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LBAS > SEC Filings for LBAS > Form 10-Q on 12-Jul-2013All Recent SEC Filings

Show all filings for LOCATION BASED TECHNOLOGIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LOCATION BASED TECHNOLOGIES, INC.


12-Jul-2013

Quarterly Report


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

FORWARD LOOKING STATEMENTS

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

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 contract.

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

Devices can also be manufactured with SIM cards provided by carriers other than AT&T. 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.

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.

We are constantly upgrading our PocketFinder device software and the back end, both of which directly impact the user's experience by providing additional features and increased functionality. The software updates for all of our products are delivered over the air, which allows every customer to receive the latest version of our PocketFinder firmware simply by placing their device in a charger.

On the hardware side, we have begun development of a 3G PocketFinder which may be available for sale before the end of 2013. Having a 3G consumer device will enable us to sell PocketFinders and Pet finders into markets that predominately operate on the 3G network, like Canada and Australia.

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

Our vehicle products are now available in 2G or 3G and we are working on a waterproof vehicle device specifically to meet demand for tracking watercraft.

We are also developing three new devices based on the LBT-886 chassis. The first is a variant of the 886, which can transmit its location data using either a GSM network or a satellite network. The second is a "lone worker" GPS device, which is equipped with a panic button so a person can communicate safety or danger by pushing a button. The third is a GPS device which senses and reports external data such as temperature, humidity and light. We believe the expansion of the 886 product line will be particularly attractive to companies and organizations that are currently testing our products, including the US military, mining companies and governmental organizations with lone worker programs. We anticipate these devices will be ready for production later this calendar year.


Consumer Sales Channels. In the US, our PocketFinder family of products can be found at the following online locations: Apple.com, Amazon.com, Walmart.com, Brookstone.com, the US Coast Guard Exchanges, Crutchfield.com and our www.pocketfinder.com website. The PocketFinder product can also be found in Apple stores in the US and Canada. Additionally, once our new PocketFinder 886 Vehicle device receives network certification, we intend to make the device available for purchase at AT&T's retail and online stores.

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

In Asia, Apple has invited us to sell PocketFinder devices in their Singapore, China, Hong Kong, Australia and New Zealand stores and Online. We are in the process of exploring opportunities and expect to make our devices available for sale in these regions.

Commercial Sales Channels. Our commercial sales have been ramping steadily since the launch of our business solutions platform last August. We continue to acquire approximately one new business customer every day, and we expect this segment of our business to continue to grow rapidly over the next 18 months. In October 2012, we received a purchase order from AT&T for our LBT-886 devices which was fulfilled in March and April of 2013. This initial order for devices is being used internally by AT&T to keep track of some of their emergency response mobile assets. Our relationship with AT&T has the potential to significantly expand over the next 24 months as AT&T looks to place tracking units on more of its mobile assets.

In February of this year, the military concluded its testing of the LBT-886 and the device received final military approval. We have been negatively impacted by the sequester but we believe we could receive orders from the military sometime this calendar year.

For the foreseeable future, we will focus the majority of our internal sales efforts on commercial channels as we believe the commercial market is larger and more easily accessible than the consumer market. Researchers continue to claim rapid growth in the M2M markets with the number of cellular M2M connections projected to rise from 143.7 million in 2012 to 478.1 million in 2017, when they will account for 5.6% of total mobile subscriptions, according to a new report from Pyramid Research. Over the same timeframe, airtime revenues will grow from $4.9 billion to $13 billion, says Pyramid. With government policy and regulation largely driving the M2M agenda in most parts of the world, China is set to become the largest market this year, overtaking the US, while Brazil is on course to be third biggest in 2017 - thanks to telematics regulations that are driving penetration in vehicles. Similar telematics rules are likely to propel Russia into fourth place, claims Pyramid. Similarly, ABI Research is predicting a very significant increase in security applications based on M2M technology.

Revenues. Our revenue this quarter was $755,179 which represents a 28% increase from last quarter. Revenue for the nine months ended May 31, 2013 was $1,554,891. Approximately 57% of revenue for the nine months ended May 31, 2013 is from the AT&T order.

Sales Pipeline. Our devices are currently being tested by companies and organizations large and small, around the world. Within the next 12-24 months some of our largest potential orders could come from the following sources: 1) a branch of the US military which is currently evaluating our devices for an order that could exceed 300,000 units; 2) a fortune 100 company that is already familiar with our products and has asked us to submit a bid on a 70,000 unit opportunity in 2014; and 3) a large international airline carrier that is currently evaluating units and has a need for up to 50,000 devices.

We do not expect to win all of the business that is currently in our pipeline, but expect to earn some of it. Our ability to monetize some of our potential sales opportunities requires us to spend additional capital for research and development. Therefore, the number of new customers we are able to acquire depends in some measure on our ability to raise additional capital.

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


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

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

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

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

? Pet care and location capability; and

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

Our Intellectual Property Investment. We continue to invest in intellectual property that consists of apparatus patents and applications and system and method patents and applications. We have filed claims that cover many aspects of the PocketFinder, its operating system and user interface. We expanded and filed additional claims this fiscal year that cover new aspects of the PocketFinder People device, its operating system and user interface. Our intellectual property portfolio includes 34 issued US patents, 11 pending US patents, 7 pending foreign patents, 6 PCT filings, 17 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 and families stay connected with one another. We have the ability to add our customer's existing location devices onto our superior location platform in order to simplify the customers need to manage all location-based devices through one easy tool.

Our marketing initiatives will include:

? Licensing opportunities for the products in international areas or regions;

? Self-branded or "white label" opportunities for niche market or vertical market sales;

? Affinity group marketing and outreach opportunities;

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

? Retail distribution initiatives.

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

? Potential licensing fees;

? Organizations that will self-brand LBT's services for specialized niche markets ("white label");

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

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

? Consumer and commercial tracking device accessory sales; and

? Monthly recurring service fees.

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

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

Our Competition. Personal location and property tracking devices are beginning to significantly penetrate the marketplace. We believe this condition represents a tremendous opportunity as customers will be attracted in large numbers once the intrinsic value of such devices is recognized and mass market adoption begins.


Our competitors include, but are not limited to: Geospatial Platform Providers, Application Developers, Garmin's GTU-10, Qualcomm's Tagg, Lo-Jack, SpotLight, and commercial providers such as Fleetmatics, NetworkFleet, and Qualcomm. Some competitors may be better financed, or have greater marketing and scientific resources than we do.

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

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

Employees and Outsourced Assistance. We have limited our use of contracted professionals who have been engaged in hardware and software development, early marketing and sales preparation, and preparation for customer service support. Mr. Scalisi, our Co-President and Chief Development Officer, Mr. Morse, our Co-President and Chief Executive Officer, and Mrs. Mejia, our Chief Operating Officer, Mr. Gregory Gaines, our Chief Marketing and Sales Officer, Mr. Gregory Harrison, our General Counsel, and Dave Morse, Jr., as VP of Customer Service, currently devote 100% of their business time to our operations. Our CFO, Mr. Eric Fronk, is currently serving part-time. In addition to our new Board members, we have added several key contributors with customer service, general counsel/business development, and sales leadership experience. Remaining true to our "outsourced" model for growth and expansion, any large personnel increase will be accomplished through sales and customer support outsourced organizations contracted to provide respective services. The company will remain focused on our core competency of providing location devices and services.

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, 2013 as compared to the three months ended May 31, 2012.

Revenue. For the three months ended May 31, 2013, we generated $755,179 of net revenue as compared to $133,716 of net revenue for the three months ended May 31, 2012. Net revenue for the three months ended May 31, 2013, consisted of $643,696 from the sales of PocketFinder devices and $111,483 from monthly subscription service income.

Cost of Revenue. For the three months ended May 31, 2013, cost of revenue totaled $1,128,585 resulting in a negative gross margin of $373,406 or 49% as compared to a negative gross margin of $127,506 or 95% for the three months ended May 31, 2012. Cost of revenue for the three months ended May 31, 2013, included approximately $392,000 of physical inventory adjustments related to repackaging PocketFinder products carried in Apple stores as well as adjustments related to increasing the lower of cost or market inventory reserve. In addition, the negative gross margin was more favorable during the three months ended May 31, 2013, as a result of device sales to AT&T and an increased margin on device sales.

Operating Expenses. For the three months ended May 31, 2013, our total operating expenses were $1,950,472 as compared to total operating expenses of $1,327,404 for the three months ended May 31, 2012. Operating expenses increased by $623,067 or 47% in 2013 from 2012. The increase in operating expenses is primarily attributed to the following fluctuations:

? An $87,634 increase in general and administrative expenses to $486,947 for the three months ended May 31, 2013, as compared to $399,313 for the three months ended May 31, 2012. The increase in general and administrative expenses in 2013 as compared to 2012 is primarily due to increased advertising and marketing fees to market our products and increased computer expenses related to our website and development of the PocketFinder apps;

? A $425,005 increase in professional fees to $1,004,725 for the three months ended May 31, 2013, as compared to $579,720 for the three months ended May 31, 2012. For the three months ended May 31, 2013, there were numerous consultants engaged in business develop and capital raising activities. Such consultants received $903,956 of stock compensation in exchange for advisory services during the three months ended May 31, 2013; and


? A $112,511 increase in research and development to $112,511 for the three months ended May 31, 2013, as compared to $0 for the three months ended May 31, 2012, as a result of developing upgrades and enhanced features to our LBT-886 product during the three months ended May 31, 2013.

Other Income/Expenses. For the three months ended May 31, 2013, we reported net other expense totaling $781,533 that mainly consisted of net interest expense, . . .

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