertible promissory note for $150,000 with a board member. The note bears interest at 10% per annum, may be converted into common stock of the Company at $0.10 per share, or 50% of the Company’s closing stock price at any time after April 15, 2015, upon written notice. The note is due on September 11, 2016 and is secured by all assets of the Company.

 

On September 22, 2014, the Company issued 3,500,000 shares of common stock for the conversion of debt in the amount of $21,000.

 

On October 1, 2014, the Company issued 2,076,923 shares of common stock for the conversion of debt in the amount of $13,500.

 

 

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2014

---

  

12.	SUBSEQUENT EVENTS (Continued)

 

On October 14, 2014, the Company entered into a convertible promissory note for $100,000 with a board member. The note bears interest at 10% per annum, may be converted into common stock of the Company at $0.10 per share, or 50% of the Company’s closing stock price at any time after April 15, 2015, upon written notice. The note is due on October 14, 2016 and is secured by all assets of the Company.

 

On October 28, 2014, the Company issued 3,285,714 shares of common stock for the conversion of debt in the amount of $23,000.

 

On November 13, 2014, the Company issued 1,730,769 shares of common stock for the conversion of debt in the amount of $9,000.

 

On November 13, 2014, the Company issued 1,255,224 shares of common stock in connection with a note payable extension. The shares were valued at $75,313, which represents the fair value of the note payable extension costs on the award date.

 

On November 21, 2014, the Company entered into a convertible promissory note for $500,000. The note bears interest at 10% per annum, may be converted into common stock of the Company at $0.10 per share, or 50% of the Company’s closing stock price at any time after April 15, 2015, upon written notice. The note is due on December 1, 2015 and is secured by all assets of the Company.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures.  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 us in the reports that we file or submit 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 Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of August 31, 2013, due to the material weaknesses resulting from a lack of segregation of duties in our accounting department and a limited corporate governance structure.

 

Internal Control Over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).  Our internal control over financial reporting is designed to provide reasonable assurance, not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.  Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of August 31, 2014. Management’s assessment was based on criteria set forth by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in Internal Control over Financial Reporting —Guidance for Smaller Public Companies.  In performing the assessment under the 1992 COSO framework, management has concluded that there is a material weakness in internal control over financial reporting.  Due to the limited number of staff resources, we believe there are instances where a lack of segregation of duties exists to provide effective controls.

 

As a result of this weakness, our internal control over financial reporting is not effective.  The weakness and its related risks are not uncommon in a company of our size because of the limitations in size and number of staff.  We believe that we have taken initial steps to mitigate these risks by consulting outside advisors.  However, this weakness in internal controls over financial reporting could result in a more than remote likelihood that a material misstatement would not be prevented or detected.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm because we are not an accelerated filer or a large accelerated filer.    

 

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 Glenn Davidson. In April 2014, Glenn Davidson resigned to pursue a full-time opportunity and was replaced by our current part-time CFO, Gregory Andrews. Other than the changes in our CFO, there were no changes in internal controls over financial reporting that occurred during the year ended August 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

  

 

ITEM 9B. OTHER INFORMATION.

 

Board of Directors

 

Each of our directors is elected by the stockholders for a term of one year and serves until his or her successor is elected and qualified.  Effective March 1, 2014, each outside director is paid 250,000 shares of restricted common stock for their 12 months of service. Our board is comprised of the following directors: David Morse, Desiree Mejia, Chuck Smith, Greggory Haugen, and Jeffrey Devlin.

 

The following table sets forth information regarding our committees.

 

Compensation Committee: Chuck Smith – Chair, Jeff Devlin and Greggory Haugen

 

Audit Committee: – Chair, vacant, Jeff Devlin, Chuck Smith

 

Governance & Nominating Committee: Jeff Devlin – Chair, Chuck Smith and Greggory Haugen

 

Appointment of Chief Financial Officer

 

On April 1, 2014, we appointed Gregory J. Andrews to serve as our Chief Financial Officer (“CFO”).  We entered into a Consulting Agreement whereby Mr. Andrews will serve as our CFO for a period of one year for monthly compensation of $8,000. In addition, the Consulting Agreement entitles Mr. Andrews $17,000 for each quarterly filing and $20,000 for each annual filing. Payment of the quarterly and annual filing fees are to be made 50% in cash and 50% in the Company’s common stock.

 

 

PART III

  

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Executive Officers and Directors.  Our directors are elected by the stockholders for a term of one year and serve until successors are elected and qualified.  Officers hold their positions at the pleasure of our board of directors, subject to employment contracts.  Each of our executive officers serves pursuant to employment contracts.  See “Item 11, Executive Compensation – Employment Contracts.”

 

The following table sets forth information regarding our executive officer and directors.

 

Name	Age	Position
David M. Morse	61	President and Chief Executive Officer and Director
Joseph F. Scalisi	51	Chief Development Officer
Desiree Mejia	43	Chief Operating Officer, Secretary and Director
Gregory J. Andrews	54	Chief Financial Officer
Greggory S. Haugen	51	Director
Charles H. Smith	71	Director
Jeff Devlin	67	Director

 

Dr. Morse has served as President, Chief Executive Officer and Chairman of the Board of Directors since October 8, 2007.  From late 2001 to 2005, Dr. Morse was involved in several start-up ventures providing consulting services (People Basics from August 2001 to April 2002 and ESP Networks from April 2002 to July 2004).  In September 2005, he joined with Joseph Scalisi and Desiree Mejia to incorporate Location Based Technologies, Corp. (“Old LBT”) (formerly known as PocketFinder, Inc.), which we acquired in October 2007.  Old LBT had been formed to develop the PocketFinder personal locators.  Dr. Morse brings 20 years of executive-level experience to us.  The majority of his career focused on the consumer market, leading him to serve as Vice President of Consumer Billing Services for Pacific Bell from 2000 to 2001.  His passion for customer service led to his appointment as Chief Customer Officer for Pacific Bell from 1997 to 2000 where he worked directly with the Chairman and the Executive Committee to establish the alignment of corporate strategy and process management objectives.  Prior to Pacific Bell, he served as Vice President of Sales and Service for SBC, now AT&T, the second largest telecommunications company in the United States, from 1991 to 1997.  While at SBC, he led an organization of more than 4,000 employees in 23 locations, serving 7,000,000 households.  Subsequent to leading the consumer organization, he served as Vice President of Product Marketing responsible for SBC’s core billing product.

 

Dr. Morse received a PhD in Organizational Behavior from Columbia Pacific University, a Master of Arts degree in Psychology from the University of Northern Colorado and a Bachelor of Science degree from Brigham Young University.

 

Dr. Morse has given keynote addresses on education and business management to several organizations and lectured at University of California at Berkeley, University of California at Davis, University of California at Los Angeles and Massachusetts Institute of Technology.  He also serves as Chair for the University of California’s Board focused on Mathematics, Engineering, and Science Achievement (MESA).

 

Mr. Scalisi has served as Chief Development Officer since October 11, 2007.  Prior to becoming our Chief Development Officer, Mr. Scalisi was an officer of our predecessor company, PocketFinder, Inc. from 2004 to 2007.  As co-founder, Mr. Scalisi designed the first generation PocketFinder device.  With vast knowledge of the communications industry, including expertise in patents and trademarks, Mr. Scalisi is responsible for filing intellectual property applications, architecting the PocketFinder design team (interactive voice recognition (“IVR”), mapping interface, man-machine user interface, and hardware design) and participates in the negotiation of contracts.  Mr. Scalisi is married to Mrs. Mejia.

 

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

 

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

  

Mrs. Mejia has served as Chief Operating Officer, Secretary and a director since October 11, 2007.  As a co-founder, Mrs. Mejia is responsible for running the day-to-day operations and oversees the Accounting and Marketing departments.  Mrs. Mejia is married to Mr. Scalisi.

 

Mrs. Mejia developed the PocketFinder concept after realizing that a true need exists to “see” your children even when you can’t be with them.  With co-founder Joseph Scalisi, Mrs. Mejia took the concept of using a GSM/GPRS tracking platform, combining it with a mapping service and creating a revolutionary tracking system.  Thus the PocketFinder system was born.

 

 

Prior to becoming our Chief Operating Officer in 2007, Mrs. Mejia was the Chief Operating officer for our predecessor company, PocketFinder, Inc. from 2004 to 2007.  Previously, Mrs. Mejia worked for ESP Networks from December 2000 through November 2004.  Prior to December 2000, Mrs. Mejia worked with venture capital firms to help raise funds for the technology sector.  She also consulted with a wireless manufacturing company to assist with the launch of a new wireless device.  Prior to this, Mrs. Mejia worked with Deloitte and Touche, LLP where she specialized in the technology and telecommunications field.  Previously, Mrs. Mejia acted as the head researcher and assistant to the Chairman at MESA Research, whose clients included AT&T, Motorola, Nortel, 3Com and Phillips.  She has a Bachelor of Arts degree in Sociology from California State University, Dominguez Hills, California.

 

Mr. Andrews assumed the duties of Chief Financial Officer in April 2014 as an independent contractor.  He brings extensive experience to LBT having been the CFO of both public and private companies. Prior to joining LBT, Mr. Andrews held various executive management positions in industries including infrastructure services, airport parking, retail, distribution and professional services. Most recently, he served as Operating Partner/CFO for a portfolio company owned by Marwit Capital, LLC, a middle market private equity firm located in Newport Beach, California. Prior to that, he was a divisional Chief Executive Officer for Macquarie Infrastructure Corp. (NYSE-MIC) where he led the national expansion of the company’s off-airport parking division and assisted in the successful initial public offering of MIC in 2004. Mr. Andrews graduated Boston College with a BS in accounting and has a Master in Business Administration from the UCLA Anderson School. He is a certified public accountant and holds Series 79 and 63 securities licenses.

 

Mr. Haugen was elected as a director in October 2011.  He has been an active financier since 1990, leading teams investing over $5 billion in various companies and portfolios of distressed consumer, real estate and residential assets in the U.S. and internationally.  Mr. Haugen was a founding Senior Partner of CarVal Investors, a Value Fund with more than $10 billion in assets under management when he left in 2008.  Since that time, Mr. Haugen has invested in and provided consulting advice to several early stage companies, including the company.  Mr. Haugen currently serves on the Board of Capital Partners Funding Group, Inc., a U.S. business and financial consulting company whose mission is to provide clients with long term capital funding solutions using very sophisticated financial programs that utilize various tax advantaged insurance products.  Mr. Haugen received his Masters of Management from the J.L Kellogg Graduate School of Management at Northwestern University in 1990 with concentrations in Finance, Marketing, International Business and Organizational Behavior.  Prior to graduate school, Mr. Haugen was a Senior Accountant with KPMG Peat Marwick in Minneapolis after obtaining his Bachelor of Science in Business Administration at Boston University in 1985.

 

Mr. Smith was elected as a director in October 2011.  He is the former President and Chief Executive Officer of SBC West, now AT&T and formerly SBC Pacific Bell/SBC Nevada Bell, overseeing more than 50,000 employees who delivered telecom products and services to that company’s millions of business and consumer customers in California and Nevada.  Mr. Smith joined Pacific Bell in 1967 after graduating from California State University at Los Angeles with a Bachelor’s Degree in Social Science with additional graduate course work and spent his more than 30 year telecom career predominantly in Operations and Executive Management positions.  In 1985 he completed a graduate program for executives at Carnegie Mellon University.  Mr. Smith was named the forth Alfred North Whitehead Distinguished Lecturer in Lifelong Learning at the University of Redlands.  Additionally, Mr. Smith was Vice Chair of the Board for USC’s Center for Telecommunications Management.  He remains actively involved as an advisor for numerous business, educational, and community support boards and agencies.  Currently Mr. Smith is Vice Chairman of the Board of the University of San Francisco and has also received honorary doctorate degrees from Menlo College and Holy Names College.

 

Mr. Devlin served as Senior Vice President of New Business Development for Doner Advertising, where he placed accounts with major companies and organizations including the National Football League (NFL), Atari, Sirius XM Satellite Radio, The Coca-Cola Company and Intel. Mr. Devlin also produced General Motors’ first-ever branded feature film, “The Last Ride,” featuring Dennis Hopper. Devlin’s industry honors include 17 CLIO Awards; 16 Andy Awards for advertising excellence; 21 Telly Awards for outstanding commercials; four Effie Media Awards; and a prestigious Gold Camera from the U.S. International Film Festival. His award-winning piece for Visa, Olympics is on permanent display at the Museum of Modern Art (MOMA) in New York. Mr. Devlin is currently a member of the Board of Directors for the United States Equestrian Team, Somerset Hills Handicapped Riders, and Mojo Organics. He is also on the Board of Advisors for Atari and Sirius XM Satellite Radio and is a member of the executive committee for the Association of Independent Commercial Producers (AICP). Mr. Devlin received a Bachelor’s degree from Bethel University in Nashville, Tennessee, and completed graduate work at Dartmouth College in Hanover, New Hampshire.

 

Other Persons Expected to Make Significant Contributions.  Tina Florance, CPA, provides us with accounting and financial advisory services.  She oversees our accounting group and financial reporting duties.

 

Code of Ethics.  We have adopted a Code of Ethics (the “Code”) that applies to our directors, officers and employees, including our principal executive officer and principal financial and accounting officer, respectively.  A written copy of the Code is available on written request to us.

 

 

Compliance with Section 16(a) of the Exchange Act.  We do not have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended.  Hence, compliance by our officers and directors with Section 16(a) of that Act is not required.

   

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation Table.  The table set forth below summarizes the compensation payable to our executive officers during the years ending August 31, 2014 and 2013 for services in all capacities.  Those listed in the table received no cash bonuses, non-equity incentive plan compensation or nonqualified deferred compensation earnings during those two fiscal years.

 

 Summary Compensation Table

 

Name and Principal Position		Fiscal Year Ended 8/31		Salary  ($)			Stock Awards ($)		Option  Awards ($)		Total ($)
David M. Morse (1)		2014			180,000	(9)	-		-			180,000	(9)
		2013			180,000	(9)	-		-			180,000	(9)
Joseph F. Scalisi (2)		2014			157,500	(10)	-		-			157,500	(10)
		2013			180,000	(10)	-		-			180,000	(10)
Desiree Mejia (3)		2014			180,000	(11)	-		-			180,000	(11)
		2013			180,000	(11)	-		-			180,000	(11)
Gregory J. Andrews (4)		2014			40,500	(12)	8,500		-			49,000	(12)
Glenn Davidson (5)		2014			19,848	(13)	-		-			19,848	(13)
Kenneth E. Fronk (6)		2014			12,000	(14)	-		8,128			20,128	(14)
		2013			96,000	(14)	-		72,198			168,198	(14)
Gregory Gaines (7)		2014			71,500	(15)	-		-			71,500	(15)
		2013			162,000	(15)	36,000		-			162,000	(15)
Gregory Harrison (8)		2014			91,000	(16)	-		18,118			109,118	(16)
		2013			168,000	(16)	-		123,806			291,806	(16)

 

---

(1)	President, Chief Executive Officer and Chairman of the Board
(2)	Chief Development Officer
(3)	Chief Operating Officer, Secretary and Director
(4)	Chief Financial Officer (effective April 1, 2014)
(5)	Chief Financial Officer (from December 2013 to March 2014)
(6)	Chief Financial Officer (from March 2012 to November 2013)
(7)	Vice President of Marketing and Sales (effective February 1, 2014)
(7)	Chief Marketing and Sales Officer (from October 2011 to January 2014)
(8)	General Counsel (from April 2011 to March 2014)
(9)	In 2014, $133,500 was paid and $46,500 was accrued for future payment.  In 2013, $120,000 was paid and $60,000 was accrued for future payment.
(10)	In 2014, $154,400 was paid and $3,100 was accrued for future payment.  In 2013, $120,000 was paid and $60,000 was accrued for future payment.
(11)	In 2014, $180,000 was paid and $12,096 was also paid to reduce the 2013 accrued amount. In 2013, $120,000 was paid and 60,000 was accrued for future payment.
(12)	In 2014, $32,500 was paid and $8,000 was accrued for future payment pursuant to a consulting agreement.
(13)	In 2014, $19,848 was paid and $0 was accrued for future payment pursuant to a consulting agreement.
(14)	In 2014, $12,000 was paid and $4,000 was also paid to reduce the 2013 accrued amount. In 2013, $64,000 was paid and $32,000 was accrued for future payment.
(15)	In 2014, $71,500 was paid and $5,306 was also paid to reduce the 2013 accrued amount. In 2013, $108,000 was paid and $54,000 was accrued for future payment.
(16)	In 2014, $75,375 was paid and $15,625 was accrued for future payment. In 2013, $106,000 was paid and $62,000 was accrued for future payment.

 

  

Outstanding Equity Awards.  The table below summarizes the outstanding equity awards to our executive officers as of August 31, 2014.

 

Outstanding Equity Awards at Fiscal Year-End

 

Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($)	Option Expiration Date
David M. Morse	-	6,000,000	$0.33/share	(1)
David M. Morse	500,000	3,500,000	$0.31/share	January 12, 2017
Joseph F. Scalisi	-	6,000,000	$0.33/share	(1)
Joseph F. Scalisi	500,000	3,500,000	$0.31/share	January 12, 2017
Desiree Mejia	-	6,000,000	$0.33/share	(1)
Desiree Mejia	500,000	3,500,000	$0.31/share	January 12, 2017

 

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(1)	The options expire ten years from the date of performance goal achieved.

 

Compensatory Plans.  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.  The plan is administered by our board of directors which has the power, pursuant to the plan, to delegate the administration of the plan to a committee of the board.  There are no other arrangements or plans in which we provide pension, retirement or similar benefits for our officers or directors.

 

Compensation of Directors.  Directors are elected for a one-year term and receive a total of 250,000 shares of common stock as compensation.  The first 125,000 shares of common stock are issued at the commencement of the service term and the remaining 125,000 shares of common stock are issued six months thereafter.

 

Employment Contracts.  David Morse (President and Chief Executive Officer), Joseph Scalisi (Chief Development Officer) and Desiree Mejia (Chief Operating Officer), are each employed pursuant to written employment agreements with identical terms.  The agreements were renewed on January 12, 2012 and expire in five years on January 12, 2017.  Under the terms of the agreement, each officer is entitled to a base salary of $15,000 per month.  Effective June 1, 2014, the monthly compensation to Joseph Scalisi was reduced by 50% to $7,500. Additional increases in increments of $5,000 or $10,000 per month are based on attaining certain numbers of subscribers and for successfully achieving cash flow in each country outside the U.S.  He or she may participate in any general bonus plan established by the board of directors and is entitled to participate in our stock incentive plan on such terms as the board deems appropriate from time to time.  He or she will also be entitled to participate in any and all benefits and perquisites as are generally provided for the benefit of executive employees.  The agreements terminate on death, incapacity (after 180 days), resignation and cause as defined.  If terminated without cause, he or she is entitled to base salary at least equal to the salary, including bonuses and commissions, of our highest paid employee, and medical benefits, through the end of the employment term or, if such termination occurs in the last year of the employment term, for a period of two years after the date of termination.  If during that period any events occur that would have resulted in increasing his or her base salary, he or she is entitled to be paid such additional amounts.

 

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Beneficial Ownership of Certain Owners and Management. The following table sets forth information regarding the number of common stock shares that were beneficially owned on November 20, 2014 by:

 

●

Each person, or group of affiliated persons, who is known to us to be the beneficial owner of more than 5% of our outstanding common stock;

●

Each of our executive officers and directors; and

●

All of our directors and executive officers as a group.

 

For this table, beneficial ownership of our common stock is determined in accordance with the rules of the Securities and Exchange Commission and includes any shares of common stock over which a person exercises sole or shared voting or investment power, or of which a person has a right to acquire ownership through the exercise of an option, warrant or right or the conversion of a security at any time within 60 days of November 20, 2014.  Subject to any applicable community property laws, the persons or entities named in the table below have sole voting and investment power with respect to all shares indicated as beneficially owned by them.  Unless otherwise indicated, the address of the beneficial owners is 49 Discovery, Suite 260, Irvine, California 92618.

 

		Shares of Common Stock Beneficially Owned(1)
Name of Beneficial Owner		Number				Percent
David M. Morse
President, Chief Executive Officer and Chairman of the Board			25,415,573				8.9%
Joseph F. Scalisi (2)
Chief Development Officer			11,345,430				4.0%
Desiree Mejia(2)
Chief Operating Officer, Secretary and Director			15,065,430				5.3%
Gregory J. Andrews, Chief Financial Officer			425,000				0.1%
Greggory S. Haugen, Director (3)			27,171,026				9.5%
Charles H. Smith, Director			1,041,667				0.4%
Jeff Devlin, Director			225,000				0.1%
All executive officers and directors as a group (1)			80,689,126				28.3%

 

(1)

Applicable percentage ownership is based on 255,112,822 shares of common stock outstanding as of November 20, 2014, provided that any shares of common stock not outstanding which are subject to options, warrants, rights or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding shares owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person.

(2)

Mr. Scalisi and Mrs. Mejia are married and, by virtue of community property laws or otherwise, each may have an interest in the shares reported by the other.

(3)

The shares of common stock beneficially owned by Mr. Haugen do not include 3,740,000 shares owned by the Haugen Children 2006 Trust and Haugen Siblings’ Trust. Mr. Haugen disclaims beneficial ownership of said shares.

 

  

Securities Authorized for Issuance Under Equity Compensation Plans.  The following table provides information with respect to outstanding options and warrants as of November 18, 2014, pursuant to compensation plans (including individual compensation arrangements) under which equity securities of are authorized for issuance.

 

		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
			(a)				(b)				(c)
Equity compensation plans approved by security holders							--				--
Equity compensation plans not approved by security holders			20,000,000(1)				$0.30				1,400,000
Total			20,000,000								1,400,000

 

(1)

Includes stock options granted under the Amended and Restated 2007 Stock Incentive Plan to officers Mr. Morse, Mr. Scalisi and Mrs. Mejia to purchase up to 12,000,000 shares of common stock and to three employees to purchase 6,600,000 shares of common stock between $0.15 and $0.31 per share.  Options vest upon reaching certain milestones contained in executive employment agreements.  All such options vest upon a change of control.  The options expire January 12, 2017.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions.  The following are the related party transactions in which we have engaged since September 1, 2013.

 

Advances from officer

 

During the year ended August 31, 2014, there were $236,500 of new advances from Joseph Scalisi, our Chief Development Officer and stockholder, and repayments on advances totaled $160,325.  

 

Services Provided

 

Debra Mejia provides bookkeeping and accounting services to us for $4,500 per month.  Mrs. Mejia is a relative of Desiree Mejia, Chief Operating Officer.  During the year ended August 31, 2014, bookkeeping and accounting fees to Mrs. Mejia totaled $54,225. No fees were payable to Mrs. Mejia at August 31, 2014.

 

On March 15, 2012, we entered into an Executive Employment Agreement with David Morse, Jr. to act as Vice President of Customer Service. Mr. Morse is a relative of David Morse, our President and Chief Executive Officer. Mr. Morse is paid compensation of $12,500 plus sales commissions and is entitled to earn up to 1,500,000 stock options that vest upon achieving certain milestones. During the year ended August 31, 2014, total cash compensation and stock compensation, including the vesting of certain stock options, paid to Mr. Morse totaled $163,771.

 

As consideration for personally guaranteeing our line of credit with Silicon Valley Bank, Greggory Haugen charges a combined fee of $25,000 per month that is payable in cash or common stock. Mr. Haugen was elected a director in October 2011. During the year ended August 31, 2014, such fees to Mr. Haugen totaled $300,000. Fees payable to Mr. Haugen amounted to $403,000 at August 31, 2014.

 

The Company occupies office space at a facility leased by SkyBell Technologies, Inc. (“SkyBell”). In addition, the Company outsources its customer service to SkyBell under a month to month contract that commenced in February 2014. SkyBell is owned and operated by Joseph Scalisi, Chief Development Officer, and Desiree Mejia, Chief Operating Officer. During the year ended August 31, 2014, the Company incurred $54,055 in costs related to these services. As of August 31, 2014 the Company owed SkyBell $68,979.

 

 

Related Party Notes Payable

 

We entered into five secured promissory note agreements totaling $1,376,500 with our board member, Greggory Haugen. The notes are due starting on September 30, 2015 and through July 24, 2016, bear interest at 10% per annum and may be converted into shares of our common stock at $0.10 to $.20 per share.

 

We converted $117,215 of deferred compensation owed to employees David Morse, Desiree Mejia, Eric Fronk, Greg Harrison, David Morse Jr. and a consultant into unsecured convertible promissory notes that are due on demand, bear interest at 5% per annum and may be converted into shares of our common stock.

 

Director Independence.  Our board of directors has determined that the following directors are “independent directors” as defined by the rules of The NASDAQ Stock Market (“NASDAQ”): Messrs. Smith and Devlin.  Although our common stock is not listed on NASDAQ, the board uses the definition of independence from the NASDAQ listing standards to assess independence of our directors. Under applicable SEC and NASDAQ rules, the existence of certain “related-party” transactions above certain thresholds between a director and us are required to be disclosed and preclude a finding by the board that the director is independent.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Friedman LLP served as our independent registered public accounting firm for the fiscal years ended August 31, 2014 and 2013, respectively. The following table represents the fees billed to us for the audit and other services provided by our accountants:

 

		2014				2013
Audit fees		$	93,460			$	74,918
Total Fees		$	93,460			$	74,918

 

Audit Fees. This category includes the annual audit of our consolidated financial statements included in our Annual Report on Form 10-K and the quarterly reviews of our consolidated financial statements included in our Form 10-Qs.  This category also includes advice on accounting matters that is normally provided by the accountant in connection with statutory and regulatory filings.

  

Pre-Approval Policies and Procedures.  Prior to engaging our accountants to perform a particular service, our board of directors obtains an estimate for the service to be performed.  All of the services described above were approved by the board of directors in accordance with its procedures.  

 

 

PART IV

 

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)(1) Financial Statements

 

See Part II, Item 8. Financial Statements and Supplementary Data

 

(a)(2) Financial Statement Schedules

 

Schedules have been omitted since they are not applicable, they are not required, or the information required to be set forth in the schedules is included in the Consolidated Financial Statements or Notes thereto.

 

(b) Exhibits

 

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).
10.67	Secured Convertible Promissory Note between the Company and Greggory Haugen dated July 24, 2014. †
10.68	Second Amendment and Loan Extension between the Company and Adam Marcotte dated August 28, 2014. †
10.69	Third Amendment and Loan Extension between the Company and Cody Evans dated August 28, 2014. †
10.70	Third Amendment and Loan Extension between the Company and David and Barbara Alampi dated August 28, 2014. †
10.71	Third Amendment and Loan Extension between the Company and David and Denisse Kuennen dated August 28, 2014. †
10.72	Third Amendment and Loan Extension between the Company and James and Kristin Heer dated August 28, 2014. †
10.73	Third Amendment and Loan Extension between the Company and Rolf Haugen dated August 28, 2014. †
10.74	Secured Convertible Promissory Note between the Company and EPCP II Capital, LLC dated September 4, 2014. †
10.75	Third Loan Amendment between the Company and Bridge Loans, LLC dated September 5, 2014. †
10.76	Secured Convertible Promissory Agreement between the Company and Greggory Haugen dated September 11, 2014. †
10.77	Secured Convertible Promissory Agreement between the Company and Greggory Haugen dated October 14, 2014. †
10.78	Second Amendment and Loan Extension between the Company and Dan Horner dated November 14, 2014. †
10.79	Second Amendment and Loan Extension between the Company and Chuck Smith dated November 14, 2014. †
10.80	Secured Convertible Promissory Note between the Company and Atlantic Capital Holdings, LLC dated November 21, 2014. †
21.1	Subsidiary of the Registrant - Location Based Technologies, Ltd. (an England and Wales private and limited company) †
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

 

 

 Signatures

 

In accordance with Section 13 or 15(d) of the Exchange Act, the company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	LOCATION BASED TECHNOLOGIES, INC. (Registrant)
November 26, 2014	By:	/s/ David M. Morse
		David M. Morse,
		President and Chief Executive Officer

 

November 26, 2014	By:	/s/ Gregory J. Andrews
		Gregory J. Andrews
		Chief Financial Officer

 

 

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

 

November 26, 2014	/s/ David M. Morse
	David M. Morse,
	President, Chief Executive Officer and Director
November 26, 2014	/s/ Desiree Mejia
	Desiree Mejia,
	Chief Operating Officer and Director
November 26, 2014	/s/ Joseph Scalisi
	Joseph Scalisi,
	Chief Development Officer
November 26, 2014	/s/ Greggory S. Haugen
	Greggory S. Haugen
	Director
November 26, 2014	/s/ Charles H. Smith
	Charles H. Smith
	Director
November 26, 2014	/s/ Jeff Devlin
	Jeff Devlin
	Director

 

 

Supplemental Information to be Furnished with Reports Filed

Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act

 

1.	No annual report to security holders covering the company’s last fiscal year has been sent as of the date of this report.

 

2.	No proxy statement, form of proxy, or other proxy soliciting material has been sent to any of the company’s security holders with respect to any annual or other meeting of security holders.

 

3.	If such report or proxy material is furnished to security holders subsequent to the filing of this Annual Report on Form 10-K, the company will furnish copies of such material to the Commission when it is sent to security holders.