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 May 31 , 2014.

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

Commission File Number 333-139395

LOCATION BASED TECHNOLOGIES, INC.

(Name of registrant as specified in its charter)

Nevada	20-4854758
(State 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 July 11, 2014, there were 229,583,162 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

May 31, 2014 and August 31, 2013

(Unaudited)

	May 31, 2014		August 31, 2013

ASSETS

*CURRENT ASSETS*
Cash and cash equivalents	$	150,802	$	680,914
Accounts receivable, net of allowances		97,793		77,584
Inventory, net of reserves		629,235		788,470
Prepaid expenses and other assets		35,468		47,976
Deferred financing costs		94,150		25,827

Total current assets		1,007,448		1,620,771

Property and equipment, net of accumulated depreciation		96,430		110,813

*OTHER ASSETS*
Intangible assets, net of accumulated amortization		658,590		715,732
Inventory, net of reserves		892,434		893,401
Deposits		30,000		30,000

Total other assets		1,581,024		1,639,133

TOTAL ASSETS	$	2,684,902	$	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

May 31, 2014 and August 31, 2013

(Unaudited)

	May 31, 2014			August 31, 2013

LIABILITIES AND STOCKHOLDERS' DEFICIT

*CURRENT LIABILITIES*
Convertible demand notes payable and accrued interest	$	29,803		$	-
Related party convertible demand notes payable and accrued interest		1,178,140			-
Accounts payable and accrued expenses		2,011,951			1,699,114
Deferred compensation		141,410			267,730
Deferred revenue		21,464			25,371
Line of credit and accrued interest		-			1,009,042
Advances from officer and accrued interest		26,188			29,219
Convertible term notes payable and accrued interest, net of unamortized discounts		3,048,653			3,585,225
Related party convertible term notes payable and accrued interest, net of unamortized discounts		104,466			1,049,590
Current portion of term loans and accrued interest		1,165,159			-
Derivative liabilities		-			745,148

Total current liabilities		7,727,234			8,410,439

Convertible term notes payable		806,615			-
Related party convertible term notes payable and accrued interest, net of unamortized discounts		2,543,911			1,719,036
Term loans		842,083			-

TOTAL LIABILITIES		11,919,843			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; 228,160,821 and 211,917,511 shares issued and outstanding at May 31, 2014 and August 31, 2013, respectively		228,161			211,917
Additional paid-in capital		50,639,692			49,388,375
Prepaid services paid in common stock		(105,924	)		(294,585	)
Accumulated deficit		(59,996,870	)		(56,064,465	)

Total stockholders' deficit		(9,234,941	)		(6,758,758	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	2,684,902		$	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 nine months ended May 31, 2014 and 2013

(Unaudited)

	For the three months ended						For the nine months ended
	May 31, 2014			May 31, 2013			May 31, 2014			May 31, 2013

Net revenue
Devices	$	216,223		$	643,696		$	567,196		$	1,260,828
Services		238,916			111,483			637,838			294,063

Total net revenue		455,139			755,179			1,205,034			1,554,891

Cost of revenue
Devices		182,960			923,560			418,929			1,583,849
Services		234,122			205,025			727,365			571,748

Total cost of revenue		417,082			1,128,585			1,146,294			2,155,597

Gross profit (loss)		38,057			(373,406	)		58,740			(600,706	)

Operating expenses
General and administrative		341,138			486,947			1,360,347			1,539,039
Officer compensation		142,000			253,835			621,746			798,465
Professional fees		285,717			1,004,725			834,674			1,861,706
Rent		19,202			19,202			57,607			57,931
Research and development		-			112,511			99,548			257,797
Salaries and wages		85,762			73,252			195,585			224,453
Loss on asset impairment		-			-			-			455,916

Total operating expenses		873,819			1,950,472			3,169,507			5,195,307

Net operating loss		(835,762	)		(2,323,878	)		(3,110,767	)		(5,796,013	)

Other income (expense)
Financing costs		(105,875	)		(96,634	)		(359,755	)		(456,734	)
Amortization of beneficial conversion feature		(440	)		(85,530	)		(61,388	)		(219,669	)
Amortization of deferred financing costs		(343,805	)		(39,749	)		(452,155	)		(172,257	)
Amortization of debt discount		(55,026	)		(53,757	)		(260,196	)		(53,757	)
Gain (Loss) on change in fair value of derivative liabilities		-			123,460			-			(517,055	)
Interest expense, net		(203,554	)		(107,734	)		(524,991	)		(220,611	)
Gain on debt settlement		-			-			886,548			-
Loss on debt extinguishment		-			(521,820	)		-			(521,820	)
Gain (Loss) on asset disposals		-			631			(48,431	)		631
Foreign currency gain (loss), net		-			(400	)		(470	)		41

Total other income (expense)		(708,700	)		(781,533	)		(820,838	)		(2,161,231	)

Net loss before income taxes		(1,544,462	)		(3,105,411	)		(3,931,605	)		(7,957,244	)

Provision for income taxes		-			-			800			800

Net Loss	$	(1,544,462	)	$	(3,105,411	)	$	(3,932,405	)	$	(7,958,044	)

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 nine months ended May 31, 2014 and 2013

(Unaudited)

	For the three months ended						For the nine months ended
	May 31, 2014			May 31, 2013			May 31, 2014			May 31, 2013

Basic and Diluted - Earnings (loss) Per Share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.04	)

Basic and Diluted - Weighted Average Number of Shares Outstanding		226,402,077			207,493,355			218,267,881			203,331,478

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 nine months ended May 31, 2014 and 2013

(Unaudited)

	For the nine months ended
	May 31, 2014			May 31, 2013
Cash Flows from Operating Activities
Net loss	$	(3,932,405	)	$	(7,958,044	)
Adjustment to reconcile net loss to net cash used in operating activities:
Loss on change in fair value of derivative liabilities		-			517,055
Loss (Gain) on asset disposal		49,000			(631	)
Gain on sale of trademark		(569	)		-
Gain on debt settlement		(886,548	)		-
Loss on asset impairment		-			455,916
Loss on debt extinguishment		-			521,820
Provision for doubtful accounts and sales returns		13,931			(31,343	)
Provision (credit) for inventory reserve		(86,605	)		206,120
Depreciation and amortization		92,336			85,619
Amortization of beneficial conversion feature		61,388			219,669
Amortization of deferred financing costs		452,155			172,257
Amortization of prepaid services paid in common stock		389,111			877,706
Amortization of debt discount		260,196			53,757
Common stock issued for services and financing costs		161,170			742,668
Warrants issued for services and financing costs		-			99,873
Stock options issued for services		36,575			131,341
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(34,140	)		65,045
(Increase) decrease in inventory		246,807			336,690
(Increase) decrease in prepaid expenses and other assets		12,508			80,829
Increase (decrease) in accounts payable and accrued expenses		368,239			467,546
Increase (decrease) in accrued officer compensation		(9,070	)		212,849
Increase (decrease) in deferred revenue		(3,907	)		39,207
Increase (decrease) in accrued interest		420,783			156,581

Net cash used in operating activities		(2,389,045	)		(2,547,470	)

Cash Flows from Investing Activities
Purchase of property and equipment		(76,742	)		(146,098	)
Proceeds from sale of trademark		7,500			-

Net cash used in investing activities		(69,242	)		(146,098	)

Cash Flows from Financing Activities
Advances / (repayments) from officers, net		(3,825	)		-
Payments for deferred financing costs		-			(6,000	)
Payments on term loans		(18,000	)		-
Proceeds from convertible term notes payable		500,000			1,791,000
Proceeds from related party convertible term notes payable		1,450,000			800,000
Repayments of related party convertible term notes payable		-			(100,000	)

Net cash provided by financing activities		1,928,175			2,485,000

Net decrease in cash and cash equivalents		(530,112	)		(208,568	)

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

Cash and cash equivalents, end of year	$	150,802		$	167,986

Non-Cash Financing Activities:
Conversion of accrued compensation into convertible notes payable	$	117,250		$	996,987
Conversion of accounts payable into common stock	$	315,000		$	-
Issuance of common stock for deferred financing costs	$	357,330		$	-
Issuance of warrants for financing costs classified as debt discount	$	213,486		$	-
Issuance of common stock for payment on term loan	$	80,000		$	-

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

Organization

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

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

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

Consolidation Policy

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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 nine months ended May 31, 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 May 31, 2014, had an accumulated deficit of $59,996,870 and negative working capital of $6,719,787. 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

May 31, 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 May 31, 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 nine months ended May 31, 2014, revenue from the Company’s largest customer amounted to $187,621 or 27% of total net revenue. Accounts receivable from this customer amounted to $54,275 or 56% of total accounts receivable at May 31, 2014.

For the nine months ended May 31, 2013, revenue from the Company’s largest customer amounted to $882,569 or 57% of total net revenue. Accounts receivable from this customer amounted to $1,517 or 2% of total accounts receivable at May 31, 2013.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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 May 31, 2014 and August 31, 2013, the allowance for doubtful accounts amounted to $9,000 and $3,000, respectively.

Allowance for Sales returns

An allowance for sales returns is recorded as a reduction to revenue and based on management’s judgment using historical experience and expectation of future conditions. As of May 31, 2014 and August 31, 2013, the allowance for sales returns amounted to $16,431 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 $989,881 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. No inventory obsolescence reserve was recorded during the nine months ended May 31, 2013. Management estimated sales for the next 24 month period based on historical sales data and prospective sales trends and determined that all inventory is expected to be sold in the next two years. Management analyzed and tested certain components that could possibly become obsolete and determined that the useful life exceeded the two year estimate to sell the inventory. In addition, the components inventory, net of the LCM valuation reserve, totaling $892,434 is classified as a noncurrent asset at May 31, 2014 (see Note 2).

Fair Value of Financial Instruments

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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.

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 nine months ended May 31, 2013, the Company recorded an impairment of certain patents amounting to $455,916. There was no such impairment recognized during the nine months ended May 31, 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 May 31, 2014 and August 31, 2013, the Company capitalized $742,945 for patent related expenditures. As of May 31, 2014 and August 31, 2013, the Company capitalized $52,539 and $59,470 for trademark related expenditures, respectively. Accumulated amortization of intangible assets was $136,894 and $86,683 at May 31, 2014 and August 31, 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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 May 31, 2014 and August 31, 2013, deferred revenue amounted to $21,464 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 $440 and $85,530 during the three months ended May 31, 2014 and 2013, respectively. The Company recognized amortization expense related to the beneficial conversion features on convertible notes payable totaling $50,693 and $219,669 during the nine months ended May 31, 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

May 31, 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.

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

May 31, 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 May 31, 2014 and 2013, the Company incurred $19,807 and $51,327 of advertising costs, respectively. For the nine months ended May 31, 2014 and 2013, the Company incurred $486,269 and $420,023 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 May 31, 2014 and 2013, stock-based compensation expense associated with stock options totaled $3,443 and $30,122, respectively. For the nine months ended May 31, 2014 and 2013, stock-based compensation expense associated with stock options totaled $36,575 and $131,341 respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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 nine months ended May 31, 2014 and 2013.

Earnings/ Loss Per Share

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

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

	May 31, 2014		August 31, 2013

Warrants		17,956,715		15,456,715
Stock options		2,925,000		3,475,000
Convertible notes payable		39,853,796		25,300,352
Dilutive potential common shares		60,735,511		44,232,067

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

2. INVENTORY

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

	May 31, 2014			August 31, 2013
Current:
Finished goods	$	1,041,739		$	1,286,953
Inventory valuation reserve for finished goods		(412,504	)		(498,483	)
Inventories, current	$	629,235		$	788,470

Noncurrent:
Device components	$	1,469,811		$	1,471,404
Inventory valuation reserve for components		(577,377	)		(578,003	)
Inventories, noncurrent	$	892,434		$	893,401

In the first quarter of 2012, the Company purchased a substantial amount of inventory components to produce PocketFinder® devices. Management analyzed its inventories based on existing purchase orders and current potential orders for future delivery and determined we may not realize all of the inventory components within the next year. The Company expects that it will take approximately one year to sell finished goods inventory on hand at May 31, 2014. Following the sale of all finished goods inventory, components inventory will be utilized to manufacture additional devices that are expected to be sold in year 2. Inventories totaling $892,434 and $893,401 which may not be realized within a 12-month period have been reclassified as long-term as of May 31, 2014 and August 31, 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

3. PROPERTY AND EQUIPMENT

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

	May 31, 2014			August 31, 2013
Machinery and equipment	$	139,821		$	106,354
Computer software (mobile apps)		82,999			66,999
Computer software (internal)		29,537			51,263
Computer and video equipment		19,756			19,756
Office furniture	$	24,526		$	24,526

		296,640			268,898
Less: accumulated depreciation		(200,210	)		(158,085	)

Total property and equipment	$	96,430		$	110,813

Depreciation expense for the three months ended May 31, 2014 and 2013 amounted to $10,076 and $13,476, respectively. Depreciation expense for the nine months ended May 31, 2014 and 2013 amounted to $42,125 and $35,519, respectively.

4. INTANGIBLE ASSETS

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

	May 31, 2014			August 31, 2013
Patents	$	742,945		$	742,945
Trademarks		52,539			59,470

		795,484			802,415
Less: accumulated amortization		(136,894	)		(86,683	)

Total intangible assets	$	658,590		$	715,732

Amortization expense totaled $16,921 and $16,938 for the three months ended May 31, 2014 and 2013, respectively. Amortization expense totaled $50,211 and $50,100 for the nine months ended May 31, 2014 and 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

4. INTANGIBLE ASSETS (Continued)

As of May 31, 2014, Company estimates amortization expense approximating $67,000 each year for the next five years and $324,000 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 nine months ended May 31, 2014, there were advances from our Co-President totaling $151,000 and $154,825 of repayments. As of May 31, 2014, there was $25,000 of outstanding advances and $1,188 of related accrued interest.

Accounts Payable

Amounts payable to related parties totaled $328,000 and $105,000 as of May 31, 2014 and August 31, 2013, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

6. CONVERTIBLE NOTES PAYABLE

	May 31, 2014		August 31, 2013
Convertible Demand Notes Payable

Note payable in the amount of $28,500 due on demand at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.10 per share. In connection with the extension of the due date and consolidation of notes on March 14, 2014, 51,000 shares of the Company’s stock valued at $3,060 were awarded.	$	28,500	$	-

Total convertible demand notes payable		28,500		-

Accrued interest		1,303		-

Total convertible demand notes payable and accrued interest	$	29,803	$	-

Convertible Term Notes Payable

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

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

Note payable in the amount of $500,000 due on March 25, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 1,000,000 shares of the Company’s common stock valued at $164,022 were issued in connection with the note. As of May 31, 2014 the note was not renewed and is due on demand.		500,000		500,000

Note payable in the amount of $25,000 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. As of May 31, 2014, the note was not renewed and is due on demand.		25,000		25,000

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

6. CONVERTIBLE NOTES PAYABLE

	May 31, 2014		August 31, 2013
Convertible Term Notes Payable

Two notes payable in the amount of $75,000 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	$	75,000

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 $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

Two notes payable in the amount of $68,500, plus accrued interest of $7,952, were combined into a new note 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 combination of the notes and the extension of due dates, 137,000 shares of the Company’s stock valued at $12,330 were awarded in January 2014.		76,452		68,500

Note payable in the amount of $500,000 due on September 21, 2014 at an interest rate of 36% per annum. The note is collateralized by 20,000,000 shares of common stock.		500,000		-

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

6. CONVERTIBLE NOTES PAYABLE (Continued)

	May 31, 2014		August 31, 2013
Convertible Term Notes Payable (Continued)

Note payable in the amount of $25,000 due on October 10, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. In connection with the extension of the due date, 50,000 shares of the Company’s stock valued at $2,450 were awarded in April 2014.	$	25,000	$	25,000

Note payable in the amount of $100,000 due on October 15, 2014 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “Z warrants” to purchase 200,000 shares of the Company’s common stock valued at $30,731 were issued in connection with the note. In connection with the extension of the due date, 200,000 shares of the Company’s stock valued at $7,340 were awarded in April 2014.		100,000		100,000

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

Two notes payable in the amount of $600,000 due on September 30, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “BB warrants” to purchase 1,000,000 shares of the Company’s common stock valued at $133,001 were issued in connection with the extension of the notes during 2013.		600,000		-

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

CONVERTIBLE NOTES PAYABLE (Continued)

	May 31, 2014			August 31, 2013
Convertible Term Notes Payable (Continued)

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		3,576,452			3,423,500

Unamortized debt and beneficial conversion feature discounts		(86,221	)		(126,102	)

Accrued interest		365,037			287,827

Total convertible notes payable, net and accrued interest		3,855,268			3,585,225

Less current portion		(3,048,653	)		(3,585,225	)

Long-term convertible notes payable, net and accrued interest	$	806,615		$	-

Related Party Convertible Demand Notes Payable

Five notes payable in the amount of $1,114,587 due on demand at an interest rate of 5% per annum and convertible into shares of the Company’s common stock at $0.10 per share.	$	1,114,487	$	-

Total related party convertible demand notes payable		1,114,487		-

Accrued interest		63,653		-

Total related party convertible demand notes payable and accrued interest	$	1,178,140	$	-

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

6. CONVERTIBLE NOTES PAYABLE (Continued)

	May 31, 2014		August 31, 2013
Related Party Convertible Term Notes Payable

Note payable in the amount of $100,000 due on June 30, 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. In connection with the extension of the due date on March 31, 2014, 200,000 shares of the Company’s stock valued at $20,000 were awarded.	$	100,000	$	-

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

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

Note payable in the amount of $100,000 due on December 20, 2015 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.15 per share. “DD warrants” to purchase 200,000 shares of the Company’s common stock valued at $10,085 were issued in connection with the note.		100,000		-

Note payable in the amount of $200,000 due on March 5, 2016 at an interest rate of 10% per annum and convertible into shares of the Company’s common stock at $0.20 per share. “EE warrants” to purchase 200,000 shares of the Company’s common stock valued at $11,508 were issued in connection with the note.		200,000		-

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

6. CONVERTIBLE NOTES PAYABLE (Continued)

	May 31, 2014			August 31, 2013
Related Party Convertible Notes Payable (Continued)

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

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

Total related party convertible notes payable		2,600,000			2,925,737

Unamortized debt and beneficial conversion feature discounts		(186,609	)		(254,827	)

Accrued interest		234,986			97,716

Total related party convertible notes payable, net and accrued interest		2,648,377			2,768,626

Less current portion		(104,466	)		(1,049,590	)

Long-term related party convertible notes payable, net and accrued interest	$	2,543,911		$	1,719,036

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

For the Years Ending:

May 31, 2015	$	3,994,439
May 31, 2016		3,325,000

Total	$	7,319,439

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

7. LINE OF CREDIT AND TERM LOANS

SVB Line of Credit

On January 5, 2011, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Silicon Valley Bank 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.

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

As of May 31, 2014, the outstanding balance on the term loan and accrued interest totaled $1,000,000 and $9,042, 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 over a period of 16 months. 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.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

7. LINE OF CREDIT AND TERM LOAN (Continued)

JMJ Notes Payable (Continued)

As of May 31, 2014, the principal maturities of the SVB and JMJ term loans are as follows:

For the Years Ending:

May 31, 2015	$	1,156,117
May 31, 2016		758,750
May 31, 2017		83,333

Total term loans		1,998,200

Less current portion of term loans		(1,156,117	)

Long-term term loans	$	842,083

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 May 31, 2014 and 2013 totaled $19,202. Total rental expense on operating leases for the nine months ended May 31, 2014 and 2013 totaled $57,607 and $57,931, respectively.

As of May 31, 2014, the future minimum lease payments are as follows:

For the Years Ending:

May 31, 2015	$	93,130
May 31, 2016		7,193

Total	$	100,323

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

9. EQUITY

Common Stock

The Company issued 3,192,709 shares of common stock to consultants in exchange for various advisory services during the nine months ended May 31, 2014. The shares were valued at $192,670, which represents the fair market value of the shares provided on the award date.

The Company issued 5,203,667 shares of common stock in connection with note payable extensions during the nine months ended May 31, 2014. The shares were valued at $364,830, 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 issued 1,913,601 shares of common stock for the payment pursuant the JMJ Settlement during the nine months ended May 31, 2014. The shares were valued at $80,000, which represents the fair market value of the principal payments on the award date.

The Company issued 20,000,000 shares of common stock as collateral for a $500,000 prommissory note during the nine months ended May 31, 2014.

Warrants

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

	Number of Shares		Exercise Price		Expiration

Outstanding warrants as of August 31, 2013		15,456,715

Warrants granted:
BB warrants		1,200,000	$	0.20	August 29, 2016
CC warrants		600,000	$	0.20	November 6, 2016
DD warrants		500,000	$	0.15	January 21, 2017
EE warrants		200,000	$	0.15	March 4, 2017

Outstanding warrants as of May 31, 2014		17,956,715

The weighted average exercise price of outstanding warrants was $0.20 at May 31, 2014, with expiration dates ranging from December 16, 2014 to March 4, 2017.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 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 May 31, 2014.

On August 30, 2007, the Company granted options outside of the 2007 Plan to three of the Company’s officers to purchase 6,000,000 common shares each for a total of 18,000,000 common shares at $0.33 per share that vest upon the achievement of certain milestones. The options expire 10 years from the vested date. As of May 31, 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 May 31, 2014, there were 1,500,000 options that were vested and presently exercisable. No options were exercised as of May 31, 2014.

On March 15, 2012, the Company granted options under the 2007 Plan to three officers and one employee of the Company to purchase 6,500,000 common shares at $0.31 per share per share that vest upon the achievement of certain milestones. The options expire on March 15, 2017. As of May 31, 2014, there were 1,425,000 options that were vested and presently exercisable. No options were exercised as of May 31, 2014.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

10. PROVISION FOR INCOME TAXES

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

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

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

	May 31, 2014			August 31, 2013
Net operating loss carry forward and deductible temporary differences		20,674,563			19,904,000
Valuation allowance	$	(20,674,563	)	$	(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:

	May 31, 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%	)

		-			-

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2014

10. PROVISION FOR INCOME TAXES (Continued)

As of May 31, 2014 and August 31, 2013, the Company had federal and state net operating loss carryforwards of approximately $51,934,091 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 May 31, 2014 and 2013, no accrued interest and penalties are recorded relating to uncertain tax positions. Any such interest and penalties would be included in interest expense as a component of pre-tax net income or loss. The Company's tax filings are no longer open to examination by the Internal Revenue Service for tax years prior to 2009 and by state taxing authorities for tax years prior to 2008.

11. RECENT ACCOUNTING PRONOUNCEMENT

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

12. SUBSEQUENT EVENTS

On June 4, 2014, the Company issued 702,341 shares of common stock in connection with the conversion of notes payable valued at $21,000 on the award date.

On June 18, 2014, the Company issued 720,000 shares of common stock in connection with the conversion of notes payable valued at $18,000 on the award date. A total of 360,000 common shares were issued in satisfaction of the May 15, 2014 principal payment.

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 is engaged in the growing market for the Internet-of-Things (“IoT”). The company designs, develops, and sells consumer and commercial GPS tracking solutions that enhance the way customers stay connected with any mobile asset or mobile person. Our products and services provide data that are intended to enhance safety, security, connectivity, operational savings, coordination of mobile assets and managerial or parental decisions. Our devices operate on the worldwide GSM network and therefore work around most of the world. 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 Luggage, 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 Personal/Pet or luggage devices 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 2-4 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.

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 “starter interrupt” 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 and on their roaming partners’ networks. 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.

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.

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 very soon.

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.

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 have completed integration of the system and have begun sales of the system to public utilities (power, water and telecom) and will soon expand to specific commercial and other first responder agencies throughout the United States.

The shipping and asset tracking market is showing signs of IoT interest. In Berg Insight’s 2nd Edition of research on Container Tracking and Security, they focused on tracking and security of intermodal shipping containers. The installed base of remote tracking systems for shipping containers is forecasted to grow at a compound annual growth rate of 49.1 percent from 137,000 units at the end of 2012 to 1.0 million units by 2017. The LBT-886 device is well suited for tracking of assets and containers.

Our Personal Locator Services. Our products are currently being sold through various online retailers and through our website. We provide customer service and support in the United States and 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 37 issued US patents, 3 pending US patents, 2 issued foreign patents, 3 pending foreign patents, 6 PCT filings, 16 registered trademarks and 4 Madrid protocol trademark cases.

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

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 will continue our own retail efforts, but we believe we will reach the largest and most desirable markets by focusing more on commercial opportunities.

We subdivide the commercial market into three categories: small/midsize businesses, (including the strategic utility company market), enterprise businesses and governmental organizations including the US military. We will attempt to gain market share in the small/midsize business segment through channel sales efforts. The enterprise businesses and military segments are far more difficult to penetrate because they tend to require long sales cycles and rigorous testing but, once approved, tend to be good long-term partners. To date, most of the large companies and organizations we are working with have approached us. We expect that as we continue to gain traction with large, reputable institutions, their peers will continue to seek us out. The exclusive contract integrating DOE’s VERDE feed positions us with a significant differentiator in the utility market throughout the US and Canada.

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

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

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

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

Employees and Outsourced Assistance. We have limited our use of contracted professionals who have been engaged in hardware and software development, early marketing and sales preparation, and preparation for customer service support. Mr. 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. Mr. Scalisi has recently been sharing his time with other ventures that may continue over the coming quarters. 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 May 31, 2014 compared to the three months ended May 31, 2013.

Revenue. For the three months ended May 31, 2014, we generated $455,136 of net revenue compared to $755,179 of net revenue for the three months ended May 31, 2013. Normalized device sales, without the AT&T order, represent an increase in device sales of 141% over the same quarter in 2013. The 39% decrease in total revenue is due to the following:

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Device revenue – For the three months ended May 31, 2014, we generated $216,223 of net device revenue compared to $643,696 for the three months ended May 31, 2013. The $427,473 decrease in device revenue consists of the following:

	o	The most significant contributor to the decrease in revenue for the three months ended May 31, 2014 is due to spikes in LBT-886 orders from our commercial sales channel. During the three months ended May 31, 2013, revenue from the sale of LBT-886 devices to AT&T totaled $490,410. 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 May 31, 2014. During this quarter, sales totaling $9,404 of LBT-886 devices were from various other commercial accounts;
	o	Revenue from the sale of PocketFinder Personal devices increased from $2,699 for the three months ended May 31, 2013 to $133,579 for the three months ended May 31, 2014 due to an increase in quantities sold as a result of sales programs and the addition of a few resellers during the quarter;
	o	Revenue from the sale of PetFinder devices decreased from $27,947 for the three months ended May 31, 2013 to $8,791 for the three months ended May 31, 2014 due to the company’s strategic focus away from the pet market until its new devices with indoor locate capability are ready for market; and
	o	PocketFinder Vehicle sales decreased from $93,957 for the three months ended May 31, 2013 to $70,640 for the three months ended May 31, 2014 due to a change in distribution channels.

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Service revenue – For the three months ended May 31, 2014, we generated $238,916 of service revenue compared to $111,483 for the three months ended May 31, 2013. The increase is the result of adding net subscribers for the three months ended May 31, 2014.

Cost of Revenue. For the three months ended May 31, 2014, cost of revenue totaled $417,082 resulting in a positive gross margin of $38,057 compared to cost of revenue totaling $1,128,585 resulting in a negative gross margin of $373,406 for the three months ended May 31, 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, our gross margins will also continue to improve.

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

	●	Increased sales growth for the PocketFinder Vehicle and LBT-886 products;
	●	Penetration of our products into new markets, primarily Asia and Europe; and
	●	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 May 31, 2014, our total operating expenses were $873,819 compared to total operating expenses of $1,950,472 for the three months ended May 31, 2013. Operating expenses decreased by $1,076,653 or 55% for the three months ended May 31, 2014 and is primarily attributed to the following fluctuations:

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A $145,809 decrease in general and administrative expenses to $341,138 for the three months ended May 31, 2014, compared to $486,947 for the three months ended May 31, 2013. The decrease in general and administrative expenses three months ended May 31, 2014 compared to 2013 is primarily due the following:

	●	$31,520 decrease in advertising and marketing fees to market our products due to cash flow spending limitations;
	●	$40,000 decrease 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;
	●	$16,484 decrease in computer related expenditures due to spending restrictions to conserve cash; and
	●	$22,570 decrease in commissions as more sales were sold thru direct channels.

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A $64,098 decrease in officer compensation to $142,000 for the three months ended May 31, 2014, compared to $206,098 for the three months ended May 31, 2013 due to the reclassification of an officer to employee and the outsourcing of the Chief Financial Officer position for the three months ended May 31, 2014;

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Professional fees were reduced by $719,009 to $285,717 for three months ended May 31, 2014 compared to $1,004,725 for three months ended May 31, 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 $112,511 decrease in research and development costs to $0 for the three months ended May 31, 2014 compared to $112,511 for the three months ended May 31, 2013 as certain R&D projects are close to being completed; and

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A $35,227 decrease in salaries and wages to $85,762 for the three months ended May 31, 2014, compared to $120,989 for the three months ended May 31, 2013. The increase is attributed to the reclassification of an officer to an employee and lower stock based compensation.

Other Income/Expenses. For the three months ended May31, 2014, we reported net other expense totaling $708,700 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 $781,533 for the three months ended May 31, 2013. The $72,832 decrease in net other expenses is primarily due to the following:

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A $9,241 increase in financing costs to $105,875 for the three months ended May 31, 2014, compared to $96,634 for the three months ended May 31, 2013 as notes entered into during the current quarter incurred finder’s fees;

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A $85,090 decrease in the amortization of beneficial conversion features on notes payable to $440 for the three months ended May 31, 2014, compared to $85,530 for the three months ended May 31, 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 $304,056 increase in the amortization of deferred financing costs to $343,805 for the three months ended May 31, 2014, compared to $39,749 for the three months ended May 31, 2013 as there were numerous notes payable extensions issued with common stock resulting in increased deferred financing costs for three months ended May 31, 2014 than in 2013;

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A $123,460 gain on the fair value of derivative liabilities was recognized during the three months ended May 31, 2013; whereby, there was no such gain for the three months ended May 31, 2014 as the JMJ debt was settled during the first quarter of 2014;

	●	A $95,820 increase in interest expense to $203,554 for the three months ended May 31, 2014, compared to $107,734 for the three months ended May 31, 2013 as there was approximately $9.7 million in notes payable at May 31, 2014 as compared to $6.6 million in notes payable at May 31, 2013; and

	●	The recognition of a loss on debt extinguishment totaling $521,820 during the three months ended May 31, 2013; whereby, there was no such loss during the three months ended May 31, 2014.

Net Loss. For the three months ended May 31, 2014, we reported a net loss of $1,544,462 compared to a net loss of $3,105,411 for the three months ended May 31, 2013, due to fluctuations in operating and other expenses as previously discussed.

For the nine months ended May 31, 2014 compared to the nine months ended May 31, 2013.

Revenue. For the nine months ended May 31, 2014, we generated $1,205,034 of net revenue compared to $1,554,891 of net revenue for the nine months ended May 31, 2013. The 23% decrease in total revenue is due to the following:

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Device revenue – For the nine months ended May 31, 2014, we generated $567,196 of net device revenue compared to $1,260,828 for the nine months ended May 31, 2013. The $693,632 decrease in device revenue consists of the following:

	o	The most significant contributor to the decrease in revenue for the nine months ended May 31, 2014 is due to spikes in LBT-886 orders from our commercial sales channel. During the nine months ended May 31, 2013, revenue from the sale of LBT-886 devices to AT&T totaled $879,700. Although we expect to receive additional orders from AT&T in 2014, no orders for LBT-886 devices were received during the nine months ended May 31, 2014. During this nine month period, sales totaling $27,287 of LBT-886 devices were from various other commercial accounts; normalizing sales without AT&T’s order the company shows a 149% increase in device revenues compared to the nine months ending May 31, 2013;
	o	Revenue from the sale of PocketFinder Personal devices increased from $22,574 for the nine months ended May 31, 2013 to $265,787 for the nine months ended May 31, 2014 due to an increase in quantities sold as a result of focused sales programs with key retailers;
	o	Revenue from the sale of PetFinder devices decreased from $46,201 for the nine months ended May 31, 2013 to $23,632 for the nine months ended May 31, 2014; and
	o	PocketFinder Vehicle sales decreased slightly from $241,874 for the nine months ended May 31, 2013 to $241,581 for the nine months ended May 31, 2014 due to delays with multiple auto market and dealerships alliances formed in fiscal 2014.

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Service revenue – For the nine months ended May 31, 2014, we generated $637,838 of service revenue compared to $294,063 for the nine months ended May 31, 2013. The increase is the result of adding net subscribers for the nine months ended May 31, 2014.

Cost of Revenue. For the nine months ended May 31, 2014, cost of revenue totaled $1,146,294 resulting in a gross margin of $58,740 compared to cost of revenue totaling $2,155,597 resulting in a negative gross margin of $600,705 for the nine months ended May 31, 2013. The Company realized an improvement in the gross margin as there were no significant write-downs of inventory during the current nine-month period.

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

	●	Increased sales growth for the PocketFinder Vehicle and LBT-886 products;
	●	Penetration of our products into new markets, primarily Asia and Europe; and
	●	Reducing costs through enhanced self-help online tools and by moving to a less expensive local customer service call center.

Operating Expenses. For the nine months ended May 31, 2014, our total operating expenses were $3,169,507 compared to total operating expenses of $5,195,307 for the nine months ended May 31, 2013. Operating expenses decreased by $2,025,800 or 39% for the nine months ended May 31, 2014 and is primarily attributed to the following fluctuations:

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A $178,692 decrease in general and administrative expenses to $1,360,347 for the nine months ended May 31, 2014, compared to $1,539,039 for the nine months ended May 31, 2013 primarily due to a reduction in other general and administrative expenses as a result of reduced spending;

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A $176,719 decrease in officer compensation to $621,746 for the nine months ended May 31, 2014, compared to $798,465 for the nine months ended May 31, 2013 due to the reclassification of an officer to an employee in 2014 and reduced stock based compensation;

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Professional fees were reduced by $1,027,032 to $834,674 for the nine months ended May 31, 2014 compared to $1,861,706 for the nine months ended May 31, 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 $158,249 decrease in research and development costs to $99,548 for the nine months ended May 31, 2014 compared to $257,797 for the nine months ended May 31, 2013 as certain R&D projects are close to being completed;

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A $28,868 decrease in salaries and wages to $195,585 for the nine months ended May 31, 2014, compared to $224,453 for the nine months ended May 31, 2013. The decrease is attributed to the reduction of one employee and due to a reclassification of an officer to an employee; and

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The recognition of an asset impairment on certain patents totaling $455,916 during the nine months ended May 31, 2013; whereby, there was no such impairment recognized during the nine months ended May 31, 2014.

Other Income/Expenses. For the nine months ended May 31, 2014, we reported net other expense totaling $820,838 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 $2,161,231 for the nine months ended May 31, 2013. The $1,340,393 decrease in net other expenses is primarily due to the following:

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A $96,979 decrease in financing costs to $359,755 for the nine months ended May 31, 2014, compared to $456,734 for the nine months ended May 31, 2013 as majority of notes entered into in the current quarter did not incur finder’s fees;

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A $158,281 decrease in the amortization of beneficial conversion features on notes payable to $61,388 for the nine months ended May 31, 2014, compared to $219,669 for the nine months ended May 31, 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 $279,898 increase in the amortization of deferred financing costs to $452,155 for the nine months ended May 31, 2014, compared to $172,257 for the nine months ended May 31, 2013 as there was were more notes payable issued with common stock resulting in higher deferred financing costs nine months ended May 31, 2014 than in 2013;

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A $206,439 increase in the amortization of debt discounts associated with the issuance of warrants on convertible notes payable to $260,196 for the nine months ended May 31, 2014, compared to $53,757as there were more warrant issuances during the nine months ended May 31, 2014;

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A $517,055 loss on the fair value of derivative liabilities was recognized during the nine months ended May 31, 2013; whereby, there was no such gain recognized during the nine months ended May 31, 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 nine months ended May 31, 2014; whereby, there no such debt settlement during the nine months ended May 31, 2013;

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The recognition of a $48,431 loss in connection with asset disposals during the nine months ended May 31 2014; whereby, there no such asset disposals in during the nine months ended May 31, 2013;

	●	A $304,380 increase in interest expense to $524,991 for the nine months ended May 31, 2014, compared to $220,611 for the nine months ended May 31, 2013 as there was approximately $9.7 million in notes payable at May 31, 2014 as compared to $6.6 million in notes payable at May 31, 2013; and

	●	The recognition of a loss on debt extinguishment totaling $521,820 during the nine months ended May 31, 2013; whereby, there was no such loss during the nine months ended May 31, 2014.

Net Loss. For the nine months ended May 31, 2014, we reported a net loss of $3,932,405 compared to a net loss of $7,958,044 for the nine months ended May 31, 2013, due to fluctuations in operating and other expenses as previously discussed.

LIQUIDITY AND CAPITAL RESOURCES

We had cash and cash equivalents of $150,802 as of May 31, 2014, compared to $680,914 as of August 31, 2013.

As of May 31, 2014, current assets totaled $1,007,448 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 May 31, 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 the first nine months of operations. 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 May 31, 2014, current liabilities totaled $7,727,235 compared to $8,410,439 as of August 31, 2013 and consisted of accounts payable and accrued expenses, deferred compensation, term loans, convertible notes payable and accrued interest. The decrease at May 31, 2014, is due to the conversion of the $1,000,000 line of credit into a term loan and the elimination of the $745,148 derivative liability associated with the JMJ debt settlement.

As at May 31, 2014, the Company had a working capital deficit of $6,719,787 compared with a working capital deficit of $6,789,668 as of August 31, 2013.

Cash Flows from Operating Activities. During the nine months ended May 31, 2014, the Company used $2,389,045 of cash used for operating activities compared with $2,547,470 for the nine months ended May 31, 2013.

Cash Flows From Investing Activities. During the nine months ended May 31, 2014, the Company used $69,242 of cash for investing compared with $146,098 for the nine months ended May 31, 2013. The decrease in the cash used for investing operating activities was attributed to fewer capital expenditures during the nine months ended May 31, 2014 compared to the nine months ended May 31, 2013.

Cash Flows from Financing Activities. During the nine months ended May 31, 2014, the Company received $1,928,175 in cash from financing activities related to the issuance of convertible promissory notes. During the nine months ended May 31, 2013, the Company received $2,485,000 from the issuance of convertible promissory notes. Demand convertible notes payable totaling $1,142,987 are unsecured, bear interest at 5% per annum, and are to repaid out of future operating cash flows. Current convertible term notes payable totaling $2,351,452 are unsecured, bear interest at 8%-36% per annum, and are to be repaid out of future operating cash flow. Long-term convertible term notes totaling $3,325,000 are secured, bear interest at 10% per annum with due dates ranging from September 30, 2015 to March 5, 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 May 31, 2014, we had an accumulated deficit of $59,996,870 and we expect to incur continual losses until sometime in calendar year 2015-2016.

As of May 31, 2014, we had $150,802 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 six employees and do not anticipate hiring any significant number of additional employees during the next twelve months.

Off-Balance Sheet Arrangements

As of May 31, 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 May 31, 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 nine months ended May 31, 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

None.

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 April 16, 2014, the Company issued 219,512 shares of common stock in connection with the conversion of notes payable valued at $9,000 on the award date.

On May 2, 2014, the Company issued 617,647 shares of common stock in connection with the conversion of notes payable valued at $21,000 on the award date.

On May 29, 2014, the Company issued 243,243 shares of common stock in connection with the conversion of notes payable valued at $9,000 on the award date.

On June 4, 2014, the Company issued 702,341 shares of common stock in connection with the conversion of notes payable valued at $21,000 on the award date.

On June 18, 2014, the Company issued 750,000 shares of common stock in connection with the conversion of notes payable valued at $18,000 on the award date.

Warrant Issuance for Note Payable

On March 5, 2014, the Company awarded “Series EE” warrants to a note holder to purchase 200,000 common shares at $0.15 per share in connection with a debt issuance and expires on March 4, 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).

10.60	Form of “EE” Warrant Agreement. †

10.61	Unsecured Convertible Promissory Note Amendment between the Company and David M. Morse dated March 14, 2014. †

10.62	Unsecured Convertible Promissory Note Amendment between the Company and Desiree Mejia dated March 14, 2014. †

10.63	Unsecured Convertible Promissory Note Amendment between the Company and Gregory Harrison dated March 14, 2014. †

10.64	Unsecured Convertible Promissory Note Amendment between the Company and David Michael Morse Jr. dated March 14, 2014. †

10.65	Unsecured Convertible Promissory Note Amendment between the Company and Florance Accountancy dated March 14, 2014. †

10.66	Unsecured Convertible Promissory Note Amendment between the Company and Eric Fronk dated March 14, 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: July 11, 2014	By:	/s/ David M. Morse
		David M. Morse
		Co- President and Chief Executive Officer

Dated: July 11, 2014	By:	/s/ Gregory Andrews
		Gregory Andrews
		Chief Financial Officer

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