Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended February 28, 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 of incorporation)	(I.R.S. Employer Identification No.)

49 Discovery, Suite 260, Irvine, California 92618

(Address of principal executive offices)

888-600-1044

(Registrant’s telephone number)

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒

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

As of April 9, 2014, there were 247,080,419 shares of the registrant’s $.001 par value common stock issued and outstanding.

TABLE OF CONTENTS

		PAGE

PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED FINANCIAL STATEMENTS (UNAUDITED)	3

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4.	CONTROLS AND PROCEDURES	42

PART II	OTHER INFORMATION	43

ITEM 1.	LEGAL PROCEEDINGS	43

ITEM 1.A.	RISK FACTORS	43

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44

ITEM 5.	OTHER INFORMATION	44

ITEM 6.	EXHIBITS	44

SIGNATURES		45

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

February 28, 2014 and August 31, 2013

(Unaudited)

	February 28, 2014		August 31, 2013

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	86,252	$	680,914
Accounts receivable, net of allowances		35,083		77,584
Inventory, net of reserves		216,142		788,470
Prepaid expenses and other assets		65,075		47,976
Deferred financing costs		280,807		25,827

Total current assets		683,359		1,620,771

Property and equipment, net of accumulated depreciation		83,264		110,813

OTHER ASSETS
Intangible assets, net of accumulated amortization		675,511		715,732
Inventory, net of reserves		1,459,073		893,401
Deposits		30,000		30,000

Total other assets		2,164,584		1,639,133

TOTAL ASSETS	$	2,931,207	$	3,370,717

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

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

February 28, 2014 and August 31, 2013

(Unaudited)

	February 28, 2014			August 31, 2013

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,752,587		$	1,699,114
Deferred compensation		233,921			267,730
Deferred revenue		17,073			25,371
Line of credit and accrued interest		-			1,009,042
Advances from officer and accrued interest		25,689			29,219
Convertible notes payable and accrued interest, net of unamortized discounts		2,493,565			3,585,225
Related party convertible notes payable and accrued interest, net of unamortized discounts		1,233,844			1,049,590
Current portion of term loans and accrued interest		1,009,834			-
Derivative liabilities		-			745,148

Total current liabilities		6,766,513			8,410,439

Convertible notes payable		209,741			-
Related party convertible notes payable and accrued interest, net of unamortized discounts		2,816,672			1,719,036
Term loans		1,094,533			-

TOTAL LIABILITIES		10,887,459			10,129,475

Commitments and contingencies		-			-

STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $0.001 par value; 300,000,000 shares authorized; 223,060,220 and 211,917,511 shares issued and outstanding at February 28, 2014 and August 31, 2013, respectively		223,061			211,917
Additional paid-in capital		50,328,511			49,388,375
Prepaid services paid in common stock		(55,416	)		(294,585	)
Accumulated deficit		(58,452,408	)		(56,064,465	)

Total stockholders' deficit		(7,956,252	)		(6,758,758	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	2,931,207		$	3,370,717

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

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended February 28, 2014 and 2013

(Unaudited)

	For the three months ended						For the six months ended
	February 28, 2014			February 28, 2013			February 28, 2014			February 28, 2013

Net revenue
Devices	$	107,582		$	489,276		$	350,973		$	617,132
Services		233,509			101,881			398,922			182,580

Total net revenue		341,091			591,157			749,895			799,712

Cost of revenue
Devices		92,152			529,029			235,969			660,288
Services		255,253			188,943			493,243			366,724

Total cost of revenue		347,405			717,972			729,212			1,027,012

Gross loss		(6,314	)		(126,815	)		20,683			(227,300	)

Operating expenses
General and administrative		290,576			444,732			1,019,210			1,052,092
Officer compensation		233,059			206,098			479,746			435,768
Professional fees		174,465			452,053			548,958			856,981
Rent		19,202			19,202			38,405			38,729
Research and development		9,790			102,922			99,548			145,286
Salaries and wages		61,243			109,343			109,822			260,063
Loss on asset impairment		-			-			-			455,916

Total operating expenses		788,335			1,334,350			2,295,689			3,244,835

Net operating loss		(794,649	)		(1,461,165	)		(2,275,006	)		(3,472,135	)

Other income (expense)
Financing costs		(105,000	)		(279,100	)		(253,880	)		(360,100	)
Amortization of beneficial conversion feature		(28,301	)		(72,906	)		(60,948	)		(134,139	)
Amortization of deferred financing costs		(90,523	)		(50,542	)		(108,350	)		(132,508	)
Amortization of debt discount		(106,264	)		-			(205,170	)		-
Loss on change in fair value of derivative liabilities		-			504,132			-			(640,515	)
Interest expense, net		(168,146	)		(68,005	)		(321,436	)		(112,877	)
Gain on debt settlement		-			-			886,548			-
Loss on asset disposals		(49,000	)		-			(48,431	)		-
Foreign currency loss, net		(470	)		334			(470	)		318

Total other income (expense)		(547,704	)		33,913			(112,137	)		(1,379,821	)

Net loss before income taxes		(1,342,353	)		(1,427,252	)		(2,387,143	)		(4,851,956	)

Provision for income taxes		-			-			800			800

Net Loss	$	(1,342,353	)	$	(1,427,252	)	$	(2,387,943	)	$	(4,852,756	)

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

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended February 28, 2014 and 2013

(Unaudited)

	For the three months ended						For the six months ended
	February 28, 2014			February 28, 2013			February 28, 2014			February 28, 2013

Basic and Diluted - Earnings (loss) Per Share	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

Basic and Diluted - Weighted Average Number of Shares Outstanding		216,584,974			202,713,856			214,133,373			201,216,048

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

Location Based Technologies, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended February 28, 2014 and 2013

(Unaudited)

	For the six months ended
	February 28, 2014			February 28, 2013
Cash Flows from Operating Activities
Net loss	$	(2,387,943	)	$	(4,852,756	)
Adjustment to reconcile net loss to net cash used in operating activities:
Loss on change in fair value of derivative liabilities		-			640,515
Loss on asset disposal		49,000			-
Gain on sale of trademark		(569	)		-
Gain on debt settlement		(886,548	)		-
Loss on asset impairment		-			455,916
Provision for doubtful accounts and sales returns		1,000			(23,954	)
Provision for inventory reserve		(330	)		79,243
Depreciation and amortization		61,306			55,206
Amortization of beneficial conversion feature		60,948			134,139
Amortization of deferred financing costs		108,350			132,256
Amortization of prepaid services paid in common stock		239,169			402,917
Amortization of debt discount		205,170			-
Common stock issued for services and financing costs		88,670			265,500
Warrants issued for services and financing costs		-			99,873
Stock options issued for services		33,132			101,219
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		41,501			(285,109	)
(Increase) decrease in inventory		6,986			95,159
(Increase) decrease in prepaid expenses and other assets		(17,099	)		29,247
Increase (decrease) in accounts payable and accrued expenses		317,643			669,369
Increase (decrease) in accrued officer compensation		21,691			125,350
Increase (decrease) in deferred revenue		(8,298	)		(7,251	)
Increase (decrease) in accrued interest		267,351			72,276

Net cash used in operating activities		(1,798,870	)		(1,810,885	)

Cash Flows from Investing Activities
Purchase of property and equipment		(49,467	)		(141,994	)
Proceeds from sale of trademark		7,500			-

Net cash used in investing activities		(41,967	)		(141,994	)

Cash Flows from Financing Activities
Advances / (repayments) from officers, net		(3,825	)		-
Payments for deferred financing costs		-			(6,000	)
Proceeds from convertible notes payable		150,000			1,066,000
Proceeds from related party convertible notes payable		1,100,000			600,000
Repayments of related party convertible notes payable		-			(50,000	)

Net cash provided by financing activities		1,246,175			1,610,000

Net decrease in cash and cash equivalents		(594,662	)		(342,879	)

Cash and cash equivalents, beginning of year		680,914			376,554

Cash and cash equivalents, end of year	$	86,252		$	33,675

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

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended February 28, 2014 and 2013

(Unaudited)

	For the six months ended
	February 28, 2014		February 28, 2013

Non-Cash Financing Activities:
Conversion of accrued compensation into convertible notes payable	$	55,500	$	-
Conversion of accounts payable into common stock	$	315,000	$	-
Issuance of common stock for deferred financing costs	$	312,500	$	-
Issuance of warrants for financing costs classified as debt discount	$	201,978	$	-

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 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

FEBRUARY 28, 2014

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

Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to financial statements included in the annual report on Form 10-K of Location Based Technologies, Inc. for the year ended August 31, 2013. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended February 28, 2014, are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated financial statements and the related notes should be read in conjunction with the Company’s audited financial statements for the year ended August 31, 2013, included in the Company’s report on Form 10-K.

Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred net losses since inception, and as of February 28, 2014 , had an accumulated deficit of $58,452,408 and negative working capital of $5,516,973. 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.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Use of Estimates

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

Reclassifications

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

Cash and Cash Equivalents

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

Concentration of Credit Risk

Cash and Cash Equivalents – The cash and cash equivalent balances at February 28, 2014 and August 31, 2013 were principally held by two institutions which insured our aggregated accounts with the Federal Deposit Insurance Corporation ("FDIC") up to $250,000 per insured banking institution. At times, the Company has maintained bank balances which have exceeded FDIC limits. The Company has not experienced any losses with respect to its cash balances.

Revenue and Accounts Receivable – For the six months ended February 28, 2014, revenue from the Company’s largest customer amounted to $119,570 or 16% of total net revenue. Accounts receivable from this customer amounted to $9,064 or 19% of total accounts receivable at February 28, 2014. In addition, there was another customer with accounts receivable totaling $25,687 comprising 55% of total accounts receivable at February 28, 2014.

For the six months ended February 28, 2013, revenue from the Company’s largest customer amounted to $390,677 or 49% of total net revenue. Accounts receivable from this customer amounted to $390,677 or 77% of total accounts receivable at February 28, 2013.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Allowance for Doubtful Accounts

The allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. As of February 28, 2014 and August 31, 2013, the allowance for doubtful accounts amounted to $3,000.

Allowance for Sales returns

An allowance for sales returns is recorded as a reduction to revenue and based on management’s judgment using historical experience and expectation of future conditions. As of February 28, 2014 and August 31, 2013, the allowance for sales returns amounted to $9,500 and $8,500, respectively.

Inventory

Inventories are valued at the lower of cost (first-in, first-out) or market and primarily consisted of components and finished goods for the Company’s PocketFinder® products. Packaging costs are expensed as incurred. The Company provides for a lower-of-cost-or-market ("LCM") adjustment against gross inventory values. An inventory valuation reserve approximating $1,076,000 was recorded to reduce the value of the inventory to the current selling price. Management estimates the current selling price as the realizable value of the 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, is classified as a noncurrent asset at February 28, 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.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method and with useful lives used in computing depreciation ranging from 1 to 5 years. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized. During the six months ended February 28, 2014, the Company disposed of a $49,000 fixed asset resulting in a $49,000 loss on fixed asset disposal.

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 six months ended February 28, 2013, the Company recorded an impairment of certain patents amounting to $455,916. There was no such impairment recognized during the six months ended February 28, 2014.

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 February 28, 2014 and August 31, 2013, the Company capitalized $742,945 for patent related expenditures. As of February 28, 2014 and August 31, 2013, the Company capitalized $52,539 and $59,470 for trademark related expenditures, respectively. Accumulated amortization of intangible assets was $119,973 and $86,683 at February 28, 2014 and August 31, 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Intangible Assets – Patents and Trademarks (Continued)

Patents are subject to amortization upon issuance by the United States Patent and Trademark Office. Intangible assets are amortized in accordance with FASB ASC 350 – Intangibles – Goodwill and Other, using the straight-line method over the shorter of their estimated useful lives or remaining legal life.

Deferred Revenue

Deferred revenue is a liability related to revenue producing activity for which revenue has not yet been recognized. As of February 28, 2014 and August 31, 2013, deferred revenue amounted to $17,073 and $25,371, respectively, and consisted of prepaid service revenue from subscribers.

Beneficial Conversion Feature of Convertible Notes Payable

The Company accounts for the beneficial conversion feature of convertible notes payable when the conversion rate is below market value. Pursuant to FASB ASC 470-20 – Debt With Conversion and Other Options , the estimated fair value of the beneficial conversion feature is recorded in the financial statements as a discount from the face amount of the notes. Such discounts are amortized over the term of the notes or conversion of the notes, if sooner. The Company recognized amortization expense related to the beneficial conversion features on convertible notes payable totaling $28,301 and $72,906 during the three months ended February 28, 2014 and 2013, respectively. The Company recognized amortization expense related to the beneficial conversion features on convertible notes payable totaling $60,948 and $134,139 during the six months ended February 28, 2014 and 2013, respectively

Derivative Liabilities

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Derivative Liabilities (Continued)

The Company determined that the conversion feature of two promissory notes met the criteria of an embedded derivative, and therefore the conversion feature of these notes needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion feature was estimated at the default date when the notes became convertible using the Black-Scholes model. In connection with the JMJ debt settlement, the derivative liabilities were eliminated and included in the gain on debt settlement.

Revenue Recognition

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

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

Service Revenue – Service revenue consists of monthly service fees initiated by the customer upon activation of a PocketFinder® device. Services fees are billed and collected in the month the service is provided. Service revenue is recognized upon collecting the monthly service fee from the customer. The Company does not believe the difference between recognizing revenue at the beginning of the subscription month versus the end of the subscription month is material to the financial statements.

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.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Advertising Costs

Advertising costs are expensed as incurred. For the three months ended February 28, 2014 and 2013, the Company incurred $0 and $100,671 of advertising costs, respectively. For the six months ended February 28, 2014 and 2013, the Company incurred $466,612 and $368,696 of advertising costs, respectively.

Research and Development

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

Stock Based Compensation

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

In accordance with ASC 718, the Company estimates the grant-date fair value of its stock options using the Black-Scholes option-pricing model, which takes into account assumptions regarding an expected dividend yield, a risk-free interest rate, an expected volatility factor for the market price of the Company’s common stock and an expected term of the stock options. The fair value of stock options granted is amortized on a straight-line basis over the vesting periods. For the three months ended February 28, 2014 and 2013, stock-based compensation expense associated with stock options totaled $12,502 and $19,364, respectively. For the six months ended February 28, 2014 and 2013, stock-based compensation expense associated with stock options totaled $33,132 and $101,219 respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

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

Income Taxes

The Company accounts for income taxes under FASB ASC 740 – Income Taxes . Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements’ carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. The Company has included its $800 minimum California state income tax in its provision for income taxes for the six months ended February 28, 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.

	February 28, 2014		August 31, 2013

Warrants		17,756,715		15,456,715
Stock options		2,925,000		3,475,000
Convertible notes payable		32,671,569		25,300,352
Dilutive potential common shares		53,353,284		44,232,067

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

2. INVENTORY

Inventory at February 28, 2014 and August 31, 2013 consisted of the following:

	February 28, 2014			August 31, 2013
Current:
Finished goods	$	308,642		$	1,286,953
Inventory valuation reserve for finished goods		(92,500	)		(498,483	)
Inventories, current	$	216,142		$	788,470

Noncurrent:
Finished goods	$	972,164		$	-
Inventory valuation reserve for finished goods		(405,983	)		-
Device components		1,470,565			1,471,404
Inventory valuation reserve for components		(577,673	)		(578,003	)
Inventories, noncurrent	$	1,459,073		$	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 finished goods and inventory components within the next year. The Company expects that it will take approximately one to three years to sell finished goods inventory on hand at February 28, 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 two. Although management does not believe there are any issues with inventory obsolescence as of February 28, 2014, an obsolescence reserve may be necessary in the future if inventory continues to move at its current turnover rate. Inventories totaling $1,459,073 and $893,401 which may not be realized within a 12-month period have been reclassified as long-term as of February 28, 2014 and August 31, 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

3. PROPERTY AND EQUIPMENT

Property and equipment at February 28, 2014 and August 31, 2013 consisted of the following:

	February 28, 2014			August 31, 2013
Machinery and equipment	$	139,821		$	106,354
Computer software (mobile apps)		82,999			66,999
Computer software (internal)		2,263			51,263
Computer and video equipment		19,756			19,756
Office furniture		24,526			24,526
		269,365			268,898
Less: accumulated depreciation		(186,101	)		(158,085	)
Total property and equipment	$	83,264		$	110,813

Depreciation expense for the three months ended February 28, 2014 and 2013 amounted to $13,825 and $12,196, respectively. Depreciation expense for the six months ended February 28, 2014 and 2013 amounted to $28,016 and $22,044, respectively.

4. INTANGIBLE ASSETS

Intangible assets at February 28, 2014 and August 31, 2013 consisted of the following:

	February 28, 2014			August 31, 2013
Patents	$	742,945		$	742,945
Trademarks		52,539			59,470
		795,484			802,415
Less: accumulated amortization		(119,973	)		(86,683	)
Total intangible assets	$	675,511		$	715,732

Amortization expense totaled $16,553 and $16,370 for the three months ended February 28, 2014 and 2013, respectively. Amortization expense totaled $33,290 and $33,162 for the six months ended February 28, 2014 and 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

4. INTANGIBLE ASSETS (Continued)

As of February 28, 2014, Company estimates amortization expense approximating $67,000 each year for the next five years and $340,000 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 six months ended February 28, 2014, there were advances from our Co-President totaling $151,000 and $154,824 of repayments. As of February 28, 2014, there was $25,000 of outstanding advances and $689 of related accrued interest.

Accounts Payable

Amounts payable to related parties totaled $250,000 and $100,000 as of February 28, 2014 and August 31, 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

6. CONVERTIBLE NOTES PAYABLE

	February 28, 2014		August 31, 2013
Convertible Notes Payable

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

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

Note payable in the amount of $300,000 due on July 13, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.30 per share. In connection with the extension of the due date on January 22, 2014, 600,000 shares of the Company’s stock valued at $60,000 were awarded.		300,000		300,000

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

Three notes payable in the amount of $102,500 due on July 9, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.30 per share. In connection with the extension of the due date, 150,000 shares of the Company’s stock valued at $15,000 were awarded in January 2014.		75,000		102,500

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

6. CONVERTIBLE NOTES PAYABLE (Continued)

	February 28, 2014		August 31, 2013
Convertible Notes Payable (Continued)

Two notes payable in the amount of $150,000 due on July 13, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.30 per share. In connection with the extension of the due date, 300,000 shares of the Company’s stock valued at $30,000 were awarded in January 2014.	$	150,000	$	150,000

Note payable in the amount of $76,452 due on August 9, 2014 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 extension of the due date, 137,000 shares of the Company’s stock valued at $12,330 were awarded in January 2014.		76,452		41,000

Note payable in the amount of $75,000 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 of the Company’s common stock valued at $24,617 were issued in connection with the note.		75,000		75,000

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

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

6. CONVERTIBLE NOTES PAYABLE (Continued)

	February 28, 2014			August 31, 2013
Convertible Notes Payable (Continued)

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

Note payable in the amount of $150,000 due on January 21, 2016 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.15 per share. “DD warrants” to purchase 300,000 shares of the Company’s common stock valued at $25,971 were issued in connection with the note.		150,000			-

Total convertible notes payable		2,476,452			3,423,500

Unamortized debt and beneficial conversion feature discounts		(27,187	)		(126,102	)

Accrued interest		254,041			287,827

Total convertible notes payable, net and accrued interest		2,703,306			3,585,225

Less current portion		(2,493,565	)		(3,585,225	)

Long-term convertible notes payable, net and accrued interest	$	209,741		$	-

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

6. CONVERTIBLE NOTES PAYABLE (Continued)

	February 28, 2014		August 31, 2013
Related Party Convertible Notes Payable

Six notes payable in the amount of $996,987 due on March 13, 2015 at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.20 per share.	$	996,987	$	996,987

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

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

Note payable in the amount of $100,000 due on March 31, 2014 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.		100,000		-

Seven notes payable in the amount of $2,500,000 due on September 30, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 400,000 and “BB warrants” to purchase 2,000,000 shares of the Company’s common stock valued at $324,585 were issued in connection with the extension of the notes during 2013.		2,500,000		1,900,000

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

	February 28, 2014			August 31, 2013
Related Party Convertible Notes Payable

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		$	-

Total related party convertible notes payable		4,081,237			2,925,737

Unamortized debt and beneficial conversion feature discounts		(289,602	)		(254,827	)

Accrued interest		258,881			97,716

Total related party convertible notes payable, net and accrued interest		4,050,516			2,768,626

Less current portion		(1,233,844	)		(1,049,590	)

Long-term related party convertible notes payable, net and accrued interest	$	2,816,672		$	1,719,036

As of February 28, 2014, the principal maturities of the convertible notes payable and related party convertible notes payable are as follows:

For the Years Ending:

February 28, 2015	$	3,432,689
February 29, 2016		3,125,000

Total	$	6,557,689

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 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 for a $1,000,000 non-formula line of credit. The principal amount outstanding under the credit line accrues interest at a floating per annum rate equal to the greater of (i) the Prime Rate, plus 2.5% or (ii) 6.5% and is to be paid monthly. The Company must maintain certain financial covenants under the Loan Agreement. The personal guarantor for the credit line is a director and stockholder of the Company.

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

As of February 28, 2014, the outstanding balance on the term loan and accrued interest totaled $1,000,000 and $8,167, respectively. As of August 31, 2013, the outstanding balance on the line of credit and accrued interest totaled $1,000,000 and $9,042, respectively.

JMJ Notes Payable

On December 12, 2013 the Company and JMJ executed a comprehensive Release and Settlement Agreement (“Settlement”) which pertains to all claims and counter-claims previously filed by both Parties. The Settlement will require the company to repay $1,096,200 principal and interest on the outstanding notes to be $324,000 in cash payments and $772,200 in common stock. Under the payment terms of the Settlement, $1,105,000 previously classified as convertible notes were reclassified as a term loan 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.

26

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

7.             LINE OF CREDIT AND TERM LOAN (Continued)

JMJ Notes Payable (Continued)

As of February 28, 2014, the principal maturities of the SVB and JMJ term loans are as follows:

For the Years Ending:

February 28, 2015
$ 1,001,667

February 29, 2016 1,011,200

February 28, 2017 83,333

Total term loans
2,096,200

Less current portion of term loans
(1,001,667 )

Long-term term loans
$ 1,094,533

8.             COMMITMENTS AND CONTINGENCIES

Operating Leases

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

Total rental expense on operating leases for each of the three months ended February 28, 2014 and 2013 totaled $19,202. Total rental expense on operating leases for the six months ended February 28, 2014 and 2013 totaled $38,405 and $38,729, respectively.

As of February 28, 2014, the future minimum lease payments are as follows:

For the Years Ending:

February 28, 2015
$ 84,800

February 29, 2016 28,772

Total
$ 113,572

27

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

9.             EQUITY

Common Stock

The Company issued 5,842,709 shares of common stock to consultants in exchange for various advisory services during the six months ended February 28, 2014. The shares were valued at $393,670, which represents the fair market value of the shares provided on the award date.

The Company issued 50,000 shares of common stock in connection with a note payable extension during the six months ended February 28, 2014. The shares were valued at $7,500, which represents the fair market value of the note payable extension costs on the award date.

The Company issued 5,250,000 shares of common stock for the conversion of $315,000 in accounts payable. The shares were valued at $315,000, which represents the fair market value of the conversion costs on the award date.

The Company agreed to issue 1,287,000 shares of common stock valued at $123,330 in connection with six note payable extensions and a debt issuance. The Company agreed to issue 875,000 shares of common stock to four board members for their service on the board. Aforementioned stock awards were not issued as of February 28, 2014 and are included in accrued liabilities.

Warrants

Warrants to purchase up to 17,756,715 shares of the Company’s common stock are outstanding at February 28, 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

Outstanding warrants as of February 28, 2014
17,756,715

The weighted average exercise price of outstanding warrants was $0.21 at February 28, 2014, with expiration dates ranging from December 16, 2014 to January 21, 2017.

28

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

9.             EQUITY (Continued)

Stock Options

On January 12, 2012, the board of directors adopted the Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan”). The aggregate number of shares of common stock that may be issued under the 2007 Plan is 20,000,000 and such shares are reserved for issuance out of the authorized but previously unissued shares. Employees, service providers and non-employee directors of the Company and its affiliates are eligible to receive non-statutory stock options, incentive stock options, restricted stock and stock appreciation rights. The 2007 Plan will continue until the earlier of the termination of the 2007 Plan by the board of directors or ten years after the effective date. There were 18,500,000 incentive stock options granted under the 2007 Plan as of February 28, 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 February 28, 2014, there were no options that were vested and presently exercisable.

On January 12, 2012, the Company granted options under the 2007 Plan to three of the Company’s officers to purchase 4,000,000 common shares each for a total of 12,000,000 common shares at $0.31 per share that vest upon the achievement of certain milestones. The options expire on January 12, 2017. As of February 28, 2014, there were 1,500,000 options that were vested and presently exercisable. No options were exercised as of February 28, 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 per share that vest upon the achievement of certain milestones. The options expire on March 15, 2017. As of February 28, 2014, there were 1,425,000 options that were vested and presently exercisable. No options were exercised as of February 28, 2014.

29

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 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.

The components of the Company’s deferred tax asset as of February 28, 2014 and August 31, 2013 are as follows:

February 28,

2014

August 31,

2013

Net operating loss carry forward and deductible temporary differences
$ 20,072,000 $ 19,904,000

Valuation allowance (20,072,000 ) (19,904,000 )

Net deferred tax asset
$ - $ -

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

February 28,

2014

August 31,

2013

Federal tax at statutory rate
34.00 % 34.00 %

State income tax net of federal benefit 5.83 % 5.83 %

Valuation allowance (39.83% ) (39.83% )

- -

30

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2014

10.           PROVISION FOR INCOME TAXES (Continued)

As of February 28, 2014 and August 31, 2013, the Company had federal and state net operating loss carryforwards of approximately $50,395,000 and $48,074,000, respectively, which can be used to offset future federal income tax. The federal and state net operating loss carryforwards expire at various dates through 2032. Deferred tax assets resulting from the net operating losses are reduced by a valuation allowance, when, in the opinion of management, utilization is not reasonably assured. These carryforwards may be limited upon a change in ownership or consummation of a business combination under IRC Sections 381 and 382.

As of February 28, 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.

11.           SUBSEQUENT EVENTS

On March 5, 2014, the Company entered into a secured promissory note agreement with a board member for $200,000 due on March 5, 2016. The note bears interest at 10% per annum and may be converted into common stock of the Company at the rate of $0.15 per share. In addition, the note holder will receive a three year warrant to purchase 200,000 shares of common stock at $0.15.

On March 17 and 18, 2014, the Company issued 321,571 shares of common stock in connection with the conversion of notes payable valued at $19,000 on the award date.

On March 17 and 19, 2014, the Company issued 1,187,000 shares of common stock in connection with six debt extensions valued at $117,330 on the award date.

On March 21, 2014, the Company entered into a secured promissory note agreement for $500,000 due on September 21, 2014. The note bears interest at 3% per month and is convertible upon default. In connection with the note payable, the Company issued 20,000,000 shares of common stock as collateral and 2,000,000 shares of common stock as financing costs.

On April 2, 2014, the Company issued 511,628 shares of common stock in connection with the conversion of notes payable valued at $22,000 on the award date.

31

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

FORWARD LOOKING STATEMENTS

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

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

Overview. We were incorporated under the laws of the State of Nevada in April 2006 as Springbank Resources, Inc. (“SRI”). SRI was formed to engage in the exploration and development of oil and gas, and by 2007 had disposed of all of its assets and satisfied its liabilities. In October 2007, SRI acquired all of the outstanding stock of Location Based Technologies, Corp. (“Old LBT”), following which SRI merged Old LBT into itself and, in the process, SRI’s name was changed to Location Based Technologies, Inc. Old LBT was incorporated in September 2005 by David Morse, Joseph Scalisi and Desiree Mejia, who became our officers and directors, in order to develop the PocketFinder personal locators.

Our principal executive offices are located at 49 Discovery, Suite 260, Irvine, California 92618, and our telephone number is 888-600-1044.

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

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

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

Our Business. The company designs, develops, and sells consumer and commercial GPS tracking solutions that enhance the way customers stay connected with people or things. Our products and services provide data that are intended to enhance safety, security, connectivity, money savings, coordination of mobile assets and managerial or parental decisions. Our devices operate on the worldwide GSM network. Consumer products are primarily intended to be used by people who need to locate any portable asset (powered or unpowered), vehicles, pets, and people who are unable to use a cell phone to communicate their location or for travelers who seek a dedicated tracking system to enhance safety and connectivity. Commercial products are marketed to businesses of all sizes and governmental organizations that need to track vehicles, mobile equipment, portable assets and workers.

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

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

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

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

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

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

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

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

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

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

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

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

Our current hardware development is primarily focused on enhancing the indoor tracking capability of a new 3G PocketFinder device 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 market and the pet market. Additionally, we were recently informed that AT&T’s 2G network will be terminated in early 2017 so having a 3G device will prepare us for that eventual transition. Both the lone worker and dual Iridium/GSM device are designed to exploit sales channels such as the US military, lone worker programs and large corporations with employees in dangerous areas. Our involvement in the airline cargo and container application has also resulted in the development of a fully “submersible” waterproof LBT-886 variant that will meet application requirements. These projects were also undertaken pursuant to customer requests.

In addition to creating new products, we will also work to customize products to better fit specific vertical market needs and requirements. For example, we are currently working on a light, temperature and humidity sensor which can be attached to our LBT-886 device. This project was also undertaken pursuant to a customer request. We are close to closing the first commercialization of an application using sensors to protect assets while being shipped.

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, Newegg.com, Walmart.com, Bestbuy.com/Future Shop (Canada), Crutchfield.com, our www.pocketfinder.com website and numerous affiliate marketing websites. Additionally, our new PocketFinder 886 Vehicle device has received network certification and we intend to make the device available for purchase at AT&T’s retail and online stores this calendar year.

Internationally, our devices are being sold and marketed in Mexico, the United Kingdom (the, “UK”) other European Union countries, Colombia and Ecuador. In the UK, we have partnered with EE (the largest mobile-to-mobile telecommunications company in the UK). 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% between 2011 and 2016 in a selection of European markets, including Germany, France, Poland, Russia, Sweden and the UK. These are the findings of new research from Frost & Sullivan, which predicts that the number of SIM connections will rise to 75 million in 2016, with the UK emerging as the biggest market and Germany a close second. The market-research company also reports that Europe’s mobile network operators are looking to expand their M2M portfolios to profit from applications rather than just connectivity. LBT desires to play a part in the European M2M/IoT growth expansion and we are working with companies in the UK, France, Poland and Sweden as potential distributors.

In Asia, we have recently received iDA approval which will allow us to begin sales through Apple in Singapore. Through our primary distributor in Australia and New Zealand, FindA, we are gaining acceptance in multiple applications for both Consumer and Commercial customers. We expect to begin sales in Singapore this coming quarter.

Commercial Sales Channels. Our relationship with AT&T has the potential to significantly expand over the next 24 months as AT&T looks to place tracking units on more of its mobile assets. We believe that in calendar year 2014, AT&T may place a significant order for additional devices.

The Company’s relationship with our distributor in Australia is experiencing solid success bringing LBT’s platform and products into high growth commercial sales opportunities. The distributor may distribute to the territories of Australia, New Zealand, Malaysia and the Philippines based on early expressions of interest from these areas.

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

We have signed an exclusive contract with the Department of Energy (the, “DOE”) on a project which will allow us to integrate and market 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 conditions. The system, called VERDE (Visualizing Energy Resources Dynamically on the Earth), enables decision-makers to respond swiftly to major power disruptions. 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 expect to begin sales of the system to commercial customers, public utilities (power, water and telecom) and other first responder agencies throughout the United States within 90 days.

Our Personal Locator Services. Our products are currently being sold through various brick-and-mortar and online retailers and through our website. We provide customer service and support in the United States through existing partners in other parts of the world. In the consumer market we are selling into multiple vertical market segments including the following:

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

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

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

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

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Pet care and location capability; and

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

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

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

Our Target Markets and Marketing Strategy. We provide wireless location based solutions for global positioning products along with its proprietary “friendly user interface” software system. We deliver rugged, compact products with near real time location-based information over its proprietary server architecture. Our products optimize the way businesses utilize mobile assets, save money and connect with key personnel; similarly, families utilizing our products in our ever increasingly mobile society are now able to easily stay connected with one another while on the go and from wherever they are. We have the ability to add our customer’s existing location devices onto our superior location platform in order to simplify the customers need to manage all location-based devices and assets through one easy tool.

Our marketing initiatives will include:

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Licensing opportunities for our software/EUI and products in international areas or regions;

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Self-branded or “white label” opportunities for niche market or vertical market sales;

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Affinity group marketing and outreach opportunities;

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Utilization of direct response sales due to public relations outreach in special interest magazines and newsletters; and

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Retail distribution initiatives.

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

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Software licensing fees;

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

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

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

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Consumer and commercial tracking device accessory sales; and

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Monthly recurring service fees.

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

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 telesales efforts and through upselling our existing PocketFinder customers. The enterprise businesses and military segments are far more difficult to penetrate because they tend to require long sales cycles and rigorous testing but, once approved, tend to be long-term partners. To date, most of the large companies and organizations we are working with have approached us. We expect that as we continue to gain traction with large, reputable institutions, their peers will continue to seek us out. 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. Personal location and property tracking devices are beginning to significantly penetrate the marketplace. We believe this condition represents a tremendous opportunity as customers will be attracted in large numbers once the intrinsic value of such devices is recognized and mass market adoption begins.

Our competitors include, but are not limited to: Geospatial Platform Providers, Application Developers, Garmin’s GTU-10, Tagg, Amber Alert, Spark Nano, LiveView GPS, eZoom, iTrack, 5 Star, Meitrack, iTrack GPS Locator, Lo-Jack, SpotLight, and commercial providers such as Fleetmatics, NetworkFleet, and Qualcomm. Some competitors may be better financed, have superior technology or have greater marketing and scientific resources than we do.

In related markets, GPS devices have become widely used for automotive and marine applications where line-of-sight to GPS satellites is not a significant issue. Manufacturers such as Garmin, Navman, Magellan, TomTom, Pharos, NovAtel and DeLorne are finding a market interested in using these products for both business and leisure purposes. As a result, use of GPS technology in devices such as chart plotters, fitness and training devices, fish finders, laptop computers, and personal digital assistant (“PDA”) location devices are gaining significant market acceptance and commercialization. Prices range from $100 to several thousand dollars. We expect that increasing consumer demand in these markets will drive additional applications and lower price points.

Government Regulation. We are subject to federal, state and local laws and regulations applied to businesses generally as well as Federal Communications Commission, Internationale Canada (“IC”) and CE (European Economic Area) wireless device regulations and controls. We believe that we are in conformity with all applicable laws in all relevant jurisdictions. We are NOM and NYCE certified and ready to begin sales in Mexico. We do not believe that we are subject to any environmental laws and regulations of the United States and the states in which we operate.

Employees and Outsourced Assistance. We have limited our use of contracted professionals who have been engaged in hardware and software development, early marketing and sales preparation, and preparation for customer service support. Mr. Scalisi, our Co-President and Chief Development Officer, Mr. Morse, our Co-President and Chief Executive Officer, and Mrs. Mejia, our Chief Operating Officer, Dan Hogan, our VP of Marketing, and Dave Morse, Jr., as VP of Customer Service, currently work full time for the Company. Effective as of the date of this filing, our current part-time CFO, Glenn Davidson , shall be replaced by Gregory Andrews. Mr. Andrews will serve as CFO on a part-time basis. 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.

RESULTS OF OPERATIONS

For the three months ended February 28, 2014 compared to the three months ended February 28, 2103.

Revenue. For the three months ended February 28, 2014, we generated $341,091 of net revenue compared to $591,157 of net revenue for the three months ended February 28, 2013. The 42% decrease in total revenue is due to the following:

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Device revenue – For the three months ended February 28, 2014, we generated $107,582 of net device revenue compared to $489,276 for the three months ended February 28, 2013. The $381,694 decrease in device revenue consists of the following:

The most significant contributor to the decrease in revenue for the three months ended February 28, 2014 is due to spikes in LBT-886 orders from our commercial sales channel. During the three months ended February 28, 2013, revenue from the sale of LBT-886 devices was for AT&T’s initial order and totaled $389,000. Although we expect to receive additional orders from AT&T in 2014, no orders for LBT-886 devices were received during the three months ended February 28, 2014. During this quarter, sales totaling $8,000 of LBT-886 devices were from various other commercial accounts;

Revenue from the sale of PocketFinder People increased from $5,000 for the three months ended February 28, 2013 to $19,000 for the three months ended February 28, 2014 due to an increase in quantities sold as a result of sales price reductions;

Revenue from the sale of PetFinder devices increased from $6,000 for the three months ended February 28, 2013 to $16,000 for the three months ended February 28, 2014 due to an increase in sales as a result of price reductions.

PocketFinder Vehicle sales decreased from $88,000 for the three months ended February 28, 2013 to $63,000 for the three months ended February 28, 2014 due to a change in distributions channels; and

There was $1,000 of PocketFinder accessories sales during the three months ended February 28, 2013 that remained constant at $1,000 during the three months ended February 28, 2014.


	●	Service revenue – For the three months ended February 28, 2014, we generated $233,509 of service revenue compared to $101,881 for the three months ended February 28, 2013. The increase is the result of adding approximately 3,300 net subscribers for the three months ended February 28, 2014 as compared to the three months ended February 28, 2013.

Cost of Revenue. For the three months ended February 28, 2014, cost of revenue totaled $347,405 resulting in a negative gross margin of $6,314 compared to cost of revenue totaling $717,972 resulting in a negative gross margin of $126,815 for the three months ended February 28, 2013. The Company realized an improvement in the gross margin as there were no significant write-downs of inventory during the current quarter.

A majority of the costs we incur to generate revenue are fixed. These costs include but are not limited to, customer service, operating expenses and employee salaries. As we continue to grow our revenue, the discrepancy between our fixed costs and our income will decrease.

Management estimates that revenue will exceed costs in 2015 assuming the following conditions occur:

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Increased sales growth for the PocketFinder Vehicle and LBT-886 products;

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Penetration of our products into new markets, primarily Asia and Europe; and

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Reducing costs by incorporating self-help UserVoice tools that allow customers to resolve issues and find answers directly from the website when they are online no matter the time or day. In addition, we will be changing our customer service call center and moving it to a more local service with lower costs.

Operating Expenses. For the three months ended February 28, 2014, our total operating expenses were $788,335 compared to total operating expenses of $1,334,350 for the three months ended February 28, 2013. Operating expenses decreased by $546,015 or 41% for the three months ended February 28, 2014 and is primarily attributed to the following fluctuations:

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A $154,156 decrease in general and administrative expenses to $290,576 for the three months ended February 28, 2014, compared to $444,732 for the three months ended February 28, 2013. The decrease in general and administrative expenses three months ended February 28, 2014 compared to 2013 is primarily due the following:

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$119,000 decrease in advertising and marketing fees to market our products due to cash flow spending limitations;

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$52,000 increase in stock based awards to board of directors for their service due to timing differences as awards were not made in the same quarter each year;

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$25,000 decrease in computer relates expenditures due to spending restrictions to conserve cash;

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$50,000 decrease in license fees due to obtaining certifications in 2013; and

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$12,000 reduction in other general and administrative expenses as a result of reduced spending.

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A $26,961 increase in officer compensation to $233,059 for the three months ended February 28, 2014, compared to $206,098 for the three months ended February 28, 2013 due to the reclassification of an employee to an officer for the three months ended February 28, 2014;

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Professional fees were reduced by $277,588 to $174,465 for three months ended February 28, 2014 compared to $452,053 for three months ended February 28, 2013. This was primarily due to a reduction in the value of common stock being issued in connection with business development and financial advisory fees;

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A $93,132 decrease in research and development costs to $9,790 for the three months ended February 28, 2014 compared to $102,922 for the three months ended February 28, 2013 as certain R&D projects are close to being completed; and

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A $48,100 decrease in salaries and wages to $61,243 for the three months ended February 28, 2014, compared to $109,343 for the three months ended February 28, 2013. The decrease is attributed to the reduction of one employee and due to a reclassification of an employee to an officer.

Other Income/Expenses. For the three months ended February 28, 2014, we reported net other expense totaling $547,704 which consisted of financing costs, amortization of beneficial conversion feature, deferred financing costs and debt discount, interest expense and loss on asset disposals compared to net other income totaling $33,913 for the three months ended February 28, 2013. The $581,617 increase in net other expenses is primarily due to the following:

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A $163,405 decrease in financing costs to $115,695 for the three months ended February 28, 2014, compared to $279,100 for the three months ended February 28, 2013 as majority of notes entered into in the current quarter did not incur finder’s fees;

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A $55,300 decrease in the amortization of beneficial conversion features on notes payable to $17,606 for the three months ended February 28, 2014, compared to $72,906 for the three months ended February 28, 2013 as there were several convertible notes with beneficial conversion features were fully amortized in 2013 and new notes entered into in 2014 did not contain beneficial conversion features;

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A $39,981 increase in the amortization of deferred financing costs to $90,523 for the three months ended February 28, 2014, compared to $50,542 for the three months ended February 28, 2013 as there were numerous notes payable extensions issued with common stock resulting in increased deferred financing costs for three months ended February 28, 2014 than in 2013;

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A $106,264 increase in the amortization of debt discounts associated with the issuance of warrants on convertible notes payable to $106,264 for the three months ended February 28, 2014. There were no such warrant issuances during the three months ended February 28, 2013;

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A $504,132 gain on the fair value of derivative liabilities was recognized during the three months ended February 28, 2013; whereby, there was no such gain for the three months ended February 28, 2014 as the JMJ debt was settled during the first quarter of 2014; and

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A $100,141 increase in interest expense to $168,146 for the three months ended February 28, 2014, compared to $68,005 for the three months ended February 28, 2013 as there was approximately $8.9 million in notes payable at February 28, 2014 as compared to $3.5 million in notes payable at February 28, 2013 .

Net Loss. For the three months ended February 28, 2014, we reported a net loss of $1,342,353 compared to a net loss of $1,427,252 for the three months ended February 28, 2013, due to fluctuations in operating and other expenses as previously discussed.

For the six months ended February 28, 2014 compared to the six months ended February 28, 2103.

Revenue. For the six months ended February 28, 2014, we generated $749,895 of net revenue compared to $799,712 of net revenue for the six months ended February 28, 2013. The 6% decrease in total revenue is due to the following:

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Device revenue – For the six months ended February 28, 2014, we generated $350,973 of net device revenue compared to $617,132 for the six months ended February 28, 2013. The $266,159 decrease in device revenue consists of the following:

The most significant contributor to the decrease in revenue for the six months ended February 28, 2014 is due to spikes in LBT-886 orders from our commercial sales channel. During the six months ended February 28, 2013, revenue from the sale of LBT-886 devices was for AT&T’s initial order and totaled $389,000. Although we expect to receive additional orders from AT&T in 2014, no orders for LBT-886 devices were received during the six months ended February 28, 2014. During this six month period, sales totaling $18,000 of LBT-886 devices were from various other commercial accounts;

Revenue from the sale of PocketFinder People increased from $51,000 for the six months ended February 28, 2013 to $137,000 for the six months ended February 28, 2014 due to an increase in quantities sold as a result of sales price reductions;

Revenue from the sale of PetFinder devices slightly decreased from $18,000 for the six months ended February 28, 2013 to $15,000 for the six months ended February 28, 2014;

PocketFinder Vehicle sales increased from $156,000 for the six months ended February 28, 2013 to $178,000 for the six months ended February 28, 2014 due to multiple auto market and dealerships alliances formed in fiscal 2014; and

There was $3,000 of PocketFinder accessories sales during the six months ended February 28, 2014 compared to $2,000 during the six months ended February 28, 2013.

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Service revenue – For the six months ended February 28, 2014, we generated $398,922 of service revenue compared to $182,580 for the six months ended February 28, 2013. The increase is the result of adding approximately 2,700 net subscribers for the six months ended February 28, 2014 as compared to the six months ended February 28, 2013.

Cost of Revenue. For the six months ended February 28, 2014, cost of revenue totaled $729,212 resulting in a gross margin of $20,683 compared to cost of revenue totaling $1,027,012 resulting in a negative gross margin of $227,300 for the six months ended February 28, 2013. The Company realized an improvement in the gross margin as there were no significant write-downs of inventory during the current six-month period .

Management estimates that revenue will exceed costs in 2015 assuming the following conditions occur:

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Increased sales growth for the PocketFinder Vehicle and LBT-886 products;

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Penetration of our products into new markets, primarily Asia and Europe; and

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Reducing costs through enhanced self-help online tools and by moving to a less expensive local customer service call center.

Operating Expenses. For the six months ended February 28, 2014, our total operating expenses were $2,295,689 compared to total operating expenses of $3,244,835 for the six months ended February 28, 2013. Operating expenses decreased by $949,146 or 29% for the six months ended February 28, 2014 and is primarily attributed to the following fluctuations:

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A $32,882 decrease in general and administrative expenses to $1,019,210 for the six months ended February 28, 2014, compared to $1,052,092 for the six months ended February 28, 2013 primarily due to a reduction in other general and administrative expenses as a result of reduced spending;

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A $43,978 increase in officer compensation to $479,746 for the six months ended February 28, 2014, compared to $435,768 for the six months ended February 28, 2013 due to the reclassification of an employee to an officer in 2013;

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Professional fees were reduced by $308,023 to $548,958 for the six months ended February 28, 2014 compared to $856,981 for the six months ended February 28, 2013. This was primarily due to a reduction in the value of common stock being issued in connection with business development and financial advisory fees;

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A $45,738 decrease in research and development costs to $99,548 for the six months ended February 28, 2014 compared to $145,286 for the six months ended February 28, 2013 as certain R&D projects are close to being completed;

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A $150,241 decrease in salaries and wages to $109,822 for the six months ended February 28, 2014, compared to $260,063 for the six months ended February 28, 2013. The decrease is attributed to the reduction of one employee and due to a reclassification of an employee to an officer; and

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The recognition of an asset impairment on certain patents totaling $455,916 during the six months ended February 28, 2013; whereby, there was no such impairment recognized during the six months ended February 28, 2014.

Other Income/Expenses. For the six months ended February 28, 2014, we reported net other expense totaling $112,137 which consisted of financing costs, amortization of beneficial conversion feature, deferred financing costs and debt discount, interest expense, gain on debt settlement, and loss on asset disposals compared to net other expense totaling $1,379,821 for the six months ended February 28, 2013. The $1,267,684 decrease in net other expenses is primarily due to the following:

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A $95,525 decrease in financing costs to $264,575 for the six months ended February 28, 2014, compared to $360,100 for the six months ended February 28, 2013 as majority of notes entered into in the current quarter did not incur finder’s fees;

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A $83,886 decrease in the amortization of beneficial conversion features on notes payable to $50,253 for the six months ended February 28, 2014, compared to $134,139 for the six months ended February 28, 2013 as there were several convertible notes with beneficial conversion features were fully amortized in 2013 and new notes entered into in 2014 did not contain beneficial conversion features;

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A $24,158 decrease in the amortization of deferred financing costs to $108,350 for the six months ended February 28, 2014, compared to $132,508 for the three months ended February 28, 2013 as there was were fewer notes payable issued with common stock resulting in reduced deferred financing costs six months ended February 28, 2014 than in 2013;

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A $205,170 increase in the amortization of debt discounts associated with the issuance of warrants on convertible notes payable to $205,170 for the six months ended February 28, 2014. There were no such warrant issuances during the six months ended February 28, 2013;

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A $640,515 gain on the fair value of derivative liabilities was recognized during the six months ended February 28, 2013; whereby, there was no such gain recognized during the six months ended February 28, 2014 as the JMJ debt was settled during the first quarter of 2014;

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The recognition of a $886,548 gain in connection with the JMJ debt settlement was recognized during the six months ended February 28, 2014; whereby, there no such debt settlement during the six months ended November 30, 2012;

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The recognition of a $48,431 loss in connection with asset disposals during the six months ended February 28, 2014; whereby, there no such asset disposals in during the six months ended February 28, 2013;

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A $208,559 increase in interest expense to $321,436 for the six months ended February 28, 2014, compared to $112,877 for the six months ended February 28, 2013 as there was approximately $8.9 million in notes payable at February 28, 2014 as compared to $3.5 million in notes payable at February 28, 2013.

Net Loss. For the six months ended February 28, 2014, we reported a net loss of $2,387,943 compared to a net loss of $4,852,756 for the six months ended February 28, 2013, due to fluctuations in operating and other expenses as previously discussed.

LIQUIDITY AND CAPITAL RESOURCES

We had cash and cash equivalents of $86,252 as of February 28, 2014, compared to $680,914 as of August 31, 2013.

As of February 28, 2014, current assets totaled $1,249,540 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 February 28, 2014, from August 31, 2013 is primarily due to a decrease in cash offset by an increase in deferred financing costs. The decrease in cash is the result of covering our operating costs with minimal cash inflows during Q1 and Q2. The increase in deferred offering costs is the result of issuing common stock in connection with multiple notes payable due dates being extended.

As of February 28, 2014, current liabilities totaled $6,766,513 compared to $8,410,439 as of August 31, 2013 and consisted of accounts payable and accrued expenses, deferred compensation, line of credit, convertible notes payable, accrued interest and derivative liabilities. The decrease at February 28, 2014, is due to the conversion of the $1,000,000 line of credit into a non-current term loan and the elimination of the $745,000 derivative liability associated with the JMJ debt settlement.

As at February 28, 2014, the Company had a working capital deficit of $5,516,973 compared with a working capital deficit of $6,789,668 as of August 31, 2013.

Cash Flows from Operating Activities. During the six months ended February 28, 2014, the Company used $1,798,870 of cash used for operating activities compared with $1,810,885 for the six months ended February 28, 2013.

Cash Flows From Investing Activities. During the six months ended February 28, 2014, the Company used $41,967 of cash for investing compared with $141,994 for the six months ended February 28, 2013. The decrease in the cash used for investing operating activities was attributed to fewer capital expenditures during the six months ended February 28, 2014 compared to the six months ended February 28, 2013.

Cash Flows from Financing Activities. During the six months ended February 28, 2014, the Company received $1,250,000 in cash from financing activities related to the issuance of convertible promissory notes. During the six months ended February 28, 2013, the Company received $1,666,000 from the issuance of convertible promissory notes. Current convertible notes payable totaling $3,432,689 are unsecured, bear interest at 5%-10% per annum, and are to be repaid out of future operating cash flow. Long-term convertible promissory notes totaling $4,219,533 are secured, bear interest at 10% per annum with due dates ranging from September 30, 2015 to January 21, 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 February 28, 2014, we had an accumulated deficit of $58,452,408 and we expect to incur continual losses until sometime in calendar year 2015-2016.

As of February 28, 2014, we had $86,252 in cash and cash-equivalents. Over the next several quarters we expect to invest a significant amount to develop our sales and marketing programs associated with the commercialization and branding of the PocketFinder family of products. We also expect to fund any necessary general overhead requirements.

We expect to have to obtain additional financing in the coming months for overhead costs, general and administrative expenses and for related purposes such as packaging, shipping, and direct sales and marketing costs. Our funding requirements will depend on numerous factors, including:

●

Costs involved in production and manufacturing to fill purchase orders, software and interface customization for OEM partners, and the network necessary to further the commercialization of the PocketFinder family of products;

●

The costs of outsourced manufacturing;

●

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

●

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

●

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

Product Research and Development

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

Plant and Equipment, Employees

We do not plan to purchase or sell any significant equipment, plant or properties during the foreseeable future. Our business operations are based on a strategic outsourcing model, thereby negating the need for significant amounts of plant and equipment, or significant numbers of employees. We currently have eight employees and do not anticipate hiring any significant number of additional employees during the next 12 months.

Off-Balance Sheet Arrangements

As of February 28, 2014, we had no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of February 28, 2014, due to the material weaknesses resulting from a lack of segregation of duties in our accounting department.

Changes in Internal Control Over Financial Reporting

In December 2013, our part-time CFO, Kenneth Fronk, resigned to pursue a full-time opportunity and was replaced by our current part-time CFO, Glenn Davidson. In April 2014, our part-time CFO, 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 six months ended February 28, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

ITEM 1.A. RISK FACTORS

Not applicable.

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

Common Stock Issuances for Debt Conversion

On February 13, 2014, the Company issued 5,250,000 shares of common stock in connection with the conversion of certain accounts payable valued at $315,000 on the award date.

On March 17 and 18, 2014, the Company issued 321,571 shares of common stock in connection with the conversion of notes payable valued at $19,000 on the award date.

On April 2, 2014, the Company issued 511,628 shares of common stock in connection with the conversion of notes payable valued at $22,000 on the award date.

Common Stock Issuances for Debt Extensions

On March 17 and 19, 2014, the Company issued 1,187,000 shares of common stock in connection with six debt extensions valued at $117,330 on the award date.

Common Stock Issuances for Note Payable

On March 21, 2014, the Company entered into a secured promissory note agreement for $500,000 due on September 21, 2014. The note bears interest at 3% per month and is convertible upon default. In connection with the note payable, the Company issued 20,000,000 shares of common stock as collateral and 2,000,000 shares of common stock as financing costs.

Warrant Issuance for Note Payable

On January 21, 2014, the Company awarded “Series DD” warrants to a note holder to purchase 300,000 common shares at $0.15 per share in connection with a debt issuance and expires on January 21, 2017.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.*	Document Description

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

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

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

10.57	Secured Convertible Promissory Note between the Company and Jeffrey Leu dated January 21, 2014. †

10.58	Secured Convertible Promissory Note between the Company and Greggory Haugen dated March 5, 2014. †

10.59	Secured Convertible Promissory Note between the Company and RFF Family Partnership LP dated March 21, 2014. †

21.1	Subsidiary of the Registrant †

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

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

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

101.INS XBRL Instance Document **

101.SCH XBRL Taxonomy Extension Schema Document **

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document **

101.DEF XBRL Taxonomy Extension Definition Linkbase Document **

101.LAB XBRL Taxonomy Extension Label Linkbase Document **

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document **

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

SIGNATURES

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

	LOCATION BASED TECHNOLOGIES, INC.

Dated: April 11, 2014	By:	/s/ David M. Morse
		David M. Morse
		Co- President and Chief Executive Officer

Dated: April 11, 2014	By:	/s/ Glenn Davidson
		Glenn Davidson
		Chief Financial Officer

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For the Years Ending:

February 28, 2015	$	1,001,667
February 29, 2016		1,011,200
February 28, 2017		83,333

Total term loans		2,096,200

Less current portion of term loans		(1,001,667	)

Long-term term loans	$	1,094,533

For the Years Ending:

February 28, 2015	$	84,800
February 29, 2016		28,772

Total	$	113,572

	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

Outstanding warrants as of February 28, 2014		17,756,715

	February 28, 2014			August 31, 2013
Net operating loss carry forward and deductible temporary differences	$	20,072,000		$	19,904,000
Valuation allowance		(20,072,000	)		(19,904,000	)

Net deferred tax asset	$	-		$	-

	February 28, 2014			August 31, 2013
Federal tax at statutory rate		34.00	%		34.00	%
State income tax net of federal benefit		5.83	%		5.83	%
Valuation allowance		(39.83%	)		(39.83%	)

		-			-

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