lbt_10q-053112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended May 31, 2012

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

Commission File Number 333-139395

LOCATION BASED TECHNOLOGIES, INC.

(Name of registrant as specified in its charter)

Nevada		20-4854758
(State of incorporation)		(I.R.S. Employer Identification No.)

49 Discovery, Suite 260, Irvine, California 92618

(Address of principal executive offices)

888-600-1044

(Registrant’s telephone number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes oNo

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes xNo

As of July 11, 2012, there were 194,913,869 shares of the registrant’s $.001 par value common stock issued and outstanding.

TABLE OF CONTENTS

		PAGE

PART I	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48

ITEM 4T.	CONTROLS AND PROCEDURES	48

PART II	OTHER INFORMATION	48

ITEM 1.	LEGAL PROCEEDINGS	48

ITEM 1.A.	RISK FACTORS	48

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	49

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	49

ITEM 5.	OTHER INFORMATION	49

ITEM 6.	EXHIBITS	51

SIGNATURES		52

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Location Based Technologies, Inc.

CONSOLIDATED BALANCE SHEETS

May 31, 2012 and August 31, 2011

	May 31, 2012			August 31, 2011
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	330,832		$	3,619,576
Accounts receivable, net of allowance for doubtful accounts		333,871			-
Inventory		4,805,514			24,809
Prepaid expenses and other assets		274,906			1,499,504
Manufacturing deposits		-			2,800,000
Deferred financing costs		287,334			3,334

Total current assets		6,032,457			7,947,223

Property and equipment, net of accumulated depreciation		330,333			191,855

OTHER ASSETS
Patents and trademarks, net of accumulated amortization		1,250,067			1,231,084
Deposits		30,000			30,000

Total other assets		1,280,067			1,261,084

TOTAL ASSETS	$	7,642,857		$	9,400,162

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,380,549		$	1,329,689
Accrued officer compensation		938,583			914,765
Deferred revenue		362,303			-
Advances from officers and accrued interest		-			9,462
Line of credit and accrued interest		1,005,597			1,005,597
Convertible notes payable and accrued interest		1,752,322			918,534

Total current liabilities		5,439,354			4,178,047

TOTAL LIABILITIES		5,439,354			4,178,047

Commitments and contingencies		499,387			685,500

STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $0.001 par value; 300,000,000 shares authorized; 193,886,478 and 191,570,055 shares issued and outstanding at May 31, 2012 and August 31, 2011, respectively		131,486			129,170
Common stock to be issued		27
Additional paid-in capital		43,747,812			41,752,408
Prepaid services paid in common stock		(50,000	)		(293,333	)
Accumulated deficit		(42,125,209	)		(37,051,630	)

Total stockholders' equity		1,704,116			4,536,615

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	7,642,857		$	9,400,162

See accompanying notes to unaudited financial statements.

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended May 31, 2012 and 2011

(Unaudited)

	For the three months ended						For the nine months ended
	May 31, 2012			May 31, 2011			May 31, 2012			May 31, 2011

Net revenue
Devices	$	96,543		$	2,830		$	318,631		$	5,889
Services		37,173			1,745			49,809			3,553

Total net revenue		133,716			4,575			368,440			9,442

Cost of revenue
Devices		80,956			3,235			287,014			4,580
Services		77,459			1,520			189,923			9,222
Other		102,807			2,021			379,278			7,275

Total cost of revenue		261,222			6,776			856,215			21,077

Gross loss		(127,506	)		(2,201	)		(487,775	)		(11,635	)

Operating expenses
General and administrative		399,313			227,192			1,109,434			529,332
Officer compensation		199,500			135,000			975,359			405,000
Professional fees		579,720			336,844			1,828,842			1,004,005
Rent		19,202			41,694			57,607			127,302
Research and development		-			119,400			546,075			124,663
Salaries and wages		129,669			-			167,894			-

Total operating expenses		1,327,404			860,130			4,685,211			2,190,302

Net operating loss		(1,454,910	)		(862,331	)		(5,172,986	)		(2,201,937	)

Other income (expense)
Financing costs		(48,000	)		(137,000	)		(78,971	)		(2,361,405	)
Amortization of beneficial conversion feature		-			-			-			(236,167	)
Amortization of deferred financing costs		(164,499	)		(47,333	)		(197,499	)		(111,335	)
Interest income (expense), net		(162,837	)		(139,437	)		(203,904	)		(354,885	)
Gain on debt settlement		-			-			580,598			-
Foreign currency gain (loss), net		(26	)		(100	)		(17	)		(137	)

Total other income (expense)		(375,362	)		(323,870	)		100,207			(3,063,929	)

Net loss before income taxes		(1,830,272	)		(1,186,201	)		(5,072,779	)		(5,265,866	)

Provision for income taxes		-			-			800			800

Net Loss	$	(1,830,272	)	$	(1,186,201	)	$	(5,073,579	)	$	(5,266,666	)

See accompanying notes to unaudited financial statements.

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended May 31, 2012 and 2011

(Unaudited)

	For the three months ended						For the nine months ended
	May 31, 2012			May 31, 2011			May 31, 2012			May 31, 2011

Accumulated Deficit:

Balance, beginning of period	$	(40,294,937	)	$	(32,909,390	)	$	(37,051,630	)	$	(28,828,925	)

Net Loss	$	(1,830,272	)	$	(1,186,201	)	$	(5,073,579	)	$	(5,266,666	)

Balance, end of period	$	(42,125,209	)	$	(34,095,591	)	$	(42,125,209	)	$	(34,095,591	)

Basic - Earnings (loss) per share	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.05	)

Basic - Weighted Average Number of Shares Outstanding		193,616,857			119,397,514			192,609,401			113,746,522

See accompanying notes to unaudited financial statements.

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended May 31, 2012 and 2011

(Unaudited)

	For the nine months ended
	May 31, 2012			May 31, 2011

Cash Flows from Operating Activities
Net loss	$	(5,073,579	)	$	(5,266,666	)
Adjustment to reconcile net loss to net cash used in operating activities:
Recognition of loss on inventory purchase commitment		(186,113	)		-
Depreciation and amortization		122,007			47,339
Amortization of beneficial conversion feature		-			236,167
Amortization of prepaid services paid-in common stock		493,333			271,274
Common stock issued for services		714,000			1,070,977
Common stock issued for financing costs		56,000			292,515
Warrants issued for services		3,761			1,055,636
Options issued for services		461,495			-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(333,871	)		-
(Increase) decrease in inventory		(4,780,705	)		-
(Increase) decrease in prepaid expenses and other assets		1,224,598			(39,118	)
(Increase) decrease in debt issuance/financing costs		(284,000	)		(2,165	)
(Increase) decrease in deposits		2,800,000			(47,841	)
Increase (decrease) in accounts payable and accrued expenses		50,860			(593,272	)
Increase (decrease) in accrued officer compensation		23,818			246,112
Increase (decrease) in deferred revenue		362,303			-
Increase (decrease) in accrued interest		(213,760	)		132,662

Net cash used in operating activities		(4,559,853	)		(2,596,380	)

Cash Flows from Investing Activities
Purchase of property and equipment		(255,793	)		(2,600	)
Additions to patents and trademarks		(23,675	)		(10,835	)

Net cash used in investing activities		(279,468	)		(13,435	)

Cash Flows from Financing Activities
Advances / (repayments) from officers, net		(9,423	)		(136,224	)
Proceeds from sale of convertible notes payable and warrants		1,000,000			-
Proceeds from convertible notes payable		560,000			2,380,000
Repayment on convertible notes payable		-			(275,000	)
Proceeds from notes payable		500,000			58,298
Repayment on notes payable		(500,000	)		(63,000	)
Proceeds from line of credit		-			1,000,000
Net cash provided by financing activities		1,550,577			2,964,074

Net increase (decrease) in cash and cash equivalents		(3,288,744	)		354,259

Cash and cash equivalents, beginning of period		3,619,576			267

Cash and cash equivalents, end of period	$	330,832		$	354,526

See accompanying notes to unaudited financial statements.

Location Based Technologies, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended May 31, 2012 and 2011

(Unaudited)

	For the nine months ended
	May 31, 2012		May 31, 2011

Supplemental disclosure of cash flow information:
Income taxes paid	$	800	$	3,200
Interest paid	$	109,472	$	161,609


Supplemental disclosure of noncash financing and investing activities:

Issuance of common stock for financing costs	$	56,000	$	292,515
Issuance of common stock for services	$	714,000	$	1,070,977
Issuance of warrants for services	$	3,761	$	1,055,636
Issuance of options for services	$	461,495	$	-
Issuance of common stock for conversion of notes payable and accrued interest	$	-	$	1,055,944

See accompanying notes to unaudited financial statements.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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.

Merger

On August 24, 2007, Location Based Technologies, Corp. merged with PocketFinder, LLC. The merger was approved by the shareholders of Location Based Technologies, Corp. and PocketFinder, LLC by unanimous written consent. Location Based Technologies, Corp. was the survivor of the merger with PocketFinder, LLC.

Each Class A Membership Unit of the LLC was converted into 150,000 shares of common stock of the Company or fraction thereof and each Class C Membership Unit of the LLC was cancelled. Upon consummation of the merger, 10.9 Class A Membership Units of the LLC were converted into 1,635,000 shares of common stock of the Company.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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

Stock Exchange Agreement

On October 11, 2007, Location Based Technologies, Corp. effected a stock exchange agreement and plan of reorganization (the “Agreement”) with Springbank Resources, Inc. (“SRI”) whereby SRI acquired all of the issued and outstanding shares of Location Based Technologies, Corp. in exchange for shares of SRI’s common stock.

Subject to the terms and conditions of the Agreement, SRI issued, and the stockholders of Location Based Technologies, Corp. accepted 55,153,500 shares of SRI’s common stock in consideration for all of the issued and outstanding shares of Location Based Technologies, Corp. The shares of SRI’s common stock were allocated to the shareholders of Location Based Technologies, Corp. in accordance with the Agreement.

The former shareholders of Location Based Technologies, Corp. acquired control of SRI upon the closing of the stock exchange transaction. The exchange was accounted for as a reverse acquisition. Accordingly, for financial statement purposes, Location Based Technologies, Corp. was considered the accounting acquiror, and the related business combination was considered a recapitalization of Location Based Technologies, Corp. rather than an acquisition by SRI. The historical financial statements prior to the Agreement are those of Location Based Technologies, Corp., and the name of the company was changed to Location Based Technologies, Inc.

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.

Stock Split

All share and per-share amounts in the accompanying financial statements, unless otherwise indicated, have been retroactively restated to reflect a 3 for 1 stock split approved by the Board in October 2008, as if the split had been in effect since inception.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to financial statements included in the annual report on Form 10-K of Location Based Technologies, Inc. for the year ended August 31, 2011. 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, 2012, 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, 2011, included in the Company’s report on Form 10-K.

Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has incurred net losses since inception, and as of May 31, 2012, had an accumulated deficit of $42,125,209. 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 CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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, 2012 and August 31, 2011 were principally held by two institutions which insured our aggregated accounts with the Federal Deposit Insurance Corporation ("FDIC") up to $250,000 per insured banking institution. At times, the Company has maintained bank balances which have exceeded FDIC limits. The Company has not experienced any losses with respect to its cash balances.

Revenue and Accounts Receivable – For the nine months ended May 31, 2012, revenue from one of the Company’s customers amounted to $224,253 or 61% of total net revenue. Accounts receivable from this customer amounted to $333,871 or 100% of total accounts receivable at May 31, 2012.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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, 2012 and August 31, 2011 the allowance for doubtful accounts amounted to $304,597.

Inventory

Inventories are valued at the lower of cost (first-in, first-out) or market and primarily consisted of packaging supplies, components and finished goods at May 31, 2012 and August 31, 2011.

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. For 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, 2012 and August 31, 2011, the liability from inventory purchase commitments amounted to $499,387 and $685,500, respectively.

Fair Value of Financial Instruments

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

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method and with useful lives used in computing depreciation ranging from 1 to 5 years. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized.

Internal Website Development Costs

Under FASB ASC 350-50 – Intangibles – Goodwill and Other – Website Development Costs, costs and expenses incurred during the planning and operating stages of the Company's web site development are expensed as incurred. Costs incurred in the web site application and infrastructure development stages are capitalized by the Company and amortized to expense over the web site's estimated useful life or period of benefit. As of May 31, 2012 and August 31, 2011, the Company capitalized costs totaling $1,361,959 related to its website development.

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 year ended August 31, 2010, due to uncertainties related to the recovery of its investment in the PocketFinder® website as a result of generally poor economic conditions and the Company’s history of difficulties in obtaining financing for product launch, the Company recorded a full impairment of its Website Development Costs totaling $1,361,959.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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, 2012 and August 31, 2011, the Company capitalized $1,208,643 and $1,184,968, respectively, for patent related expenditures. As of May 31, 2012 and August 31, 2011, the Company capitalized $59,470 for trademark related expenditures.

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 $4,692 and $24,848 for the nine months ended May 31, 2012 and 2011, 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, 2012, deferred revenue amounted to $362,303 and consisted of the aggregate value of on-hand inventory of PocketFinder® devices held by a distributor.

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.

Device Sales Revenue – Revenue from the sales of PocketFinder® products is recognized upon shipment to website customers and upon delivery to distributors. Reductions to revenue for product held at distributors are recognized as deferred revenue until product is “sold through” to retailers. Revenue is further reduced for expected future product returns based on management’s judgment using historical experience and expectation of future conditions.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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

Revenue Recognition (Continued)

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 collection from the customer.

Shipping Costs

Amounts billed to customers related to shipping and handling are classified as revenue, and the Company’s shipping and handling costs are included in cost of sales.

Research and Development

Research and development costs are clearly identified and are expensed as incurred in accordance with FASB ASC 730 – Research and Development. For the nine months ended May 31, 2012 and 2011, the Company incurred $546,075 and $124,663 of research and development costs, respectively.

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. For the nine months ended May 31, 2012, stock-based compensation expense associated with stock options totaled $461,495.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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

Provision for 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 franchise fee in its provision for income taxes for the nine months ended May 31, 2012 and 2011.

Foreign Currency Translation

The Company accounts for foreign currency translation of its wholly owned subsidiary, Location Based Technologies, Ltd., pursuant to FASB ASC 830 – Foreign Currency Matters. The functional currency of Location Based Technologies, Ltd. is the British Pound Sterling. All assets and liabilities of Location Based Technologies, Ltd. are translated into United States Dollars using the current exchange rate at the end of each period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. Certain transactions of the Location Based Technologies, Ltd. are denominated in United States dollars. Translation gains or losses related to such transactions are recognized for each reporting period in the related consolidated statements of operations.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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

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 stock options and warrants issued by the Company. These potential common shares are excluded from diluted loss per share as their effect would be anti-dilutive.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends ASC Topic 820, Fair Value Measurement. The purpose of ASU 2011-04 is to clarify the intent about the application of existing fair value measurement and disclosure requirements and to change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The Company did not have a material impact to its consolidated financial statements implementing the provisions of ASU 2011-04.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

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

Recent Accounting Pronouncements (Continued)

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which amends ASC Topic 220, Comprehensive Income. The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The update will require entities to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate consecutive statements, and entities will no longer be allowed to present items of other comprehensive income in the statement of stockholders’ equity. Reclassification adjustments between other comprehensive income and net income will be presented separately on the face of the financial statements. The Company does not expect the provisions of ASU 2011-05 to have a material impact to its consolidated financial statements.

In August 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other, which amends ASC Topic 350, Intangibles — Goodwill and Other. The purpose of ASU 2011-08 is to simplify how an entity tests goodwill for impairment. Entities will assess qualitative factors to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. In instances where the fair value is determined to be less than the carrying value, entities will perform the two-step quantitative goodwill impairment test. The Company does not expect the provisions of ASU 2011-08 to have a material impact to its consolidated financial statements.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

2. INVENTORY

Inventory at May 31, 2012 and August 31, 2011 consisted of the following:

	May 31, 2012		August 31, 2011

Packaging supplies	$	59,029	$	13,129
Device components		1,697,849		11,680
Finished goods		3,048,636		-

Total inventory	$	4,805,514	$	24,809

3. PROPERTY AND EQUIPMENT

Property and equipment at May 31, 2012 and August 31, 2011 consisted of the following:

	May 31, 2012			August 31, 2011

Website development costs	$	1,361,959		$	1,361,959
Machinery and equipment		394,661			168,024
Computer software (mobile apps)		125,626			101,626
Computer and video equipment		43,040			40,777
Office furniture		37,692			34,800

		1,962,978			1,707,186

Less: accumulated depreciation and impairment adjustment		(1,632,645	)		(1,515,331	)

Total property and equipment	$	330,333		$	191,855

Depreciation expense for the nine months ended May 31, 2012 and 2011 amounted to $117,314 and $20,131, respectively. In addition, the Company recorded an impairment of its Website development costs in the amount of $1,361,959 during the year ended August 31, 2010, due to uncertainty concerning, at the time, its ability to obtain sufficient financing to bring its products to market.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

4. RELATED PARTY TRANSACTIONS

Advances from Officers

From time to time, the Company’s officers advance funding to the Company to cover operating expenses. Cash advances from officers accrue interest at the rate of 8% per annum and have no formal repayment terms.

During the nine months ended May 31, 2012, there were no new advances from officers and repayments on advances totaled $9,423. In June 2011, $500,000 of advances from an officer was converted into 2,500,000 shares of the Company’s common stock at $0.20 per share. Outstanding advances from officers amounted to $0 as of May 31, 2012.

During the nine months ended May 31, 2012, $55 of interest was accrued and $94 of interest was paid on officer advances. In August 2011, $105,433 of accrued interest on advances from an officer was converted into 527,165 shares of the Company’s common stock at $0.20 per share. Accrued interest on officer advances amounted to $0 as of May 31, 2012.

Services Provided

A relative of the Chief Operating Officer provides bookkeeping and accounting services to the Company for $2,500 per month. During the nine months ended May 31, 2012, bookkeeping and accounting fees for this related party totaled $22,500.

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 $10,000 per month and received 1,500,000 stock options that vests upon achieving certain milestones. During the nine months ended May 31, 2012, total compensation under these related party agreements totaled $113,500.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

5. NOTE PAYABLE

$500,000 Promissory Note

On January 17, 2012, the Company entered into a promissory note agreement for $500,000. Under the terms of the promissory note agreement, principal and any unpaid interest shall be repaid by April 16, 2012. The note bears interest at 12% or $60,000 for 90 days. In addition, the Company issued 200,000 shares of common stock valued at $56,000 on the award date.

As of May 31, 2012, the note payable balance and interest totaling $560,000 was repaid.

6. CONVERTIBLE NOTES PAYABLE

$625,000 Senior Secured Promissory Note

On November 18, 2008, the Company entered into a senior secured promissory note agreement for $625,000. Under the terms of the promissory note agreement, principal and any unpaid interest shall be repaid by February 18, 2009, or upon a minimum of $1,500,000 being raised by the Company. The note bears interest at 12% per annum and may be repaid at any time before the repayment date, in part or in full, without penalty, and is secured by common stock personally owned by an officer of the Company. In addition, the Company issued 50,000 shares of common stock valued at $55,000 on the date of issuance.

On January 30, 2009, the promissory note agreement was extended for an additional three months (“First Extension”) and due on May 18, 2009. As consideration for the First Extension, the Company issued an additional 50,000 shares of common stock valued at $47,000 on the date of issuance.

On May 7, 2009, the promissory note agreement was extended for an additional three months (“Second Extension”) and due on August 18, 2009. As consideration for the Second Extension, the Company issued an additional 50,000 shares of common stock valued at $32,000 on the date of issuance.

On August 20, 2009, the promissory note agreement was extended for an additional three months (“Third Extension”) and due on November 18, 2009. As consideration for the Third Extension, the Company issued an additional 25,000 shares of common stock valued at $20,500 on the award date.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

6. CONVERTIBLE NOTES PAYABLE (Continued)

$625,000 Senior Secured Promissory Note (Continued)

In connection with the Third Extension, a conversion feature was added whereby the outstanding principal and unpaid accrued interest may be converted, at any time, in whole or in part, into shares of the Company’s common stock on the basis of $0.65 per share. The conversion rate of $0.65 per share was below the market value of $0.82 per share resulting in a beneficial conversion feature in the amount of $163,462, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note extension.

On August 27, 2009, in accordance with the Third Extension, the Company converted $52,603 of interest accrued through July 31, 2009, into 80,927 shares of the Company’s common stock on the basis of $0.65 per share.

In June 2010, common shares personally owned by a Company officer which had been pledged as collateral for this note were surrendered to the note holder.

On February 22, 2012, the Company entered into a Settlement Agreement and General Release resulting in full satisfaction of the note payable balance and accrued interest totaling $625,000 and $146,737, respectively.

$100,000 Senior Secured Promissory Note

On May 7, 2009, the Company entered into a senior secured promissory note agreement for $100,000. Under the terms of the promissory note agreement, principal and any unpaid interest shall be repaid by August 18, 2009, or upon a minimum of $1,500,000 being raised by the Company. The note bears interest at 12% per annum and may be repaid at any time before the repayment date, in part or in full, without penalty, and is secured by common stock personally owned by an officer of the Company. In addition, the Company issued 50,000 shares of common stock valued at $32,000 on the date of issuance.

On August 20, 2009, the promissory note agreement was extended for an additional three months (“First Extension”) and due on November 18, 2009. As consideration for the First Extension, the Company issued an additional 25,000 shares of common stock valued at $20,500 on the award date.

In connection with the First Extension, a conversion feature was added whereby the outstanding principal and unpaid accrued interest may be converted, at any time, in whole or in part, into shares of the Company’s common stock on the basis of $0.65 per share.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

6. CONVERTIBLE NOTES PAYABLE (Continued)

$100,000 Senior Secured Promissory Note (Continued)

The conversion rate of $0.65 per share was below the market value of $0.82 per share resulting in a beneficial conversion feature in the amount of $26,154, recognized as a discount from the face amount of the convertible note payable and amortized over the term of the note extension.

On August 27, 2009, in accordance with the First Extension, the Company converted $2,827 of interest accrued through July 31, 2009, into 4,350 shares of the Company’s common stock on the basis of $0.65 per share.

$25,000 Promissory Note

On June 28, 2011, the Company entered into a promissory note agreement for $25,000. Under the terms of the promissory note agreement, principal and any unpaid interest shall be repaid by June 27, 2012. The note bears interest at 10% per annum. At the option of the note holder, the note may be converted, in whole or in part, into shares of the Company’s common stock on the basis of $0.25 per share.

As of May 31, 2012, the note payable balance and accrued interest totaled $25,000 and $2,322, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

6. CONVERTIBLE NOTES PAYABLE (Continued)

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, 2012, the note payable balance and prepaid interest totaled $555,000 and $9,167, respectively.

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, 2012, the note payable balance and prepaid interest totaled $620,000 and $30,000, respectively.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

6. CONVERTIBLE NOTES PAYABLE (Continued)

JMJ Financing (Continued)

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, 2012, the note payable balance and prepaid interest totaled $550,000 and $33,333, respectively.

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 January 5, 2012. 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).

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

7. LINE OF CREDIT (Continued)

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.

As of May 31, 2012, the outstanding balance on the line of credit and accrued interest totaled $1,000,000 and $5,597, respectively.

8. COMMITMENTS AND CONTINGENCIES

Inventory Purchase Commitments

On July 20, 2011, the Company initiated a purchase order to manufacture the first 10,000 PocketFinder® devices. As of August 31, 2011, the Company recognized losses and a related liability from inventory purchase commitments totaling $685,500. The liability from inventory purchase commitments is relieved as the related inventory is sold. As of May 31, 2012, the balance of the liability from inventory purchase commitments amounted to $499,387.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

8. COMMITMENTS AND CONTINGENCIES (Continued)

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, 2012 and 2011 totaled $57,607 and $127,302, respectively.

As of May 31, 2012, the future minimum lease payments are as follows:

For the Years Ending:

May 31, 2013	$	78,029
May 31, 2014		81,484
May 31, 2015		85,937
May 31, 2016		7,193

Total	$	252,643

Contingencies

In 2007, the Company sold convertible notes to accredited investors in reliance on an exemption from registration provided by Section 4(2) of the Securities Act and similar state exemptions. Management has been advised by counsel that the availability of those exemptions cannot be determined with legal certainty due to the fact that the Company or its predecessors may not have complied with all of the provisions of exemption safe-harbors for such sales offered by rules promulgated under the Securities Act by the SEC. Thus, it is possible that a right of rescission may exist for shares underlying the convertible notes for which the statute of limitations has not run. From November 2007 through December 2007, all of the convertible notes payable totaling $5,242,000 were converted into 15,726,000 shares of the Company’s common stock, and subsequently, some of the shares were sold in the open market. Management has performed an analysis under FAS 5, Accounting for Contingencies, and concluded that the likelihood of a right of rescission being successfully enforced on the remaining convertible note shares is remote, and consequently, has accounted for these shares in permanent equity in the financial statements.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

8. COMMITMENTS AND CONTINGENCIES (Continued)

Contingencies (Continued)

On April 5, 2011, Gemini Master Fund, Ltd., filed a complaint for breach of contract against Location Based Technologies for non-payment of outstanding loans. The complaint specifies damages totaling $858,292, plus pre-judgment interest, costs of suit and other relief. The entire amount of the loans plus accrued interest, which together approximate the specified damages, are included in the accompanying financial statements. On June 8, 2011, the Location Based Technologies filed a Cross-Complaint against Gemini Master Fund, Ltd. for monetary damages related to the creditor’s disposition of common shares of Location Based Technologies which had been pledged as collateral for the notes. On February 22, 2012, the Company entered into a Settlement Agreement and General Release resulting in full satisfaction of the outstanding loans and accrued interest (see Note 6).

9. EQUITY

Common Stock (Reflects 3 for 1 stock split distributed October 20, 2008)

On October 13, 2008, the Board of Directors declared a 3 for 1 stock split to be effected in the nature of a 200% stock dividend, whereby the holders of each share of common stock received an additional two shares of common stock. The record date for the stock dividend was October 20, 2008 and resulted in the issuance of an additional 58,061,276 (pre-split) shares of common stock. In addition, the Company’s articles of incorporation were amended to increase its authorized shares in an amount that corresponds to the stock split, thereby increasing the authorized shares of common stock from 100,000,000 to 300,000,000. Unless otherwise indicated, all share and per-share amounts in these financial statements have been retroactively restated to reflect the 3 for 1 stock split as if the split had been in effect since inception.

In September 2010, the Company issued 250,000 shares of common stock in connection with a note payable issuance. The shares were valued at $25,000, which represents the fair market value of the note payable issuance costs on the award date.

In September 2010, the Company issued 500,000 shares of common stock in exchange for business development and capital raising advisory services. The shares were valued at $130,000, which represents the fair market value of the services provided on the award date.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

9. EQUITY (Continued)

Common Stock (Continued)

In October 2010, the Company issued 200,000 shares of common stock in connection with a note payable issuance and extension. The shares were valued at $22,000, which represents the fair market value of the note payable issuance and extension costs on the award date.

In October 2010, the Company issued 200,000 shares of common stock in connection with a debt issuance. The shares were valued at $22,000, which represents the fair market value of the debt issuance costs on the award date.

In October 2010, the Company issued 400,000 shares of common stock in connection with debt issuances. The shares were valued at $48,000, which represents the fair market value of the debt issuance costs on the award date.

In December 2010, the Company issued 25,000 shares of common stock in connection with a note payable extension. The shares were valued at $3,500, which represents the fair market value of note payable extension costs on the award date.

In December 2010, the Company issued 150,000 shares of common stock in connection with a note payable issuance. The shares were valued at $39,000, which represents the fair market value of the note payable issuance costs on the award date.

In December 2010, the Company issued 54,480 shares of common stock in exchange for the cancellation of 54,480 “Series D” and “Series E” warrants.

In December 2010, the Company issued 3,500,000 shares of common stock for the conversion of two promissory notes totaling $700,000. The promissory notes were converted on the basis of $0.20 per share. In addition, 500,000 shares of common stock were issued in connection with the conversion in accordance with the promissory note agreement and were valued at $100,000, which represents the fair market value of the debt conversion costs on the award date.

In December 2010, the Company issued 60,000 shares of common stock in exchange for consulting services related to sales and business development services. The shares were valued at $10,200, which represents the fair market value of the services provided on the award date.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

9. EQUITY (Continued)

Common Stock (Continued)

In December 2010, the Company issued 100,000 shares of common stock in exchange for accounting related advisory services. The shares were valued at $17,000, which represents the fair market value of the services provided on the award date.

In December 2010, the Company issued 500,000 shares of common stock in exchange for business development and capital raising advisory services. The shares were valued at $130,000, which represents the fair market value of the services provided on the award date.

In December 2010, the Company issued 285,714 shares of common stock in exchange for business development and sales representative services. The shares were valued at $40,000, which represents the fair market value of the services provided on the award date.

In February 2011, the Company issued 3,000,000 shares of common stock in exchange for public relations advisory services. The shares were valued at $600,000, which represents the fair market value of the services provided on the award date.

In February 2011, the Company issued 669,932 shares of common stock for the conversion of two promissory notes and accrued interest totaling $130,000 and $3,986, respectively. The promissory notes and accrued interest were converted on the basis of $0.20 per share.

In March 2011, the Company issued 200,000 shares of common stock in connection with note payable extensions. The shares were valued at $34,000, which represents the fair market value of note payable extension costs on the award date.

In March 2011, the Company issued 1,079,863 shares of common stock for the conversion of two promissory notes and accrued interest totaling $200,000 and $15,973, respectively. The promissory notes and accrued interest were converted on the basis of $0.20 per share.

In April 2011, the Company issued 500,000 shares of common stock in exchange for business development and capital raising advisory services. The shares were valued at $80,000, which represents the fair market value of the services provided on the award date.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

9. EQUITY (Continued)

Common Stock (Continued)

In April 2011, the Company issued 321,429 shares of common stock in exchange for business development and sales representative services. The shares were valued at $45,000, which represents the fair market value of the services provided on the award date.

In April 2011, the Company issued 500,000 shares of common stock in connection with two Letter of Intent for Employment Agreements. The shares were valued at $85,000, which represents the fair market value of the services provided on the award date.

In April 2011, the Company issued 50,000 shares of common stock in exchange for accounting related advisory services. The shares were valued at $7,500, which represents the fair market value of the services provided on the award date.

In May 2011, the Company issued 20,000 shares of common stock in exchange for sales advisory services. The shares were valued at $3,200, which represents the fair market value of the services provided on the award date.

In May 2011, the Company issued 250,000 shares of common stock in exchange for business development and capital raising advisory services. The shares were valued at $40,000, which represents the fair market value of the services provided on the award date.

In May 2011, the Company issued 100,000 shares of common stock in connection with a note payable extension. The shares were valued at $19,000, which represents the fair market value of note payable extension costs on the award date.

In July 2011, the Company issued 4,318,750 shares of common stock in exchange for the conversion of $500,000 in related party advances from an officer and $363,750 of deferred officer compensation. The officer advances and deferred officer compensation were converted on the basis of $0.20 per share.

In July 2011, the Company issued 2,000,000 shares of common stock to two consultants in exchange for business development and sales representative services. The shares were valued at $440,000, which represents the fair market value of the services provided on the award date.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

9. EQUITY (Continued)

Common Stock (Continued)

In July 2011, the Company issued 1,229,559 shares of common stock for the conversion of five promissory notes and accrued interest totaling $227,498 and $18,414, respectively. The promissory notes and accrued interest were converted on the basis of $0.20 per share.

In July 2011, the Company issued 150,000 shares of common stock for the conversion of accounts payable totaling $30,000. The accounts payable were converted on the basis of $0.20 per share.

In July 2011, the Company issued 65,000 shares of common stock to two consultants in exchange for consulting services related to technology development and accounting related advisory services. The shares were valued at $12,350, which represents the fair market value of the services provided on the award date.

In July 2011, the Company issued 400,000 shares of common stock to a consultant in exchange for business development and sales representative services and for the cancellation of 28,410 previously issued “Series H” warrants and 186,567 previously issued “Series P” warrants. The shares were valued at $100,000, which represents the fair market value of the services provided on the award date.

In July 2011, the Company issued 35,000 shares of common stock to a consultant in exchange for the cancellation of 25,000 previously issued “Series R” warrants.

In July 2011, the Company performed a private placement with certain investors and issued 50,000,0000 shares of the Company’s common stock at a purchase price of $0.20 per share for cash proceeds of $8,322,412, net of offering costs of $1,677,588.

In August 2011, the Company issued 50,000 shares of common stock to a consultant in exchange for the cancellation of 20,408 previously issued “Series G” warrants.

In August 2011, the Company issued 597,165 shares of common stock in exchange for the conversion of $105,433 in accrued interest on advances from an officer and $14,000 of deferred officer compensation. The accrued interest on advances and deferred officer compensation were converted on the basis of $0.20 per share.

In August 2011, the Company issued 1,200,000 shares of common stock for the conversion of accrued finder’s fees and accounts payable totaling $281,109. The accrued finder’s fees and accounts payable were converted on the basis of $0.20 per share.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

9. EQUITY (Continued)

Common Stock (Continued)

In August 2011, the Company issued 10,785,891 shares of common stock for the conversion of sixteen promissory notes and accrued interest totaling $1,965,000 and $192,178, respectively. The promissory notes and accrued interest were converted on the basis of $0.20 per share.

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 services 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 services 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 services 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 services provided on the award date.

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 services 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 services 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 services provided on the award date.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

9. EQUITY (Continued)

Common Stock (Continued)

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 services 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.

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 services 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 services provided on the award date.

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 services provided on the award date.

Prepaid Services Paid In Common Stock

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 to be amortized from January 1, 2012 to June 30, 2012. Unamortized prepaid services paid in common stock related to such stock issuance amounted to $50,000 at May 31, 2012.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

Warrants

Warrants to purchase up to 11,321,052 shares of the Company’s common stock are outstanding at May 31, 2012 (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.

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 during the nine months ended May 31, 2012.

10. STOCK OPTIONS AND WARRANTS

Stock Options

On January 12, 2012, the Company granted options 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, 2012, there were 1,500,000 options that were vested and presently exercisable. The fair value of such options using the Black-Scholes option pricing model amounted to $404,121. No options were exercised as of May 31, 2012.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

10. STOCK OPTIONS AND WARRANTS

Stock Options (Continued)

On March 15, 2012, the Company granted options to two officers of the Company and two employees to purchase 6,500,000 common shares at $0.31 per share in accordance with an Executive Employment Agreement. 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.

Warrants

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, 2012.

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, 2012.

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 60,000 warrants exercised as of May 31, 2012 (see Note 9).

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, 2012.

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, 2012.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

10. STOCK OPTIONS AND WARRANTS (Continued)

Warrants (Continued)

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, 2012.

On March 1, 2012, the Company issued “Series X” warrants to a consultant to purchase 57,692 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, 2012.

In addition to the above, at May 31, 2012, the Company had the following warrants outstanding:

Series	Number of Shares		Exercise Price		Expiration
A		1,500,000	$	1.00		8/14/2012
B		750,000	$	2.00		8/14/2012
C		120,000	$	2.00		6/2/2013
K		15,901	$	1.34		6/5/2012
M		96,849	$	1.04		8/7/2012
N		32,468	$	0.88		9/14/2012
O		68,671	$	0.77		9/15/2012
P		410,448	$	0.67		11/24/2012
Q		20,000	$	0.75		11/2/2012
R		215,000	$	0.68		12/16/2014

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.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

11. PROVISION FOR INCOME TAXES (Continued)

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, 2012, are as follows:

Net operating loss carry forward and deductible temporary differences	$	13,368,000
Valuation allowance		(13,368,000	)

Net deferred tax asset	$	-

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

Federal tax at statutory rate	$	34.00	%
State income tax net of federal benefit		5.83	%
Valuation allowance		(39.83	%)

	$	-

The Company’s valuation allowance increased by $2,216,000 for the nine months ended May 31, 2012.

As of May 31, 2012, the Company had federal and state net operating loss carryforwards of approximately $33,563,000 which can be used to offset future federal income tax. The federal and state net operating loss carryforwards expire at various dates through 2031. 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, 2012 and August 31, 2011, 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 2007 and by state taxing authorities for tax years prior to 2006.

LOCATION BASED TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2012

(Unaudited)

12. SUBSEQUENT EVENTS

On June 5, 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.

On June 7, 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.

On June 27, 2012, the Company entered into an Extension Agreement related to a promissory note agreement for $25,000 to extend the due date for an additional six months to December 27, 2012. All other terms remain unchanged.

From June 28, 2012 to July 9, 2012, the Company entered into six unsecured convertible promissory note agreements for $630,000. Under the terms of the promissory note agreements, principal and any unpaid interest shall be repaid from June 28, 2013 to July 9, 2013. The notes bear interest at 10% per annum and may be prepaid in whole or in part, without penalty. At the option of the note holders, the notes may be converted, in whole or in part, into shares of the Company's stock on the basis of $0.30 per share.

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

FORWARD LOOKING STATEMENTS

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

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

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

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

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

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

Location Based Technologies®, PocketFinder® and PocketFinder Pets® are registered trademarks, and PocketFinder Network™, PocketFinder People™, PocketFinder Vehicle™, PocketFinder Luggage™, PocketFinder Mobile™ 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. We design, develop, and sell leading-edge personal locator devices and services. Our devices utilize Global Positioning System (“GPS”) and General Packet Radio Service (“GPRS”) technologies in conjunction with our patented, proprietary hardware and software to allow users to locate their devices in real time. Our flagship PocketFinder products are small, completely wireless, location devices that enable users to locate a person, pet, vehicle or other valuable item anytime from almost anywhere. The device location and other critical information can be viewed by logging on to our website (www.pocketfinder.com) or by using the PocketFinder iPhone, iPod touch, or iPad Apps and, most recently, an Android App (available from Google Play or Android Market). Customers may also access the website from any Internet capable smartphone. The PocketFinder can also push near real time location information to users via email or SMS Text Messaging.

Current products include: PocketFinder People, PocketFinder Pets, PocketFinder Vehicles, PocketFinder Mobile, a very long battery life asset tracking device called the PF-886, and GPSVehicleLocator devices. These products are all based on proprietary LBT technology and will be utilized to serve strategic vertical markets with global opportunities.

Apple Store sales began in late November of 2011 and Apple Online launched just prior to that timeframe. With six full months of being on the shelf LBT has delivered slightly over 8,200 devices to Apple. We have also recently expanded the sales channel to include PocketFinder Pet and Vehicle locators that are now available to purchase from our PocketFinder website. Combined Apple and website sales and activations are showing steady increases month over month. June sales reflect our highest combined sales and activations month with an 11% increase in device activations. Advertising and general market awareness over the past few months includes our PocketFinder products highlighted by Dr. Gadget on radio and on ABC’s The View and Extra; NBC’s Today Show, and a month long focus on teen driving safety in partnership with NBCUniversal in Texas. In addition Jennifer Jolly presented our products in Chicago, Atlanta, and Los Angeles on CNN, CBS, WGN, WLS, Daily Motion, and ABC’s Money Matters. We are significantly expanding our presence on the Worldwide Web as well as in digital and print media.

All consumer sales include two months of free service with the purchase of the device; therefore, revenues continue to reflect the latency of the monthly recurring income. We are also exploring several service option plans for family and multiple accounts. Some plans offered will be paid in advance, typically in one lump sum payment.

Our Apple sales include only the United States and Canada yet our devices continue to draw International attention. Work with Apple Online to open up the market in Mexico is progressing and should be open for sales soon. We currently have devices working in over 70 countries (37% of all countries in the world) and multiple requests for distribution opportunities from 64 countries around the world. Associated with this kind of interest, we are working with a select few of these distributors and addressing the need for local wireless carrier involvement in order to be able to provide a reasonably priced monthly service fee, solid customer and technical support, and market reach. The first distributor in the Australasia territory is very close to closing.

Our preferred partners are the wireless carriers themselves because of their ready network and customer/billing infrastructure. Negotiations with four Tier 1 wireless carriers have progressed and devices are being tested on their networks. Early discussions/exploration with several other Tier 2 and 3 carriers also continue. A couple of the Tier 1 carriers cover multiple countries and their involvement, albeit slow, will net broad International market coverage.

Commercial and Government/Military applications are also progressing as is our relationship with The World Famous West Coast Customs. While our devices are being used in many of their custom builds we are also expanding the relationship to include co-branded distribution opportunities as well as other Commercial activities. Filming for this September’s WCC’s TV series is well underway (showing in 28.5M households weekly) and will include demonstrations of how to install our vehicle device as well as the ease and simplicity of our multiple Interfaces. The co-branded products would be available for sale online and in select retail stores where other WCC products are sold. We are finalizing the WCC project and anticipate launching the co-branded products later this summer.

We recently launched our new Business Solutions website and support infrastructure. This site and intelligence was designed utilizing a vast amount of customer input and guidance. We now have 59 businesses actively using our system with many more in the pipeline. We continue to work with several major International airlines with global cargo applications utilizing the PF-886 device. We are also working with two major banks in Mexico interested in the vehicle solution for insurance related applications (our location products were featured during “Cargo Weeks” show during June in Mexico City, Mexico) as well as a number of national retail concerns. There is tremendous need for various applications in these areas.

Our products are all supported by feature rich Apps that allow users to maximize the functionality and benefits of PocketFinder devices from almost anywhere at any time. The iPhone, native iPad, and Android Apps are free downloads available through the iTunes Store or on Google Play and the Android Market respectively. They deliver the ability to set up and manage PocketFinder devices while users are on the go throughout the day or night from virtually anywhere in the world that the user’s phone has network connectivity. BlackBerry and Windows Mobile Professional 6.0 Operating Systems are able to access the existing www.pocketfinder.com website to manage and set up accounts.

In response to specific customer demand for a small location device that delivered as much as 30 days of battery life for asset tracking and, more specifically, the shipping of high value parts and/or products, we developed the PF-886 device, an extended battery life product. These devices provide more than 3 weeks with 5 minute locates and deliver multiple months of continuous service with a once or twice a day location option. The devices are small (approximately 4 1/2 inches by 2 1/4 inches) and weigh just over 5.5 ounces. Devices are available for order now.

Strategy Analytic’s Nitesh Patel released the “The $10 B Rule: Location, Location, Location” study in May 2011. Mr. Patel believes that the evolution of location based services has momentum of its own sufficient to further evolve and develop the market to a point where it is projected to be valued at $10B by 2016. He further states that “Consumers are increasingly demanding services such as search, maps, or navigation, for which location information is either fundamental to or provides greater context, utility and therefore appeal.”

In May 2012 Kumu Puri, Senior Executive, Accenture’s Electronics & High-Tech Group shared that over the past few years Accenture has studied usage of technology by consumers to identify major trends that might assist their corporate clients. Their most recent survey of 19 different technologies across users in 10 countries revealed four major trends that they believe will be crucial over the next several years. They are:

Consumers are reaching a state of “hypermobility,” rapidly adopting mobile technologies and downloading applications that keep them connected anywhere, anytime.

Consumers are increasingly reaching into the network and modifying their behaviors as they rely on cloud services.

Consumers’ use of electronics is increasingly more dependent on the exploding number of applications now within their reach.

Emerging markets lead in usage and spending growth of many consumer technologies.

Puri went on to say that, “Consumers are adopting mobile technology so rapidly that the mobility trend is in hyper-drive. While consumers still have strong ownership and usage of desktop or laptop computers (90% surveyed own them), purchase intentions for computers are slowly declining. Simultaneously, smartphone and tablet PC ownership is rising steeply. More than half of consumers we surveyed own a smartphone – up 25 points in the past 12 months. This marks a growth rate of 89% over the previous year. One-third of respondents bought a smartphone in 2011, an increase of 15 percentage points compared with 2010. On a similar trajectory, ownership of tablets grew by 50% last year, from 8% of consumers owning them to 12%, according to our study.

“These survey findings paint a picture of consumers striving to get and stay connected wherever they are via mobile technologies, abundant app choices and a growing set of service alternatives from the cloud. The era of hypermobility has numerous implications for consumer electronics companies as they work to capture the greatest share of wallet among their target customers.”

We are aggressively moving the PocketFinder family of products web-based features and functionality onto more functional mobile platforms to better meet the needs of this highly mobile society. We are seeing similar demands and requirements in families and in businesses. By taking advantage of the latest in GPS, GSM, and Internet technology, small and medium sized businesses will be able to more effectively and efficiently manage their mobile assets and key human resources as well as to carefully monitor the shipping and delivery of high value assets. Although we are only actively selling devices in the US and Canada, we find that many people have purchased our devices while visiting the US and then returned home to activate. Global usage now comprises countries in much of Europe, Russia, Romania, Ukraine, Mexico, China, Hong Kong, Australia, many countries in South America.

In addition, vertical applications we receive customer feedback from include: outdoor enthusiasts, adult children of the elderly, elder care providers of patients with Alzheimer’s and dementia, special needs providers for those with disabilities, pet owners, and for the tracking and recovery of valuable property and luggage while traveling. Our device is only fifty millimeters in diameter (about 2 inches). It fits easily into a child’s pocket, into a backpack, or onto a belt. The PocketFinder People and PocketFinder Pets devices will come with a form-fitting silicone pouch that can easily slide onto a belt or a pet’s collar.

We continue to tightly control our overhead and ensure that we have the right resources in place at the right time. We have a very talented senior management team that brings the right knowledge, skills and abilities to deliver world-class products and services. Distribution opportunities are being negotiated as we carefully analyze each market opportunity against the cost of entry, potential growth, economic value, and support capability metrics. We are developing a business model for international market opportunities and are in discussions with wireless carriers and/or distributors in multiple countries at this time. Key personnel have been brought in as independent contractors to supplement our existing team with customer, sales and business development skills. Our customer service center personnel have received consistently high feedback from customers who have found need for assistance and offer their support in English and Spanish.

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

	●	Parents of young children (primarily 5 to 12 years of age) who seek the peace of mind of being able to know that their children are where they are supposed to be when they are supposed to be there;
	●	Small and mid-sized business owners;
	●	1st 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 Alzheimers;
	●	Pet care and location capability; and
	●	Asset tracking and location capability: cars, trucks, snowmobiles, fleet management, luggage, boats, RVs, and other high-valued assets.

Our Intellectual Property Investment. We continue to invest in intellectual property that consists of apparatus patents and applications and system and method patents and applications. We have filed claims that cover many aspects of the PocketFinder, its operating system and user interface. We have expanded and filed additional claims this fiscal year that cover new aspects of the PocketFinder People device, its operating system and user interface. Our intellectual property portfolio includes 29 issued US patents, 16 pending US patents, 8 pending foreign patents, 6 PCT filings, 17 registered trademarks and 4 Madrid protocol trademark cases.

We own the Internet domain name www.pocketfinder.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 and with its proprietary “friendly user interface” software system. Our PocketFinder family of products delivers rugged, compact products with near real time location-based information over its proprietary server architecture. Our products optimize the way families stay connected with one another, for pet owners to know where their pets are on demand, and provide solutions for asset tracking – such as shipping of high value assets or LoadRack Tracker’s trucking solution for controlled temperature environments. 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 in one easy tool.

PocketFinder and PocketFinder Vehicle devices are being sold in the United States and in Canada through the Apple Online Store and Apple Retail Stores. PocketFinder devices for Pets are available for purchase on our website. We are also working on several “white label” marketing opportunities. In addition, licensing opportunities are being explored on the international front.

Our marketing initiatives will include:

	●	Licensing opportunities for the products in international areas or regions;
	●	Self-branded or “white label” opportunities for niche market or vertical market sales;
	●	Affinity group marketing and outreach opportunities;
	●	Utilization of direct response sales due to public relations outreach in special interest magazines and newsletters; and
	●	Retail distribution initiatives.

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

	●	Potential licensing fees;
	●	Organizations that will self-brand the PocketFinder for specialized niche markets (“white label”);
	●	Personal Locator device sales to retailers;
	●	Personal Locator device sales through affinity groups and through our website;
	●	Personal Locator 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 market. Our strategy is to provide high quality devices that meet the market’s requirements whether it is for business applications or for their children, pets, or asset tracking (luggage, vehicles, boats, etc.). Key elements of our strategy include market education of this new GPS mobile application and:

	●	A mass market retail price of under $150.00 for Personal Location devices (customized trucking solutions with additional features and capabilities will be sold at a higher cost);
	●	A basic monthly service fee in the U.S. for family applications of $12.95 and for most business applications under $20/month with multiple convenient access points (Smartphone and/or via the Internet);
	●	Ease of use at the location interface point as well as with the device; and
	●	Rugged design that meets the rigors of life and work.

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

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

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

Government Regulation. We are subject to federal, state and local laws and regulations applied to businesses generally as well as Federal Communications Commission, Internationale Canada (“IC”) and CE (European Economic Area) wireless device regulations and controls. We believe that we are in conformity with all applicable laws in all relevant jurisdictions. We are currently seeking NOM and NYCE certifications in order 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.

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

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, and Mr. Gregory Gaines, our Chief Marketing and Sales Officer, currently devote 100% of their business time to our operations. Our CFO, Mr. Eric Fronk, is currently serving part-time. In addition to our new Board members, we have added several key contributors with customer service, business development, and sales leadership experience. Remaining true to our “outsourced” model for growth and expansion, any large personnel increase will be accomplished through sales and customer support outsourced organizations contracted to provide respective services. The company will remain focused on our core competency of providing location devices and services.

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

RESULTS OF OPERATIONS

For the nine months ended May 31, 2012 as compared to the nine months ended May 31, 2011.

Revenue. For the nine months ended May 31, 2012, we generated $368,440 of net revenue as compared to $9,442 of net revenue for the nine months ended May 31, 2011. Net revenue for the nine months ended May 31, 2012, consisted of $318,631 from the sales of PocketFinder devices and $49,809 from monthly subscription service income.

Cost of Revenue. For the nine months ended May 31, 2012, cost of revenue totaled $856,215 resulting in a negative gross margin of $487,775 as compared to $21,077 for the nine months ended May 31, 2011. The cost of revenue was significantly higher than net revenue during the nine months ended May 31, 2012, as we incurred labor and cost overages to accelerate our initial production run to meet our distributor delivery deadlines. In addition, certain fixed overhead charges contributed to the negative gross margin. We anticipate that our unit cost will be significantly lower as our production volumes grow.

Operating Expenses. For the nine months ended May 31, 2012, our total operating expenses were $4,685,211 as compared to total operating expenses of $2,190,302 for the nine months ended May 31, 2011. Operating expenses increased by $2,494,909 or 113% in 2012 from 2011. The increase in operating expenses is primarily attributed to the following:

●

A $580,102 increase in general and administrative expenses to $1,109,434 for the nine months ended May 31, 2012, as compared to $529,332 for the nine months ended May 31, 2011. The increase in general and administrative expenses in 2012 as compared to 2011 is due to the following:

Increase in advertising fees to market our products;

Increase in insurance costs as a result of increasing our product liability coverage;

Increase in computer expenses related to our website and development of the PocketFinder apps; and

Recognition of board of directors fees upon the establishment of the board in October 2011.

●

A $570,359 increase in officer compensation to $974,359 for the nine months ended May 31, 2012, as compared to $405,000 for the nine months ended May 31, 2011. The increase in officer compensation is due to the addition of our Chief Marketing Officer in October 2011 and our Chief Financial Officer in March 2012. Approximately $404,000 of the increase is due to the granting of stock options to three executive officers in accordance with Executive Employment Agreements. The fair value of the stock options using the Black-Scholes option pricing model amounted to $404,121;

●

An $824,837 increase in professional fees to $1,828,842 for the nine months ended May 31, 2012, as compared to $1,004,005 for the nine months ended May 31, 2011. The increase in professional fees is primarily attributed to a significant increase in legal fees related to the Gemini Master Fund, Ltd. loan defaults and to prepare the filing of our registration statement on Form S-1. In addition, professional fees increased due to the addition of nine consultants specializing in sales and marketing, business development, financial services, technology, and customer service;

●

A $421,412 increase in research and development costs to $546,075 for the nine months ended May 31, 2012, as compared to $124,663 for the nine months ended May 31, 2011, as we increased R&D activities related to our PocketFinder XL device; and

●

The increases above were offset by a $69,695 decrease in rent to $57,607 for the nine months ended May 31, 2012, as compared to $127,302 for the nine months ended May 31, 2011, due to moving to smaller office space in Irvine.

Other Income/Expenses. For the nine months ended May 31, 2012, we reported net other income totaling $100,207 that consisted of net interest expense, financing costs, amortization of deferred financing costs, gain on debt settlement and foreign currency gains as compared to net other expenses totaling $3,063,929 for the nine months ended May 31, 2011. The $3,164,136 decrease in other income and expenses is primarily due to the following:

●

A $2,282,434 decrease in financing costs to $78,971 for the nine months ended May 31, 2012, as compared to $2,361,405 for the nine months ended May 31, 2011 due to a significant reduction in finder’s fees and financing activities following the private placement in July 2011;

●

A $236,167 decrease in the amortization of beneficial conversion features on notes payable to $0 for the nine months ended May 31, 2012, as compared to $236,167 for the nine months ended May 31, 2011 as all convertible notes were previously converted and no new convertible notes were entered into during the nine months ended May 31, 2012;

●

A $150,981 decrease in interest expense to $203,904 for the nine months ended May 31, 2012, as compared to $354,885 for the nine months ended May 31, 2011 as the majority of note payables were converted during the private placement in July 2011; and

●

A $580,598 gain on debt settlement related to the Gemini Master Fund, Ltd. notes payable was recognized during the nine months ended May 31, 2012, whereby, there was no such gain during the nine months ended May 31, 2011.

Net Loss. For the nine months ended May 31, 2012, we reported a net loss of $5,073,579 as compared to a net loss of $5,266,666 for the nine months ended May 31, 2011, due to fluctuations in operating and other expenses as previously discussed.

LIQUIDITY AND CAPITAL RESOURCES

We had cash and cash equivalents of $330,832 as of May 31, 2012, as compared to $3,619,576 as of August 31, 2011. The decrease in cash as of May 31, 2012, as compared to August 31, 2011 is attributed to the purchase of device components and the production of PocketFinder devices.

Inventory totaled $4,805,514 as of May 31, 2012, as compared to $24,809 as of August 31, 2011 and consisted of $59,029 of packaging supplies, $1,697,849 of device components and $3,048,636 of finished goods.

Prepaid expenses and other assets including deferred financing costs totaled $562,240 as of May 31, 2012, as compared to $1,502,838 as of August 31, 2011 and consisted of prepaid advisor retainers, insurance, interest, commissions, license fees, and prepaid manufacturing costs. The decrease in prepaid expenses as of May 31, 2012 from August 31, 2011 is the result of recognizing approximately $1.4 million in prepaid manufacturing costs at August 31, 2011; whereby, there were no such costs at May 31, 2012.

There were no manufacturing deposits as of May 31, 2012, as compared to $2,800,000 as of August 31, 2011. The decrease is the result of using deposits to purchase inventory components and manufacture PocketFinder devices from August 31, 2011 to May 31, 2012.

As of May 31, 2012, the total of our property and equipment, less accumulated depreciation, was a net value of $330,333, compared to the net value of $191,855 for our property and equipment, less accumulated depreciation, as of August 31, 2011. The increase is primarily due to the development of more robust PocketFinder apps and the purchase of tooling and equipment for device production.

Other assets, consisted of patents and trademarks, net of amortization, and deposits. Deposits consisted of the security deposit for our office lease and amounted to $30,000 as of May 31, 2012 and August 31, 2011. Patents and trademarks, net of amortization, amounted to $1,250,067 as of May 31, 2012, as compared to $1,231,084 as of August 31, 2011. We periodically assess our patents and intellectual property for impairment and none has been recorded to date.

Our total assets as of May 31, 2012, were $7,642,857 as compared to our total assets as of August 31, 2011, which were $9,400,162. The decrease in our total assets between the two periods was primarily due to a decrease in cash that was offset by an increase in inventory as previously discussed.

As of May 31, 2012, our accounts payable and accrued expenses were $1,380,549 as compared to $1,329,689 as of August 31, 2011.

As of May 31, 2012, accrued officer compensation was $938,583 as compared to $914,765 as of August 31, 2011.

As of May 31, 2012, deferred revenue was $362,303 and consisted of the aggregate value of on-hand inventory of PocketFinder® devices held by a distributor.

There were no outstanding advances from officers or related accrued interest as of May 31, 2012, as compared to $9,462 as of August 31, 2011. Advances from officers and accrued interest at August 31, 2011 were paid off in September 2011.

Convertible notes payable and related accrued interest totaled $1,752,322 as of May 31, 2012, as compared to $918,534 as of August 31, 2011. The $1,750,000 of convertible promissory notes are short term, to be repaid out of future operating cash flow.

The outstanding balance on our line of credit and accrued interest totaled $1,000,000 and $5,597, respectively, as of May 31, 2012.

On January 5, 2011, we entered into a Loan and Security Agreement with Silicon Valley Bank for a $1,000,000 line of credit originally expiring January 5, 2012. On August 24, 2011, the Loan and Security Agreement was amended by a First Amendment to Loan and Security Agreement to waive existing and pending defaults on loan covenants. On February 3, 2012, the Loan and Security Agreement was amended by a Second Amendment to Loan and Security Agreement to extend the maturity date to April 4, 2012 and to waive existing and pending defaults on loan covenants. On April 17, 2012, the Loan and Security Agreement was amended by a Third Amendment to Loan and Security Agreement to extend the maturity date to October 5, 2012 and to waive existing and pending defaults on loan covenants. All other terms and conditions remain unchanged. The outstanding balance and accrued interest due on the line of credit totaled $1,005,597 as of May 31, 2012. Silicon Valley Bank maintains a security interest in all of our personal property.

Commitments as of May 31, 2012, amounted to $499,387 compared to $685,500 as of August 31, 2011, and consisted of the liability on losses from inventory purchase commitments recognized in August 2011.

On December 1, 2010, in anticipation of entering into the Loan and Security Agreement with Silicon Valley Bank and in connection with loans that he had made to us, we entered into a Financing Agreement with Greggory S. Haugen under which, among other things, Mr. Haugen agreed to personally guaranty our obligations under the Loan and Security Agreement with Silicon Valley Bank. We are obligated to reimburse Mr. Haugen for any amounts, including interest, he pays under the guaranty. To compensate Mr. Haugen for his guaranty, we issued a warrant to him to purchase 3,600,000 shares of our common stock at an exercise price of $0.20 per share and we agreed to pay him $5,000 per month for so long as he has any obligation under the guaranty or he has not been reimbursed by us for any amounts paid by him under the guaranty. Currently the $5,000 monthly fee is payable in cash or shares of our common stock at Mr. Haugen’s option. Under the Financing Agreement, we granted Mr. Haugen board observation rights, certain registration rights, and the right to approve our use of funds drawn under the Loan and Security Agreement. We also agreed to grant Mr. Haugen a security interest in all of our assets, junior only to the security interest of Silicon Valley Bank. In the event of an “Actionable Violation,” which is defined to include, among other things, our failure to maintain certain minimum net income levels, our failure to maintain a specified minimum account balance, or our failure to make any payment required under the Financing Agreement or any other agreement between Mr. Haugen and us, Mr. Haugen may, among other things, market our assets (including our intellectual property) and require us to sell such assets (subject to the approval of Silicon Valley Bank) with the proceeds to be applied to all amounts then due to Silicon Valley Bank and thereafter to any amounts due by us to Mr. Haugen under the Financing Agreement or any other agreement or instrument. In January 2011, we entered into the following agreements with Mr. Haugen: (i) a Security Agreement granting him a security interest in all of our assets to secure the reimbursement obligation under the Financing Agreement and every other debt, liability or obligation that we currently or at any time in the future owe to him and (ii) a related Intellectual Property Security Agreement granting him a security interest in all of our intellectual property.

In 2007, we sold $5,242,000 in convertible notes that were subsequently converted into 5,242,000 shares of common stock. The notes were sold to accredited investors. We made these sales in reliance on an exemption from registration provided by Section 4(2) of the Securities Act and similar state exemptions. Our counsel has advised us that the availability of those exemptions cannot be determined with legal certainty due to the fact that we may not have complied with all of the form filings or other notice filing provisions of safe-harbor exemptions for such sales offered by rules promulgated under the Securities Act by the SEC and applicable state laws. Thus, it is possible that the sale of the convertible notes may have violated the registration requirements of the Securities Act and applicable state laws. As to those sales, a right of rescission may exist on which the statute of limitations has not run. We performed an analysis under FAS 5, Accounting for Contingencies, and concluded that the likelihood of a right of rescission being successfully enforced on the convertible note sales is remote.

CASH REQUIREMENTS

We are an early stage wireless technology company focused on the marketing and sales of the PocketFinder family of products for retail distribution. Since our inception, we have generated significant losses. As of May 31, 2012, we had an accumulated deficit of $42,125,209 and we expect to incur continual losses until sometime in calendar year 2013.

We have a limited history of operations. To date, we have funded our operations primarily through personal loans by the founders and the private placement of our common stock and convertible notes.

As of May 31, 2012, we had $330,832 in cash and cash-equivalents. Over the next several quarters we expect to invest significant amounts of funds to develop our sales and marketing programs associated with the commercialization and launch of the PocketFinder family of products. We also expect to fund any additional inventory requirements and any necessary general overhead requirements.

We expect to have to obtain additional financing in the coming months for general and administrative expenses as well as purchasing and maintaining inventory, and for related purposes such as packaging, shipping, and direct sales and marketing costs. We are not able to estimate the amount of funds necessary as it will be determined by the volume represented by purchase orders from targeted distributors and direct end users.

Our funding requirements will depend on numerous factors, including:

●

Costs involved in production and manufacturing to fill purchase orders, software and interface customization for OEM partners, and the network necessary to commence the commercialization of the PocketFinder People and PocketFinder Pets devices;

●

The costs of outsourced manufacturing;

●

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

●

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

●

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

On March, 16, 2012, we consummated a financing with JMJ Financial (“JMJ”) which could net us up to $2,000,000 in capital. As of May 31, 2012, we received investments from JMJ totaling $1,560,000, but future capital distributions shall be made solely at JMJ’s discretion. Due to the uncertain nature of any future funding from JMJ, we may need to raise debt or equity capital this coming quarter. The sale of additional equity securities may result in additional dilution to our stockholders. The sale of debt securities could involve substantial operational and financial covenants that might inhibit our ability to follow our business plan. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned commercialization activities, which could adversely affect our financial conditions and operating results.

Product Research and Development

We plan to continue to develop new product enhancements to our existing product on the market including PocketFinder People and PocketFinder Vehicles. We are currently in the final process of testing the PocketFinder XL (“extended life”) devices with some key potential customers.

Plant and Equipment, Employees

We do not plan to purchase or sell any significant equipment, plant or properties during the foreseeable future. We currently have nine employees and we anticipate adding up to 10 more full time employees within the next 12 months. Our business operations are based on a strategic outsourcing model, thereby negating the need for significant amounts of plant and equipment, or significant numbers of employees. Thus, we do not anticipate hiring any significant number of additional employees during the next 12 months but will add a few selected and strategic employees.

Off-Balance Sheet Arrangements

As of May 31, 2012, we had no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective as of May 31, 2012, due to the material weaknesses resulting from a lack of segregation of duties in our accounting department, and a limited corporate governance structure.

Changes in Internal Control Over Financial Reporting

There were no changes in internal controls over financial reporting that occurred during the nine months ended May 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Gemini Master Fund, Ltd. alleged that we were in default in the payment of the principal and unpaid accrued interest under two senior secured promissory notes in its favor in the original principal amounts of $625,000 and $100,000. These notes were secured by a pledge of 5,600,000 shares of our common stock personally owned by one of our officers. On or about February 1, 2010, Gemini seized all of the pledged shares and sold them to itself for a total of $10,000 at what it designated as an auction. It is our position that, at the time of the purported auction, the shares had a fair market value that exceeded the amount of the claimed obligation. In April 2011, Gemini filed a complaint against us for breach of contract for non-payment of amounts due under the two senior secured promissory notes. The complaint specifies damages totaling $858,292, plus pre-judgment interest, costs of suit and other relief. In June 2011, we filed a cross-complaint against Gemini for monetary damages related to Gemini’s disposition of the pledged shares. It is Gemini’s position that we remain obligated to pay Gemini the $858,292 in claimed damages plus pre-judgment interest, costs of suit and other relief, less the $10,000 that Gemini claims was derived from the sale of the pledged shares. It is our position, expressed in our cross-complaint, that Gemini’s disposition of the pledged shares failed to comply with the law and that the pledged shares had a fair market value that exceeded the debt for which they were sold, such that Gemini’s claimed obligation has been paid in full, and we are entitled to certain damages and related relief. On February 22, 2012, the Company entered into a Settlement Agreement and General Release resulting in full satisfaction of the two notes payable balance and accrued interest totaling $725,000 and $168,089, respectively.

ITEM 1.A. RISK FACTORS

Not applicable.

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

Common Stock Issuances for Services Provided

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.

On June 5, 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.

On June 7, 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.

Warrant Issuances

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

Board of Directors

On October 25, 2011, the Board of Directors increased the number of directors from three to seven and appointed Greggory Haugen, Charles “Chuck” Smith, David Meyers and Ronald Warner to the Company’s Board of Directors. On December 2, 2011 the Board of Directors created Audit, Compensation and Governance & Nominating Committees and appointed the directors to these committees, as follows, and appointed Greggory Haugen as Lead Director.

Compensation Committee: Chuck Smith – Chair, Ron Warner, David Meyers

Audit Committee: David Meyers – Chair, Ron Warner, Chuck Smith

Governance & Nominating Committee: Ronald Warner – Chair, Chuck Smith, David Meyers

Appointment of Chief Financial Officer

On March 16, 2012, we appointed Kenneth Eric Fronk to serve as our Chief Financial Officer (“CFO”). We entered into an Executive Employment Agreement whereby Mr. Fronk will serve as our CFO for an employment term of five years for monthly compensation of $8,000 and 1,000,000 options to purchase common stock at $0.31 per share. Options vest upon achieving certain performance conditions.

Mr. Fronk has extensive experience as a CFO of young, public and private companies. Prior to joining LBT, Mr. Fronk held various executive management positions in industries including manufacturing and distribution, software development, and bio-tech. Most recently, he served as CFO of Digital Interactive Systems, a manufacturing, distribution, and services company. Prior to that, Mr. Fronk was part of a team that prepared AlphtecSpine Inc. for its IPO occurring in 2006. From 2002 to 2005, Mr. Fronk was part of a team that lead the restructure and turnaround of Peregrine Systems Corp, a previously bankrupt software development company. The team successfully guided Peregrine Systems out of bankruptcy and ultimately sold the software to Hewlett-Packard in late 2005. Mr. Fronk began his career with Ernst and Young and PricewaterhouseCoopers, where he spent eight years working primarily in high-tech and pharmaceutical industries. Mr. Fronk earned a Bachelor of Science in Accounting from Brigham Young University and received a Master in Business Administration from the University of Southern California. He is a certified public accountant (inactive license).

ITEM 6. EXHIBITS

Exhibit No.*	Document Description
3.1	Articles of Incorporation of Springbank Resources, Inc. (now known as Location Based Technologies, Inc.) (incorporated by reference from Exhibit 3.1 to the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-139395) filed December 15, 2006).
3.1A	Amended Articles of Incorporation, dated October 20, 2008 (incorporated by reference from Exhibit 3.1A to the Registrant’s Form 10-KSB filed December 12, 2008).
3.2	Amended and Restated By-Laws of Location Based Technologies, Inc. (incorporated by reference from the Registrant’s Current Report on Form 8-K filed January 4, 2008).
10.11	Executive Employment Agreement between the Company and David Michael Morse, Jr. dated March 1, 2012. †
10.12	Third Amendment to Loan and Security Agreement between the Company and Silicon Valley Bank dated April 17, 2012. †
10.13	Promissory Note Agreement between the Company and JMJ Financial dated April 18, 2012. †
10.14	Unsecured convertible promissory note agreement between the Company and Cody Evans dated June 28, 2012. †
10.15	Unsecured convertible promissory note agreement between the Company and Adam Marcotte dated July 9, 2012. †
10.16	Unsecured convertible promissory note agreement between the Company and Rolf Haugen dated July 9, 2012. †
10.17	Unsecured convertible promissory note agreement between the Company and James and Kristy Heer dated July 9, 2012. †
10.18	Unsecured convertible promissory note agreement between the Company and David and Barbara Alampi dated July 9, 2012. †
10.19	Unsecured convertible promissory note agreement between the Company and Dave and Denise Kuennan dated July 9, 2012. †
21.1	Subsidiary of the Registrant - Location Based Technologies, Ltd. (an England and Wales private and limited company)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

101.INS	XBRL Instance Document **
101.SCH	XBRL Taxonomy Extension Schema Document **
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document **
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document **
101.LAB	XBRL Taxonomy Extension Label Linkbase Document **
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document **




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

SIGNATURES

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

	LOCATION BASED TECHNOLOGIES, INC.

Dated: July 13, 2012	By:	/s/ David M. Morse
		David M. Morse
		Co- President and Chief Executive Officer

Dated: July 13, 2012	By:	/s/ Kenneth Eric Fronk
		Kenneth Eric Fronk
		Chief Financial Officer