The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
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,” 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.
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, 2013
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/A of Location Based Technologies, Inc. for the year ended August 31, 2012. 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, 2013, 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, 2012, included in the Company’s report on Form 10-K/A.
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, 2013, had an accumulated deficit of $52,973,159 and negative working capital of $7,081,568. 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, 2013
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, 2013 and August 31, 2012 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 three months ended May 31, 2013, revenue from the Company’s largest customer amounted to $491,882 or 66% of total net revenue. 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 1.5% of total accounts receivable at May 31, 2013.
For the three months ended May 31, 2012, revenue from the Company’s largest customer amounted to $12,594 or 10% of total net revenue. For the nine months ended May 31, 2012, revenue from one of the Company’s customers amounted to $224,253 or 61% of total net revenue.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
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, 2013 the allowance for doubtful accounts amounted to $3,000. As of August 31, 2012 the allowance for doubtful accounts amounted to $304,597 and was related to the LoadRack consulting project.
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, 2013 and August 31, 2012 the allowance for sales returns amounted to $0 and $34,343, respectively.
Due From Factor
On February 27, 2013, the Company entered into a financing arrangement with a commercial factor, (the “Factor”) whereby the Factor agreed to purchase and the Company agreed to sell all of the accounts receivable generated as the result of device sales to AT&T. The Factor initially advances forty percent (40%) of the amount of each AT&T account receivable, and the remaining sixty percent (60%) of the account receivable is paid (minus the Factor’s interest and fees) once AT&T remits payment in full for the invoice. Under the terms of the Agreement, the Factor has a first lien position on all of the Company's accounts receivable and a third lien position on all other assets. The total amount due from the Factor as of May 31, 2013, totaled $57,456.
Inventory
Inventories are valued at the lower of cost (firstin, firstout) 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 lowerofcostormarket ("LCM") adjustment against gross inventory values. The Company recorded an inventory valuation reserve for LCM inventory adjustments amounting to $254,174 as of May 31, 2013. The Company has not recorded an allowance for obsolescence as there are no issues with obsolescence as of May 31, 2013. In addition, a portion of the inventory totaling $1,350,000 is classified as a noncurrent asset at May 31, 2013 (see Note 2).
Net losses on firm purchase commitments for inventory are recognized in accordance with FASB ASC 330 –
Inventory
, whereby losses arising from firm, uncancelable and unhedged commitments for the future purchase of inventory items are recognized in the current period. During the year ended August 31, 2011, the Company recognized losses and a related liability from inventory purchase commitments totaling $685,500. As of May 31, 2013 and August 31, 2012, the liability from inventory purchase commitments amounted to $0 and $48,054, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair Value of Financial Instruments
Pursuant to FASB ASC 820 –
Fair Value Measurement and Disclosures
, the Company is required to estimate the fair value of all financial instruments included on its balance sheet. The carrying value of cash, accounts receivable, inventory, accounts payable and notes payable approximate their fair value due to the short period to maturity of these instruments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method and with useful lives used in computing depreciation ranging from 1 to 5 years. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized.
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.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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, 2013 and August 31, 2012, the Company capitalized $753,715 for patent related expenditures. As of May 31, 2013 and August 31, 2012, the Company capitalized $59,470 for trademark related expenditures. Accumulated amortization on intangible assets was $70,593 and $20,493 at May 31, 2013, and August 31, 2012.
Patents are subject to amortization upon issuance by the United States Patent and Trademark Office. Intangible assets are amortized in accordance with FASB ASC 350 –
Intangibles – Goodwill and Other,
using the straight-line method over the shorter of their estimated useful lives or remaining legal life. Amortization expense totaled $16,938 and $1,575 for the three months ended May 31, 2013 and 2012, respectively. Amortization expense totaled $50,100 and $4,692 for the nine months ended May 31, 2013 and 2012, respectively.
Deferred Revenue
Deferred revenue is a liability related to a revenue producing activity for which revenue has not yet been recognized. As of May 31, 2013 and August 31, 2012, deferred revenue amounted to $55,746 and $16,539, respectively, and consisted of deposits on device orders and 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.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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).
Revenue Recognition
Revenues are recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in Financial Statements
, as amended by SAB No. 104,
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.
In the last quarter of fiscal 2012, the Company changed its accounting policy regarding revenue recognition. Previously, the Company made reductions to revenue for product held at distributors that were accounted for as deferred revenue until product was “sold through” to retailers. The Company is no longer deferring revenue recognition until the product is “sold through” to retailers.
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 advance of the service provided for that month. Service revenue is recognized upon billing the customer.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(Continued)
Shipping Costs
Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are included in cost of sales.
Advertising Costs
Advertising costs are expensed as incurred. For the nine months ended May 31, 2013 and 2012, the Company incurred $420,023 and $255,522 of advertising costs, respectively. For the three months ended May 31, 2013 and 2012, the Company incurred $51,327 and $129,231, 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, 2013 and 2012, stock-based compensation expense associated with stock options totaled $30,122 and $0, respectively. For the nine months ended May 31, 2013 and 2012, stock-based compensation expense associated with stock options totaled $108,391 and $0, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
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, 2013 and 2012.
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. Dilutive potential common shares primarily consist of 3,037,500 stock options and 12,456,715 warrants issued by the Company. As of August 31, 2012, dilutive potential common shares primarily consist of 2,562,500 stock options and 8,958,302 warrants issued by the Company. These potential common shares are excluded from diluted loss per share as their effect would be anti-dilutive.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
2.
INVENTORY
Inventory at May 31, 2013 and August 31, 2012 consisted of the following:
|
|
May 31,
2013
|
|
|
August 31,
2012
|
|
Current:
|
|
|
|
|
|
|
|
|
Packaging supplies
|
|
$
|
-
|
|
|
$
|
7,859
|
|
Device components
|
|
|
401,415
|
|
|
|
452,298
|
|
Finished goods
|
|
|
1,244,861
|
|
|
|
1,522,809
|
|
Inventory valuation reserve
|
|
|
(254,174
|
)
|
|
|
-
|
|
Inventories, current
|
|
$
|
1,392,102
|
|
|
$
|
1,982,966
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Device components
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
Finished goods
|
|
|
150,000
|
|
|
|
150,000
|
|
Inventories, noncurrent
|
|
$
|
1,350,000
|
|
|
$
|
1,350,000
|
|
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 and finished goods within the next year. Inventories totaling $1,350,000 which may not be realized within a 12-month period have been reclassified as long-term as of May 31, 2013 and August 31, 2012.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
3.
PROPERTY AND EQUIPMENT
Property and equipment at May 31, 2013 and August 31, 2012 consisted of the following:
|
|
May 31,
2013
|
|
|
August 31,
2012
|
|
Machinery and equipment
|
|
$
|
214,854
|
|
|
$
|
55,965
|
|
Computer software (mobile apps)
|
|
|
66,999
|
|
|
|
83,999
|
|
Computer software (internal)
|
|
|
51,263
|
|
|
|
51,263
|
|
Computer and video equipment
|
|
|
19,756
|
|
|
|
17,632
|
|
Office furniture
|
|
|
24,526
|
|
|
|
24,526
|
|
|
|
|
377,398
|
|
|
|
233,385
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(143,206
|
)
|
|
|
(109,403
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
234,192
|
|
|
$
|
123,982
|
|
Depreciation expense for the nine months ended May 31, 2013 and 2012 amounted to $35,519 and $117,314, respectively.
4.
RELATED PARTY TRANSACTIONS
Services Provided
A relative of the Chief Operating Officer provides bookkeeping and accounting services to the Company for $3,000 per month. During the nine months ended May 31, 2013 and 2012, bookkeeping and accounting fees for this related party totaled $27,000 and $22,500, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
4.
RELATED PARTY TRANSACTIONS
(Continued)
Services Provided
(Continued)
On March 30, 2011, the Company entered into an Employment Letter of Intent (“LOI”) with a relative of the Company’s CEO and President, to act as Vice President of Customer Service. Under the terms of the LOI, the related party is paid compensation of $10,000 per month and 250,000 shares of the Company’s common stock as a signing bonus. The common stock was valued at $42,500 on the award date. On March 15, 2012, the Company entered into an Executive Employment Agreement with the related party. Under the terms of Executive Employment Agreement, the related party is paid compensation of $12,500 per month plus sales commissions and is entitled to earn up to 1,500,000 stock options that vest upon achieving certain milestones. During the nine months ended May 31, 2013, total compensation under these related party agreements totaled $152,089.
West Coast Customs
In July 2012, an officer of the Company entered into a Subscription Agreement with West Coast Customs ("WCC") to acquire an approximate 1.5% ownership of WCC. The Company and WCC are under a Manufacturing and Trademark License Agreement for co-branding of the PocketFinder® products.
5.
CONVERTIBLE NOTES PAYABLE
$25,000 Promissory Note
On June 28, 2011, the Company entered into a promissory note agreement for $25,000 to be repaid by June 27, 2012. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.25 per share. On December 18, 2012, the promissory note agreement maturity date was extended to June 27, 2013, and accrued interest totaling $3,733 was converted into principal.
The amended conversion rate of $0.20 per share was below the market value of $0.25 per share resulting in a beneficial conversion feature in the amount of $7,183, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $5,879 for the nine months ended May 31, 2013.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$25,000 Promissory Note
(Continued)
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $27,429 and $1,220, respectively.
JMJ Financing
On March 16, 2012, the Company entered into a Securities Purchase Agreement (“SPA”) for $500,000 pursuant to which the Company entered into a Promissory Note Agreement (“Note”) for $555,000 consisting of $500,000 of principal and $55,000 of prepaid interest, and “V warrants” to purchase 869,565 shares of the Company’s common stock. Under the terms of the Note, $555,000 of principal and interest shall be repaid by September 16, 2012. If the loan is repaid within the first 90 days, no additional interest shall be charged. If the Company extends the loan beyond the first 90 days, an additional 12% interest shall be charged for the next 90 days. The Note contains a maturity date default provision whereby the greater of a predetermined conversion amount or 130% of the principal and 100% of the accrued interest is due if the note is not repaid by the due date. The Note can be converted into the Company’s common stock at the end of the term only if the principal and interest are not repaid based upon the conversion price formula. The warrants permit for the purchase of 869,565 shares of common stock at $0.23 per share. The warrants expire on March 16, 2017. Under the terms of the SPA, $200,000 was allocated for the purchase of the warrants and the remaining $300,000 was allocated for the Note. As of May 31, 2013, the note payable balance and accrued interest totaled $555,000 and $66,600, respectively.
On September 16, 2012, the Company did not extend the due date of the $555,000 Promissory Note Agreement with JMJ Financial. As such, the Company is in default in the payment of the principal and unpaid accrued interest and the note holder is able to convert unpaid principal and accrued interest into shares of the Company’s common stock.
In accordance with ASC 815 – Derivatives and Hedging, the Company determined that the conversion feature of the Note met the criteria of an embedded derivative, and therefore the conversion feature of this Note needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the default date when the Note became convertible using the Black-Scholes model. As such, on the default date, the Company recorded the conversion options as a liability and recorded a loss in the value of the derivative liability of $191,062. For the nine months ended May 31, 2013, the Company recorded a loss for the change in fair value of the derivative liability in the amount of $259,697 due to the fluctuation in the current market prices.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
JMJ Financing
(Continued)
On April 18, 2012, the Company entered into a Promissory Note Agreement (“Note”) for $620,000 consisting of $560,000 of principal and $60,000 of prepaid interest. Under the terms of the Note, $620,000 of principal and interest shall be repaid by July 18, 2012. The Note contains a maturity date default provision whereby the greater of a predetermined conversion amount or 130% of the principal and 100% of the accrued interest is due if the note is not repaid by the due date. The Note can be converted into the Company’s common stock at the end of the term only if the principal and interest are not repaid based upon the conversion price formula. As of May 31, 2013, $310,000 of the principal balance was repaid and the remaining $310,000 principal balance and $18,600 of accrued interest was converted into 2,088,465 shares of the Company’s common stock. As of May 31, 2013, there was no note payable balance or accrued interest owed.
On May 1, 2012, the Company entered into a Securities Purchase Agreement (“SPA”) for $500,000 pursuant to which the Company entered into a Promissory Note Agreement (“Note”) for $550,000 consisting of $500,000 of principal and $50,000 of prepaid interest, and “W warrants” to purchase 1,086,957 shares of the Company’s common stock. Under the terms of the Note, $550,000 of principal and interest shall be repaid by November 1, 2012. If the loan is repaid within the first 90 days, no additional interest shall be charged. If the Company extends the loan beyond the first 90 days, an additional 12% interest shall be charged for the next 90 days. The Note contains a maturity date default provision whereby the greater of a predetermined conversion amount or 130% of the principal and 100% of the accrued interest is due if the note is not repaid by the due date. The Note can be converted into the Company’s common stock at the end of the term only if the principal and interest are not repaid based upon the conversion price formula. The warrants permit for the purchase of 1,086,957 shares of common stock at $0.23 per share. The warrants expire on May 1, 2017. Under the terms of the SPA, $250,000 was allocated for the purchase of the warrants and the remaining $250,000 was allocated for the Note. As of May 31, 2013, the note payable balance and accrued interest totaled $550,000 and $66,000, respectively.
On November 1, 2012, the Company did not extend the due date of the $550,000 promissory note agreement with JMJ Financial. As such, the Company is in default in the payment of the principal and unpaid accrued interest and the note holder is able to convert unpaid principal and accrued interest into shares of the Company’s common stock.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
JMJ Financing
(Continued)
In accordance with ASC 815 – Derivatives and Hedging, the Company determined that the conversion feature of the Note met the criteria of an embedded derivative, and therefore the conversion feature of this Note needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the default date when the Note became convertible using the Black-Scholes model. As such, on the default date, the Company recorded the conversion options as a liability and recorded a loss in the value of the derivative liability of $208,348. For the nine months ended May 31, 2013, the Company recorded a loss for the change in fair value of the derivative liability in the amount of $257,358 due to the fluctuation in the current market prices.
$300,000 Unsecured Convertible Promissory Note
On June 28, 2012, the Company entered into an unsecured convertible promissory note agreement for $300,000 to be repaid by June 28, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.30 per share.
The conversion rate of $0.30 per share was below the market value of $0.42 per share resulting in a beneficial conversion feature in the amount of $120,000, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $89,753 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $291,123 and $27,781, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$50,000 Unsecured Convertible Promissory Note
On July 9, 2012, the Company entered into an unsecured convertible promissory note agreement for $50,000 to be repaid by July 9, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.30 per share.
The conversion rate of $0.30 per share was below the market value of $0.41 per share resulting in a beneficial conversion feature in the amount of $18,333, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $13,712 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $48,091 and $4,479, respectively.
$25,000 Unsecured Convertible Promissory Note
On July 9, 2012, the Company entered into an unsecured convertible promissory note agreement for $25,000 to be repaid by July 9, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.30 per share.
The conversion rate of $0.30 per share was below the market value of $0.41 per share resulting in a beneficial conversion feature in the amount of $9,167, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $6,856 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $24,046 and $2,240, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$27,500 Unsecured Convertible Promissory Note
On July 9, 2012, the Company entered into an unsecured convertible promissory note agreement for $27,500 to be repaid by July 9, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.30 per share.
The conversion rate of $0.30 per share was below the market value of $0.41 per share resulting in a beneficial conversion feature in the amount of $10,083, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $7,542 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $26,450 and $2,464, respectively.
$50,000 Unsecured Convertible Promissory Note
On July 13, 2012, the Company entered into an unsecured convertible promissory note agreement for $50,000 to be repaid by July 13, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.30 per share.
The conversion rate of $0.30 per share was below the market value of $0.40 per share resulting in a beneficial conversion feature in the amount of $16,667, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $12,466 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $48,082 and $4,425, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$100,000 Unsecured Convertible Promissory Note
On July 13, 2012, the Company entered into an unsecured convertible promissory note agreement for $100,000 to be repaid by July 13, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.30 per share.
The conversion rate of $0.30 per share was below the market value of $0.40 per share resulting in a beneficial conversion feature in the amount of $33,333, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $24,932 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $96,164 and $8,849, respectively.
$1,000,000 Secured Convertible Promissory Note
On November 28, 2012, the Company entered into a Securities Purchase Agreement and related Secured Convertible Promissory Note (“Note”) for up to $1,000,000 to be repaid by April 13, 2013. The note bears interest at 8% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. The Note is secured by a collateralized security interest granted in a patent owned by the Company.
On April 29, 2013, the Note was amended to extend the maturity date to December 30, 2013. In connection with the note extension, 3,000,000 “AA warrants” were awarded resulting in a debt extinguishment loss totaling $521,820 (see Note 10).
As of May 31, 2013, the note payable balance and accrued interest totaled $1,000,000 and $37,666, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$1,000,000 Secured Convertible Promissory Note
On December 10, 2012, the Company entered into a Securities Purchase Agreement and related Secured Convertible Promissory Note (“Note”) for up to $1,000,000 to be repaid by June 30, 2013. The note bears interest at 8% per annum and may be converted into shares of the Company’s common stock at $0.25 per share. The Note is secured by a collateralized security interest granted in a patent owned by the Company.
On January 28, 2013, but effective as of December 10, 2012, the Note was amended to extend the maturity date to July 30, 2013 and change the conversion rate to $0.20 per share. As of May 31, 2013, the Company received $25,000 of the Note proceeds.
The amended conversion rate of $0.20 per share was below the market value of $0.30 per share resulting in a beneficial conversion feature in the amount of $12,500, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $8,239 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $20,739 and $636, respectively.
$41,000 Unsecured Convertible Promissory Note
On February 5, 2013, the Company entered into an unsecured convertible promissory note agreement for $41,000 to be repaid by February 5, 2014. The note bears interest at 10% per annum and the note may be converted into shares of the Company’s common stock at $0.20 per share.
The conversion rate of $0.20 per share was below the market value of $0.24 per share resulting in a beneficial conversion feature in the amount of $8,200, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $2,606 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $35,406 and $1,303, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$500,000 Unsecured Convertible Promissory Note
On March 25, 2013, the Company entered into an unsecured convertible promissory note agreement for $500,000 to be repaid by March 25, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the note holder received a warrant to purchase one million shares of common stock at $0.20 valued at $164,022 on the award date (see Note 10). The issuance of warrants resulted in a debt discount of $123,506 that is amortized over the life of the loan.
As of May 31, 2013, the note payable balance, net of the debt discount, and accrued interest totaled $407,370 and $9,315, respectively.
$75,000 Unsecured Convertible Promissory Note
On March 19, 2013, the Company entered into an unsecured convertible promissory note agreement for $75,000 to be repaid by March 19, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the note holder received a warrant to purchase 150,000 shares of common stock at $0.20 valued at $24,617 on the award date (see Note 10). The issuance of warrants resulted in a debt discount of $18,534 that is amortized over the life of the loan.
As of May 31, 2013, the note payable balance, net of the debt discount, and accrued interest totaled $61,100 and $1,335, respectively.
$100,000 Unsecured Convertible Promissory Note
On April 15, 2013, the Company entered into an unsecured convertible promissory note agreement for $100,000 to be repaid by April 15, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the note holder received a warrant to purchase 200,000 shares of common stock at $0.20 valued at $30,731 on the award date (see Note 10). The issuance of warrants resulted in a debt discount of $23,507 that is amortized over the life of the loan.
As of May 31, 2013, the note payable balance, net of the debt discount, and accrued interest totaled $80,411 and $1,260, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
5.
CONVERTIBLE NOTES PAYABLE
(Continued)
$25,000 Unsecured Convertible Promissory Note
On April 10, 2013, the Company entered into an unsecured convertible promissory note agreement for $25,000 to be repaid by April 10, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the note holder received a warrant to purchase 50,000 shares of common stock at $0.20 valued at $7,699 on the award date (see Note 10). The issuance of warrants resulted in a debt discount of $5,886 that is amortized over the life of the loan.
As of May 31, 2013, the note payable balance, net of the debt discount, and accrued interest totaled $20,095 and $356, respectively.
$25,000 Unsecured Convertible Promissory Note
On April 10, 2013, the Company entered into an unsecured convertible promissory note agreement for $25,000 to be repaid by April 10, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the note holder received a warrant to purchase 50,000 shares of common stock at $0.20 valued at $7,698 on the award date (see Note 10). The issuance of warrants resulted in a debt discount of $5,886 that is amortized over the life of the loan.
As of May 31, 2013, the note payable balance, net of the debt discount, and accrued interest totaled $20,095 and $356, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
6.
CONVERTIBLE NOTES PAYABLE – RELATED PARTY
$400,000 Unsecured Convertible Promissory Note
On September 10, 2012, the Company entered into an unsecured convertible promissory note agreement with a board member for $400,000 to be repaid by September 10, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the Company issued 400,000 shares of common stock valued at $88,000 on the award date
The conversion rate of $0.20 per share was below the market value of $0.22 per share resulting in a beneficial conversion feature in the amount of $40,000, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $29,425 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $389,534 and $29,479, respectively.
$100,000 Unsecured Convertible Promissory Note
On November 1, 2012, the Company entered into an unsecured convertible promissory note agreement with a board member for $100,000 to be repaid by November 1, 2013. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the Company issued 100,000 shares of common stock valued at $17,000 on the award date.
As of May 31, 2013, the note payable balance and accrued interest totaled $100,000 and $5,808, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
6.
CONVERTIBLE NOTES PAYABLE – RELATED PARTY
(Continued)
$200,000 Unsecured Convertible Promissory Note
On January 31, 2013, the Company entered into an unsecured convertible promissory note agreement with a board member for $200,000 to be repaid by February 1, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the Company issued 200,000 shares of common stock valued at $48,000 on the award date.
The conversion rate of $0.20 per share was below the market value of $0.24 per share resulting in a beneficial conversion feature in the amount of $40,000, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note. Amortization expense related to this discount amounted to $13,260 for the nine months ended May 31, 2013.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $173,261 and $6,630, respectively.
$200,000 Unsecured Convertible Promissory Note
On March 6, 2013, the Company entered into an unsecured convertible promissory note agreement with a board member for $200,000 to be repaid by March 6, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the note holder received a warrant to purchase 400,000 shares of common stock at $0.20 valued at $65,727 on the award date (see Note 10). The issuance of warrants resulted in a debt discount of $49,470 that is amortized over the life of the loan.
As of May 31, 2013, the note payable balance, net of the unamortized discount, and accrued interest totaled $162,898 and $4,767, respectively.
$996,987 Unsecured Convertible Promissory Notes
On March 13, 2013, the Company converted $996,987 of deferred compensation owed to five employees and one consultant into unsecured convertible promissory notes to be repaid by March 13, 2014. The notes bear interest at 5% per annum and may be converted into shares of the Company’s common stock at $0.20 per share.
As of May 31, 2013, the notes payable balance and accrued interest totaled $996,987 and $10,927, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
7.
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 principal is due at maturity on October 5, 2013. 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.
In accordance with the Loan Agreement, Silicon Valley Bank earned a success fee equal to 6% warrant coverage of the credit line or $60,000 divided by a $0.20 share price upon the Company successfully raising new capital or equity in excess of $2,000,000. The warrant is valid for five years from the time of issuance (see Note 10).
On August 24, 2011, the Company entered into a First Amendment to Loan and Security Agreement (“First Amendment”) to waive existing and pending defaults for failing to comply with certain financial covenants. On February 3, 2012, the Company entered into a Second Amendment to Loan and Security Agreement (“Second Amendment”) to extend the maturity date to April 4, 2012 and to waive existing and pending defaults for failing to comply with certain financial covenants. On April 17, 2012, the Company entered into a Third Amendment to Loan and Security Agreement (“Third Amendment”) to extend the maturity date to October 5, 2012 and to waive existing and pending defaults for failing to comply with certain financial covenants.
On November 19, 2012, but effective as of October 5, 2012, the Company entered into a Fourth Amendment to Loan and Security Agreement (“Fourth Amendment”) with Silicon Valley Bank for the $1,000,000 line of credit to extend the maturity date to October 5, 2013, to amend the interest rate and to waive existing and pending defaults for failing to comply with certain financial covenants.
In connection with the Loan Agreement, the Company entered into a Financing Agreement with a board member to personally guarantee the Loan Agreement. As compensation for the guarantee under the Financing Agreement, a warrant was issued to purchase 3,600,000 shares of our common stock at an exercise price of $0.20 per share and payment of $25,000 per month payable in cash or shares of our common stock at the guarantor’s option.
As of May 31, 2013, the outstanding balance on the line of credit and accrued interest totaled $1,000,000 and $9,042, respectively. As of August 31, 2012, the outstanding balance on the line of credit and accrued interest totaled $1,000,000 and $5,597, respectively.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
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 the nine months ended May 31, 2013 and 2012 totaled $57,931 and $57,607, respectively.
As of May 31, 2013, the future minimum lease payments are as follows:
For the Years Ending:
|
|
|
|
|
May 31, 2014
|
|
$
|
81,484
|
|
May 31, 2015
|
|
|
85,937
|
|
May 31, 2016
|
|
|
7,193
|
|
|
|
|
|
|
Total
|
|
$
|
174,614
|
|
9.
EQUITY
In December 2011, the Company issued 250,000 shares of common stock to a consultant in exchange for consulting services related to business development. The shares were valued at $90,000, which represents the fair market value of the shares provided on the award date.
In December 2011, the Company issued 150,000 shares of common stock to three consultants in exchange for consulting services related to technology development. The shares were valued at $54,000, which represents the fair market value of the shares provided on the award date.
In December 2011, the Company issued 90,278 shares of common stock to a consultant in exchange accounting related advisory services. The shares were valued at $32,500, which represents the fair market value of the shares provided on the award date.
In December 2011, the Company issued 50,000 shares of common stock to a consultant in exchange for legal advisory services. The shares were valued at $18,000, which represents the fair market value of the shares provided on the award date.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
9.
EQUITY
(Continued)
Common Stock
(Continued)
In December 2011, the Company issued 50,000 shares of common stock to a consultant and related party in exchange for customer service related advisory services. The shares were valued at $18,000, which represents the fair market value of the shares provided on the award date.
In December 2011, the Company issued 100,000 shares of common stock to an employee in accordance with an employment agreement. The shares were valued at $36,000, which represents the fair market value of the shares provided on the award date.
In February 2012, the Company issued 200,000 shares of common stock to four of the Company’s directors in exchange for serving on the board of directors. The shares were valued at $94,000, which represents the fair market value of the shares provided on the award date.
In February 2012, the Company issued 1,000,000 shares of common stock to a consultant for business development and sales representative services valued at $300,000 on the award date.
In February 2012, the Company issued 26,786 shares of common stock to a consultant in exchange accounting related advisory services. The shares were valued at $7,500, which represents the fair market value of the shares provided on the award date.
In April 2012, the Company issued 200,000 shares of common stock in connection with a note payable issuance. The shares were valued at $56,000, which represents the fair market value of the note payable issuance costs on the award date.
In May 2012, the Company issued 24,359 shares of common stock in connection with a cashless exercise of 50,000 “Series T” warrants at an exercise price of $0.20 per share (see Note 10).
In May 2012, the Company issued 25,000 shares of common stock to a consultant in exchange accounting related advisory services. The shares were valued at $8,500, which represents the fair market value of the shares provided on the award date.
In May 2012, the Company issued 100,000 shares of common stock to a consultant in exchange for consulting services related to business development. The shares were valued at $37,000, which represents the fair market value of the shares provided on the award date.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
9.
EQUITY
(Continued)
Common Stock
(Continued)
In May 2012, the Company issued 50,000 shares of common stock to three consultants in exchange for consulting services related to technology development. The shares were valued at $18,500, which represents the fair market value of the shares provided on the award date.
In June 2012, the Company issued 1,000,000 shares of common stock to a consultant for business development and sales representative services valued at $300,000 on the award date.
In June 2012, the Company issued 27,391 shares of common stock in connection with a cashless exercise of 60,000 “Series T” warrants at an exercise price of $0.20 per share (see Note 10).
In July 2012, the Company issued 350,000 shares of common stock for the partial conversion of a promissory note amounting to $77,476. The promissory note was converted on the basis of $0.22 per share (see Note 5).
In August 2012, the Company issued 1,000,000 shares of common stock to a consultant for business development and sales representative services valued at $300,000 on the award date.
In August 2012, the Company issued 250,000 shares of common stock for the partial conversion of a promissory note amounting to $42,560. The promissory note was converted on the basis of $0.17 per share (see Note 5).
In August 2012, the Company issued 1,097,288 shares of common stock for the conversion of accrued finder’s fees and accounts payable totaling $288,844. The accrued finder’s fees and accounts payable were converted on the basis of $0.26 per share.
In August 2012, the Company issued 200,000 shares of common stock to four of the Company’s directors in exchange for serving on the board of directors. The shares were valued at $48,000, which represents the fair market value of the shares provided on the award date.
In August 2012, the Company issued 50,000 shares of common stock to a consultant in exchange accounting related advisory services. The shares were valued at $12,000, which represents the fair market value of the shares provided on the award date.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
9.
EQUITY
(Continued)
Common Stock
(Continued)
In September 2012, the Company issued 750,000 shares of common stock to a consultant for business development services valued at $172,500 on the award date.
In September 2012, the Company issued 360,000 shares of common stock for the partial conversion of a promissory note amounting to $57,773 (see Note 5).
In September 2012, the Company issued 500,000 shares of common stock for the partial conversion of a promissory note amounting to $65,320 (see Note 5).
In October 2012, the Company issued 628,465 shares of common stock for the partial conversion of a promissory note and accrued interest amounting to $85,471 (see Note 5).
In November 2012, the Company issued 1,000,000 shares of common stock to a consultant for business development services valued at $210,000 on the award date.
In November 2012, the Company issued 200,000 shares of common stock to four of the Company’s directors in exchange for serving on the board of directors. The shares were valued at $42,000, which represents the fair market value of the shares provided on the award date.
In November 2012, the Company issued 50,000 shares of common stock to a consultant in exchange accounting related advisory services. The shares were valued at $7,500, which represents the fair market value of the shares provided on the award date.
In November 2012, the Company issued 550,000 shares of common stock in connection with three note payable issuances. The shares were valued at $113,500, which represents the fair market value of the note payable issuance costs on the award date (see Note 6).
In December 2012, the Company issued 500,000 shares of common stock to a consultant for finder’s fees valued at $150,000 on the award date.
In December 2012, the Company issued 62,068 shares of common stock in connection with a cashless exercise of 200,000 “Series T” warrants at an exercise price of $0.20 per share.
In February 2013, the Company issued 1,000,000 shares of common stock to two consultants in exchange for capital markets advisory services. The shares were valued at $320,000, which represents the fair market value of the shares provided on the award date.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
9.
EQUITY
(Continued)
Common Stock
(Continued)
In February 2013, the Company issued 250,000 shares of common stock in connection with two note payable issuances. The shares were valued at $59,000, which represents the fair market value of the note payable issuance costs on the award date (see Note 6).
In February 2013, the Company issued 100,000 shares of common stock to two consultants in exchange for accounting related advisory services and consulting services related to technology development. The shares were valued at $26,000, which represents the fair market value of the shares provided on the award date.
In March 2013, the Company issued 4,000,000 shares of common stock to four consultants in exchange for capital markets advisory services. The shares were valued at $810,000, which represents the fair market value of the shares provided on the award date.
In March 2013, the Company issued 200,000 shares of common stock to four of the Company’s directors in exchange for serving on the board of directors. The shares were valued at $40,000, which represents the fair market value of the shares provided on the award date.
In March 2013, the Company issued 50,000 shares of common stock to a consultant in exchange accounting related advisory services. The shares were valued at $8,000, which represents the fair market value of the shares provided on the award date.
In March 2013, the Company issued 1,550,821 shares of common stock for the conversion of accrued finder’s fees and accounts payable totaling $260,918. The accrued finder’s fees and accounts payable were converted on the basis of $0.17 per share.
Prepaid Services Paid In Common Stock
In August 2012, the Company issued 1,000,000 shares of common stock to a consultant for business development and sales representative services valued at $300,000 on the award date to be amortized from August 1, 2012 to August 1, 2013. Unamortized prepaid services paid in common stock related to such stock issuance amounted to $50,000 at May 31, 2013.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
9.
EQUITY
(Continued)
Prepaid Services Paid In Common Stock
(Continued)
In September 2012, the Company issued 750,000 shares of common stock to a consultant for business development and sales representative services valued at $172,500 on the award date to be amortized from September 1, 2012 to September 1, 2013. Unamortized prepaid services paid in common stock related to such stock issuance amounted to $43,125 at May 31, 2013.
In December 2012, the Company issued 1,000,000 shares of common stock to two consultants for capital markets advisory services valued at $320,000 on the award date to be amortized from December 12, 2012 to December 31, 2013. Unamortized prepaid services paid in common stock related to such stock issuances amounted to $173,335 at May 31, 2013.
In March 2013, the Company issued 2,000,000 shares of common stock to three consultants for capital markets advisory and business development services valued at $410,000 on the award date to be amortized from March 12, 2013 to December 12, 2013. Unamortized prepaid services paid in common stock related to such stock issuances amounted to $174,166 at May 31, 2013.
Warrants
Warrants to purchase up to 12,456,715 shares of the Company’s common stock are outstanding at May 31, 2013 (see Note 10).
Stock Incentive Plan
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.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
9.
EQUITY
(Continued)
Stock Incentive Plan
(Continued)
The 2007 Plan is administered by the Company’s compensation committee made up of three non-executive directors. The compensation committee may determine the specific terms and conditions of all awards granted under the 2007 Plan, including, without limitation, the number of shares subject to each award, the price to be paid for the shares and the vesting criteria, if any. The compensation committee has discretion to make all determinations necessary or advisable for the administration of the 2007 Plan.
There were 18,500,000 incentive stock options granted under the 2007 Plan as of May 31, 2013 (see Note 10.)
10.
STOCK OPTIONS AND WARRANTS
Stock Options
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 in accordance with Stock Option Agreements. Options to purchase shares are vested upon the Company achieving a certain number of customers. All options vest upon a change of control of the Company. The options expire 10 years from the vested date. As of August 31, 2012, 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 in accordance with the Executive Employment Agreements. Options to purchase shares are vested upon achieving certain milestones under the Executive Employment Agreements. All options vest upon a change of control of the Company. The options expire on January 12, 2017. As of May 31, 2013, there were 1,500,000 options that were vested and presently exercisable. No options were exercised as of May 31, 2013.
On March 15, 2012, the Company granted options under the 2007 Plan to two officers of the Company to purchase 2,000,000 common shares at $0.31 per share in accordance with Executive Employment Agreements. Options to purchase shares are vested upon achieving certain milestones under the Executive Employment Agreement. All options vest upon a change of control of the Company. The options expire on March 15, 2017. As of May 31, 2013, there were 425,000 options that were vested and presently exercisable. No options were exercised as of May 31, 2013.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
10.
STOCK OPTIONS AND WARRANTS
(Continued)
On March 15, 2012, the Company granted options under the 2007 Plan to two employees to purchase 4,500,000 common shares at $0.31 per share in accordance with Executive Employment Agreements. Options to purchase shares are vested upon achieving certain milestones under the Executive Employment Agreement. All options vest upon a change of control of the Company. The options expire on March 15, 2017. As of May 31, 2013, there were 1,112,500 options that were vested and presently exercisable. No options were exercised as of May 31, 2013.
Warrants
On December 16, 2009, the Company agreed to issue “Series R” warrants to certain consultants to purchase 240,000 common shares at $0.68 per share in exchange for consulting services related to technology and product development and legal advisory services. The warrants expire on December 16, 2014. The fair value of the warrants using the Black-Scholes option pricing model amounted to $152,801. In August 2011, a “Series R” warrant to purchase 25,000 common shares was cancelled. No warrants were exercised as of May 31, 2013.
On December 17, 2010, the Company issued “Series S” warrants to the Silicon Valley Bank loan personal guarantor to purchase 3,600,000 common shares at $0.20 per share in connection with the Financing Agreement dated December 1, 2010. The warrants expire on December 14, 2015. The fair value of the warrants using the Black-Scholes option pricing model amounted to $926,900. No warrants were exercised as of May 31, 2013.
On December 17, 2010, the Company issued “Series S” warrants to a consultant to purchase 500,000 common shares at $0.20 per share for finder’s fees in connection with a debt issuance. The warrants expire on December 14, 2015. The fair value of the warrants using the Black-Scholes option pricing model amounted to $128,736. No warrants were exercised as of May 31, 2013.
On July 29, 2011, the Company issued "Series T" warrants to purchase 1,787,500 common shares at $0.20 per share to placement agents in connection with the private placement. The warrants expire on July 29, 2016. The fair value of the warrants using the Black-Scholes option pricing model amounted to $837,664. There were 310,000 warrants exercised as of May 31, 2013.
On August 31, 2011, the Company issued “Series U” warrants to Silicon Valley Bank to purchase 300,000 common shares at $0.20 per share in connection with the private placement success fee. The warrants expire on July 29, 2016. The fair value of the warrants using the Black-Scholes option pricing model amounted to $140,587. No warrants were exercised as of May 31, 2013.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
10.
STOCK OPTIONS AND WARRANTS
(Continued)
Warrants
(Continued)
On March 1, 2012, the Company issued “Series X” warrants to a consultant to purchase 57,693 common shares at $0.26 per share for marketing and promotional services provided to the Company. The warrants expire on March 1, 2015. The fair value of the warrants using the Black-Scholes option pricing model amounted to $3,761. No warrants were exercised as of May 31, 2013.
On March 16, 2012, the Company issued “Series V” warrants to JMJ Financial to purchase 869,565 common shares at $0.23 per share for cash proceeds of $200,000 under a Stock Purchase Agreement. The warrants expire on March 16, 2017. No warrants were exercised as of May 31, 2013.
On May 1, 2012, the Company issued “Series W” warrants to JMJ Financial to purchase 1,086,957 common shares at $0.23 per share for cash proceeds of $250,000 under a Stock Purchase Agreement. The warrants expire on May 1, 2017. No warrants were exercised as of May 31, 2013.
On October 15, 2012, the Company issued a “Series Y” warrant to purchase 500,000 common shares at $0.20 per share to a consultant in exchange for accounting advisory services provided to the Company. The warrant expires on October 15, 2017. The fair value of the warrants using the Black-Scholes option pricing model amounted to $99,873.
No warrants were exercised as of May 31, 2013.
From March 6, 2013 to April 15, 2013, the Company issued “Series Z” warrants to six note holders to purchase 1,850,000 common shares at $0.20 per share in connection with debt issuances. The warrants expire on March 25, 2016. The fair value of the warrants using the Black-Scholes option pricing model amounted to $300,494. The relative value allocated to the warrants amounted to $226,789. No warrants were exercised as of May 31, 2013.
On April 29, 2013, the Company awarded “Series AA” warrants to a note holder to purchase 3,000,000 common shares at $0.20 per share in connection with a debt extension. The warrants expire on April 29, 2016. The fair value of the warrants using the Black-Scholes option pricing model amounted to $521,820. No warrants were exercised as of May 31, 2013.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
11.
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, 2013
and August 31
, 2012 are as follows:
|
|
May 31,
2013
|
|
|
August 31,
2012
|
|
Net operating loss carry forward and deductible
temporary differences
|
|
$
|
17,732,000
|
|
|
$
|
14,762,000
|
|
Valuation allowance
|
|
|
(17,732,000
|
)
|
|
|
(14,762,000
|
)
|
|
|
|
|
|
|
|
|
|
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,
2013
|
|
|
August 31,
2012
|
|
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%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
The Company’s valuation allowance increased by $5,874,000 for the nine months ended May 31, 2013.
LOCATION BASED TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2013
11.
PROVISION FOR INCOME TAXES
(Continued)
As of May 31, 2013 and August 31, 2012, the Company had federal and state net operating loss carryforwards of approximately $44,520,000 and $37,063,000, 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, 2013 and August 31, 2012, 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.
12.
SUBSEQUENT EVENTS
On June 1, 2013, the Company converted $28,750 of deferred compensation owed to four employees into unsecured convertible promissory notes. The notes bear interest at 5% per annum and may be converted into shares of the Company’s common stock at $0.17 per share.
On June 20, 2013, the Company entered into an unsecured convertible promissory note agreement with a board member for $100,000 to be repaid by June 21, 2014. The note bears interest at 10% per annum and may be converted into shares of the Company’s common stock at $0.20 per share. In addition, the Company agreed to issue a warrant to purchase 200,000 shares of common stock at $0.20.
As of July 10, 2013, the Company extended the due dates on seven promissory notes totaling $577,500 maturing from June 28, 2013 to July 13, 2013. In connection with these note extensions, the Company agreed to issue 1,155,000 shares of common stock.