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LBAS > SEC Filings for LBAS > Form 10-Q on 11-Apr-2014All Recent SEC Filings

Show all filings for LOCATION BASED TECHNOLOGIES, INC.

Form 10-Q for LOCATION BASED TECHNOLOGIES, INC.


11-Apr-2014

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Our current hardware development is primarily focused on enhancing the indoor tracking capability of a new 3G PocketFinder device and a miniaturized dual Iridium/GSM device both of which are close to the final stages of building prototypes, testing and certification before market entry. Having a 3G consumer device will enable us to sell PocketFinder Personal Locator and PocketFinder Pet devices into territories that predominately operate on the 3G network, like Canada and Australia. New Wi-Fi capability will significantly improve indoor location accuracy and greatly reduce "false alert" reports that result from relying on GPS capability only. This will be particularly beneficial to the child market and the pet market. Additionally, we were recently informed that AT&T's 2G network will be terminated in early 2017 so having a 3G device will prepare us for that eventual transition. Both the lone worker and dual Iridium/GSM device are designed to exploit sales channels such as the US military, lone worker programs and large corporations with employees in dangerous areas. Our involvement in the airline cargo and container application has also resulted in the development of a fully "submersible" waterproof LBT-886 variant that will meet application requirements. These projects were also undertaken pursuant to customer requests.

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


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

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

Internationally, our devices are being sold and marketed in Mexico, the United Kingdom (the, "UK") other European Union countries, Colombia and Ecuador. In the UK, we have partnered with EE (the largest mobile-to-mobile telecommunications company in the UK). Recent reports show Europe at the forefront of M2M ("Machine-to-Machine") or the adoption of "Internet-of-things" applications with revenues from M2M services market wide expected to grow at a compounded annual rate of 33% between 2011 and 2016 in a selection of European markets, including Germany, France, Poland, Russia, Sweden and the UK. These are the findings of new research from Frost & Sullivan, which predicts that the number of SIM connections will rise to 75 million in 2016, with the UK emerging as the biggest market and Germany a close second. The market-research company also reports that Europe's mobile network operators are looking to expand their M2M portfolios to profit from applications rather than just connectivity. LBT desires to play a part in the European M2M/IoT growth expansion and we are working with companies in the UK, France, Poland and Sweden as potential distributors.

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

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

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

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

We have signed an exclusive contract with the Department of Energy (the, "DOE") on a project which will allow us to integrate and market an Oak Ridge National Laboratory technology that provides real-time status of the electric grid and critical energy sectors along with real-time severe weather conditions. The system, called VERDE (Visualizing Energy Resources Dynamically on the Earth), enables decision-makers to respond swiftly to major power disruptions. VERDE, which combines the display capabilities of Google Earth with analysis and modeling components, significantly enhances situational awareness and speeds recovery times from power outages. We expect to begin sales of the system to commercial customers, public utilities (power, water and telecom) and other first responder agencies throughout the United States within 90 days.

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

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

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

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

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

? Pet care and location capability; and

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


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

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

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

Our marketing initiatives will include:

? Licensing opportunities for our software/EUI and 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:

? Software 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 retail partners, and allowing them to sell our devices through their retail channels around the world. We will continue our own retail efforts, but we believe we will reach the largest consumer audience by leveraging the size, financial strength, infrastructure and brand recognition of our partners.

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


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

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

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

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

Employees and Outsourced Assistance. We have limited our use of contracted professionals who have been engaged in hardware and software development, early marketing and sales preparation, and preparation for customer service support. Mr. Scalisi, our Co-President and Chief Development Officer, Mr. Morse, our Co-President and Chief Executive Officer, and Mrs. Mejia, our Chief Operating Officer, Dan Hogan, our VP of Marketing, and Dave Morse, Jr., as VP of Customer Service, currently work full time for the Company. Effective as of the date of this filing, our current part-time CFO, Glenn Davidson, shall be replaced by Gregory Andrews. Mr. Andrews will serve as CFO on a part-time basis. Since its inception, LBT has used an extended workforce concept which includes outsourcing partners and vendors, and using a contingent workforce (consultants, part-time /interim executives and temporary workers) and strategic partners to stay competitive in the marketplace. We do not see this as a trend. We will continue to use this model for the foreseeable future with an eye to reduce corporate overhead and expenses.

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

RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

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


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

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

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

? 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 . . .

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