That is correct, LB is creating an .m3u file in the temp directory. When launching from LB to RetroArch, the game is shown as:
/storage/3964-6433/LaunchBox/Temp/5d2dcb58-4575-4f8e-be62-181c95a2a71c/bdaf7c4d-a416-4dcf-a358-aed481c699eb.m3u
Yes, this does break saves/states since RetroArch would be looking for the game title. In this instance, when I created a saved state it saved as: bdaf7c4d-a416-4dcf-a358-aed481c699eb.state when my previous state would be Legend of Dragoon, The (USA) (Disc 1).state13