U.S. Securities and Exchange Commission

 

Washington, D.C. 20549

 

Form 10-K

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2013

 

or

 

¨	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: 0-30611

 

Teleconnect Inc.

(Exact name of registrant as specified in its charter)

 

Florida		90-0294361
(State or other jurisdiction of		(I.R.S. Employer Identification No.
incorporation or organization)

 

Oude Vest 4

4811 HT, Breda

The Netherlands

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: 011-31-630 048 023

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value

Title of Class

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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. Yes x 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 S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed third fiscal quarter ended June 30, 2013: aggregate market value of $1,934,443 with 9,672,215 shares outstanding at $0.20.

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the last practicable date: December 19, 2013: 9,016,183 shares of common stock, $.001 par value

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933: None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I
Item 1	Business	3
Item 1A	Risk Factors	5
Item 1B	Unresolved Staff Comments	8
Item 2	Properties	8
Item 3	Legal Proceedings	8
Item 4	(Removed and Reserved)	8
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6	Selected Financial Data	9
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	13
Item 8	Financial Statements and Supplementary Data	14
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27
Item 9A	Controls and Procedures	27
Item 9B	Other Information	27
PART III
Item 10	Directors, Executive Officers and Corporate Governance	28
Item 11	Executive Compensation	29
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13	Certain Relationships and Related Transactions, and Director Independence	32
Item 14	Principal Accounting Fees and Services	32
PART IV
Item 15	Exhibits, Financial Statements, Schedules	33
Signatures		34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I

 

Item 1. Business

 

General

 

Teleconnect Inc. (the Company) (initially named Technology Systems International Inc.) was incorporated under the laws of the State of Florida on November 23, 1998.

 

Serving as a telecommunications service provider in Spain for almost 10 years, the Company never fully reached expectations and decided late in 2008 to change its course of business. In November 2009, 90% of the Company’s telecommunication business was sold to a Spanish group of investors, and on October 15, 2010, the Company completed the acquisition of Hollandsche Exploitatie Maatschappij BV (HEM), a Dutch entity established in 2007. HEM’s business involves the age validation of consumers when purchasing age restricted products, such as alcohol or tobacco. This age validation business is at the core of the Company’s strategic direction. The Dutch companies acquired in 2007 (Giga Matrix, The Netherlands, 49% and Mediawizz, The Netherlands, 100%) are considered to function complementary to this service offering.

 

With its ownership in HEM, the Company’s main activities are the manufacturing, sales and lease of age validation equipment and the performance of age validation checks. The Company also sells and maintains vending solutions (through Mediawizz). The Company is also involved in the broadcasting of in-store commercial messages using the age validation equipment between age checks (through HEM), and plans to develop market survey activities in the future (Giga Matrix).

 

Products and service offering

 

Unlike the traditional ‘in store’ method of age validation, the Company’s system (‘Ageviewers’) is designed to remotely check ages. Using a special terminal manufactured by the Company, supermarkets and liquor stores establish a brief video connection between the checkout terminal and the external age-verification center of the Company through a secure internet connection.  At this center, specially trained personnel perform the actual age verification based on the incoming images of customers buying age restricted products. The system also provides for the exact age to be determined based on photo identification in such cases where the buyer is not unmistakably of age. Age-restricted products cannot be purchased until the customer’s age is validated by the Company’s verification personnel.

 

If a terminal is not in use (before or after age verification), the system can display specific advertising material. Terminals are also suitable for brief market surveys. In addition, the Company sells remotely managed vending solutions for the sales of travelling accessories and other similar products at train stations and airports.

 

The operators of the external age-verification center are not in direct contact with the person being assessed. The chances of human error and integrity problems (due to intimidation, familiarity or disinterest, for example) are thus minimal. Equally important, because images of customers are randomly distributed among operators, minors cannot predict in which stores non-compliance, if any, will occur. With this central and systematic approach to age validation, Ageviewers solves the two key problems of the traditional method of age validation and herewith completely aligns with what is legally expected from distributers of alcohol and other age restricted products.

 

There are currently no known systems which are similar to Ageviewers, but the increasing priority in most countries to prevent the sales of alcohol and tobacco to minors will undoubtedly tempt others to become active in the area of age verification. The Company has applied for patents for its specific technology. To date, several of these patent applications have been granted.

 

The Company’s hardware products are fully in compliance with the European Machine Directive and have been tested and approved for electromagnetic compatibility. The operations are momentarily limited to Europe and therefore not subject to specific regulation in the U.S., either at the federal or state level.

 

The Company’s activities are organized from the office in Breda, The Netherlands, and all the Company’s hardware products can be accessed remotely for servicing.

 

Market

 

The Company is focused primarily on retail trade. As for its main activities, age validation, in the Netherlands (population 16.5M – the home market), some 7,500 liquor stores and supermarkets conduct about 350 million age-restricted transactions per annum which involves approximately 80% of all alcohol consumed and a significant portion of all tobacco sold. The operable European and US market is estimated to be at least 30 times larger.

 

Despite the increasing social pressure to improve the quality of age verification, and a trend towards self-scan checkouts (without personnel), there is a concentrated resistance within the alcohol industry and the supermarket branch to reorganize the way that alcohol is sold. The efforts of the Company are therefore logically focused on breaking through this resistance in the market.

 

The objective is to introduce the Company’s products as efficiently as possible along the various paths in the retail trade, and at the same time continue to generate as much social and political support for the solution as possible. Sales are organized in such a way that these efforts and developments are well supported. Management is actively pursuing key strategic partners in the countries targeted in our business plan.

 

Management and personnel

 

At September 30, 2013, the Teleconnect Board of Directors consisted of three officers Dirk Benschop, (President and CEO); Gustavo Gomez, (Chief Compliance Officer) and Les Pettitt, (Chief Financial Officer) and two non-executive directors (Mr. Jan Hovers, Supervisory Director and Mr. Ralph Kröner). On December 14th, 2012, Mr. Ralph Kröner was named to the Board of Directors.

 

The Dutch wholly owned subsidiaries HEM and Mediawizz, along with Giga Matrix, in which we hold an equity interest, are managed by a team of four managers, with a staff of two part-time administrative assistants. In addition, four external specialists support our automation processes on a contract basis. The age validation center currently employs 13 operators, six of whom have temporary contracts.  There are 28 people involved in the operation as of September 30, 2013, none of whom are represented by a labor union with respect to his or her employment by the Company. All personnel, except for management, work on a part–time basis.

 

The Company currently operates 96 hours per week (coinciding with the opening times of the retail trade) and all operators work in short shifts. In addition, the daily and weekly peaks and valleys in sales are extremely predictable, which makes it very simple to plan the number of required operators at a given moment of the day or week.

 

Stage of development of business

 

Ageviewers was originally designed to remotely prevent the sales of tobacco to minors from vending machines. After completing the technical development in 2008, a plan was executed to evidence the effectiveness of the system, comprising the installation of Ageviewers in 20 retail stores in The Netherlands. After Dutch researchers established that the system makes is virtually impossible for minors to buy tobacco (Van Hoof, J. J., Gosselt, J. F., & De Jong, M. D. T. . Shop floor compliance with age restrictions for tobacco sales: Remote versus in-store age verification. 2010, Journal of Adolescent Health, 46, 197-199), Ageviewers was specifically prepared to also prevent the sales of alcohol to minors at regular checkouts of liquor stores and supermarkets. Subsequently, the Company invested in a one year pilot comprising the installation of the system in 100 liquor and convenience stores in Holland, with the target set to perform no less than one million age validations via the system in order to evidence its acceptance by the general public.

 

After executing this millionth age check in December 2011, both effectiveness and acceptance had been evidenced and all earlier set development stage targets had been met. The Company thereafter launched its current marketing plan, which aimed at a broad implementation of the system in Dutch supermarkets to coincide with changes in the Alcohol and Catering Act in the Netherlands as per the 1^st of January 2013. After this date, Dutch law enforcement authorities could temporarily close the alcohol section of supermarkets when they are repeatedly caught selling alcohol to minors. During 2013, this change raised public awareness for Ageviewers. As of the 1^st of Januari 2014 the legal age for both alcohol and tobacco in the Netherlands will be raised to 18 years. When sufficient progress is made in the execution of its current marketing plan, for which the next goal is to reach an expansion rate of over 16 new installations per month, the Company believes it will be able to start the next phase of its business plan: the implementation of Ageviewers in the United States and EU countries. Depending on the pace with which we develop our home market, we anticipate that we will be in a position to start exploring these markets in the course of 2014.

 

As we expect independent, smaller retail organizations to take the lead in the use of Ageviewers, it is unlikely that a significant percentage of the Company’s revenue will be derived from just one or a few customers during fiscal year 2014. The Company expects, however, that larger supermarket chains will gradually leave the concept of traditional age validation and chose the Ageviewers solution. In such cases, the Company intends to take the necessary precautions to prevent credit risks.

 

The Company spent approximately $13,410 on research and development in the fiscal year ended September 30, 2013. In addition HEM expended significant resources on research and development prior to its acquisition by the Company.

 

Discontinued operation

 

Even though the Company has discontinued its majority share in telecommunications in Spain, it has maintained a 10% stake in Teleconnect SA. During the fiscal year 2013, Teleconnect SA continued to provide prepaid voice telephone services to its customers.

 

Item 1A Risk Factors

 

Lack of profitability

 

We may not achieve or sustain profitability in the future. We have incurred substantial net losses and negative cash flow from operations since our inception. As of September 30, 2013, we had an accumulated deficit of $40,637,258 and had a stockholders' equity of $2,900,492. As shown in the accompanying consolidated financial statements, the Company had net losses of $3,479,332 in 2013 and $3,875,438 in 2012. As of September 30, 2013, the Company had a working capital deficit of $2,087,316 as compared to its working capital deficit as of September 30, 2012 of $11,132,125; a decrease of 81.2%.

 

Going concern

 

The Company has received a going concern opinion from its auditor.  It has not generated significant revenues from operations and there is no assurance that significant revenues will be generated in the future. The Company may not be able to continue as a going concern.

 

Need for additional funds

 

The Company disposed of its telecom activities in fiscal year 2010 and restructured its debt during fiscal years 2011, 2012 and again in 2013. With the disposition of the business line, the Company changed its main business. This change requires the Company to secure sufficient funding to front the implementation and acceptance period in the market of the new services. Looking forward, when entering new markets with new innovative service offerings, such as the Ageviewers solution, we may not succeed in attracting sufficient funds to successfully accomplish the transition that is necessary to create a viable situation.

 

Exit for investors

 

While the Company’s Common Stock is traded on the OTC Bulletin Board, such market is thin and there can be no assurance as to the prices at which the shares will trade or that such shares will trade at all.  The actual lack of liquidity of the Company’s stock inherently has the risk that shares may not find a buyer thus making it more difficult for shareholders to sell their shares.

 

The market: resistance

 

Despite the increasing need for measures protecting youth and limiting social damage, monitoring age limits effectively also meets resistance from political and other arenas. In many cases, the legal regulation is at odds with specific objectives in the alcohol and tobacco industries which can mobilize supply industries and distribution channels in their resistance. Examples include the advertising industry, or the supermarket branch, which is financially largely dependent on the marketing of alcohol and tobacco products.

 

The strategic resistance of the alcohol and tobacco industry to changes that may affect their main distribution; the loyalty of store owners and chains of stores to the traditional verification methods imposed by branch organizations and the price perception of clients with respect to Ageviewers are factors that might negatively affect the profitability and future of the Company.

 

Success dependent on success of Ageviewers

 

The primary sources of revenues of the Company are expected to be related to Ageviewers.  If the Company is not able to successfully market and sell Ageviewers, it will not generate sufficient revenues to survive.

 

Management and personnel

 

We currently rely on a small core management team. In the event that we grow, we must not only manage demands on this team but also increase management resources, among other things, to expand, train and manage our employee base and maintain close coordination among our technical, accounting, financing, marketing and sales staff. If any growth is not properly managed, management may be unable to adequately support our clients in the future.

 

If members of our senior management team or key personnel leave the Company, the Company’s ability to operate its business could be negatively affected. There can be no assurance that the Company will be successful in replacing management or key personnel in such events. Our future success depends to a significant extent on the continued services of the senior management and these key personnel. The loss of services or any other present or future key management or employee, could have a material adverse effect on our business. We do not maintain “key person” life insurance for any of our personnel.

 

 

Also, if our business grows, we might not be able to attract additionally required key employees or other highly qualified employees in the future. We have experienced this from time to time in the past, and we expect to continue to experience in the future difficulty in hiring and retaining highly-skilled employees with appropriate qualifications. If we do not succeed in attracting sufficient new personnel or retaining and motivating our current personnel, our ability to provide our services could diminish.

 

Sales Relationships

 

Management has identified that future expansion outside The Netherlands requires us to enter into partnerships with local parties. Also, our sales rely on the efforts of branch organizations that support the use of Ageviewers. If we are unable to expand and maintain our sales representative and third-party sales channel relationships, then our ability to sell and support our services may be negatively impacted. In addition, no assurances can be provided that these third parties are committed sufficiently to our business, that they will meet their sales targets or that they will not develop their own competitive services.

 

We may not be able to maintain our current relationships or form new relationships with third parties that supply us with clients, synergies, software or related products that are important to our success. Accordingly, no assurances are provided that our existing or prospective relationships will result in sustained business partnerships, successful offerings or the generation of significant revenues.

 

Suppliers

 

We depend on the supply of electronic components and parts from various suppliers. They have from time to time experienced short-term delays in providing the requested parts. There are no assurances that we will be able to obtain these components in the future within the time frames required by us at a reasonable cost. Any failure to obtain supplies on a timely basis and at a reasonable cost, or any interruption of local access services, could have an adverse effect on our final product and service level.

 

Service Disruptions

 

The Ageviewers solution requires real-time communications between the retail stores and the centralized validation center. If the network infrastructure of the service provider is disrupted or security breaches occur on our communications lines with our clients, we may lose clients or incur additional liabilities.

 

We may in the future experience interruptions in service as a result of fire, natural disasters, power loss, or the accidental or intentional actions of service users, current and former employees and others. Although we continue to implement industry-standard disaster recovery, security and service continuity protection measures, including the physical protection of our offices and equipment, similar measures taken by others have been insufficient or circumvented in the past. There can be no assurance that our measures will be sufficient or that they will not be circumvented in the future. Unauthorized use of our network could potentially jeopardize the security of our computer systems. Furthermore, addressing security problems may result in interruptions, delays or cessation of services to our clients. These factors may result in liability to us or our clients.

 

Competition.

 

The markets we serve are highly competitive and our competitors, or future competitors, may have much greater resources to commit to growth, new technology and marketing. We cannot be sure that we will have the resources or expertise to successfully counter competition. Our competitors may be able to:

 

	*	develop and expand their, or alternative products and service offerings more quickly;
	*	adapt better to new or emerging technologies and changing client needs;
	*	take advantage of acquisitions and other opportunities more readily;
	*	devote greater resources to the marketing and sale of their services and products; and
	*	adopt more aggressive pricing policies

 

Variable Revenues and Operating Results

 

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, not all of which are in our control. These factors include:

 

	*	political climate at any point in time;
	*	the size and timing of significant equipment and software purchases;
	*	the timing of new service offerings;
	*	changes in our pricing policies;
	*	the timing and completion of the expansion of our service offering;
	*	the length of our contract cycles; and
	*	our success in expanding our sales force and expanding our distribution channels.

 

In addition, a relatively large portion of our expenses are fixed in the short-term and therefore our results of operations are particularly sensitive to fluctuations in revenues. Due to the factors noted above and other risks discussed in this section, you should not rely on period-to-period comparisons of our results of operations. Quarterly results are not necessarily meaningful and you should not unduly rely on them as an indication of future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our Common Stock may not increase or may fall. Please see Management's Discussion and Analysis of Financial Condition or Results of Operations.

 

Governmental Regulation

 

Governments are slowly developing stricter laws and increasing the penalties applied to those that sell alcohol or tobacco to minors yet some fail in the enforcement of those same laws. Lack of penalties and law enforcement significantly influence demand for effective age verification systems. No assurances can be provided that stricter laws will be implemented or existing laws will not be abolished. Also, no guarantees exist that governments will impose stricter law enforcement or that existing law enforcement will not be abolished.

 

In addition, there are no guarantees that privacy laws might not be changed in such way that processing personal data for the purpose of preventing minors to buy alcohol or tobacco will be illegal. In such circumstances, it would be impossible for the Company to continue its operations in age validation.

 

Consumer susceptibility for privacy issues

 

Abuse of personal data in any other system, such as camera systems or body scanners, might affect the public opinion on the automated processing of personal data and images. If the public opinion would turn against systems that process these data, this might severely affect our continuity.

 

Penny Stock Trading Rules.

 

When the trading price of the Company's Common Stock is below $5.00 per share, the Common Stock is considered to be “penny stocks” that are subject to rules promulgated by the Securities and Exchange Commission (Rule 15-1 through 15g-9) under the Securities Exchange Act of 1934. These rules impose significant requirements on brokers under these circumstances, including: (a) delivering to customers the Commission's standardized risk disclosure document; (b) providing to customers current bid and offers; (c) disclosing to customers the brokers-dealer and sales representatives compensation; and (d) providing to customers monthly account statements.

 

Future Sales of Our Common Stock May Depress Our Stock Price

 

The market price of our Common Stock could decline as a result of sales of substantial amounts of our Common Stock in the public market in the future. In addition, it is more difficult for us to raise funds through future offerings of Common Stock. There were 8,884,380 shares of our Common Stock outstanding as “restricted securities” as defined in Rule 144 as of September 30, 2013, which will be available for sale in the future. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

Technological Changes

 

Global industries are subject to rapid and significant technological changes. We cannot predict the effect of technological changes on our business. We will rely in part on third parties, for the development of, and access to everything from communications and networking technologies, to hardware, components and parts for user terminals. We expect that new services and technologies applicable to our market will emerge. New products and technologies may be superior and/or render obsolete the products and technologies that we currently use to deliver our services. We must anticipate and adapt to technological changes and evolving industry standards. We may be unable to obtain access to new technologies on acceptable terms or at all, and we may be unable to obtain access to new technologies and offer services in a competitive manner. Any new products and technologies may not be compatible with our technologies and business plan.

 

Voting Control

 

The largest single shareholder of the Company as of September 30, 2013, CCR Beheer BV owned approximately 27.8% of the Company’s outstanding Common Stock. During 2013, this stockholder has financially made possible the execution of the marketing plan as described earlier. As of September 30, 2013, Mr. Leo Geeris, Quick Holdings BV and Hombergh Holdings BV remained significant shareholders of the Company with 17.4%, 9.3% and 7.6% of the common stock of the Company, respectively. Subsequent to September 30, 2013, with the issuance of stock in relation to the closing of several independent private placements coinciding with the retirement of stock from Quick Holdings BV and Hombergh Holdings BV, the percentage ownership of Mr. Geeris increased slightly to 17.5% while that of Quick Holdings BV decreased to 5,5% and that of Hombergh Holdings BV decreased to 1.5%.

 

Item 1B    Unresolved Staff Comments

 

None

 

Item 2.      Properties

 

The Company’s principal executive offices were located during fiscal 2013 at Oude Vest 4, 4811 HT, Breda, The Netherlands.

These facilities are leased at commercial rates under standard commercial leases in the geographic area. We believe that suitable space for these operations is generally available on commercially reasonable terms as needed.

 

Item 3.      Legal Proceedings

 

In the normal course of its operations, the Company, has been named in legal actions seeking monetary damages. During fiscal 2013, the Company continues its legal actions in The Netherlands against parties which owe money to the Company. In one of these cases, relating to the Company’s past telecommunications business, a party filed during fiscal 2010, in defense, a counterclaim against the Company. There have been no new events in this area. While the outcome of these matters cannot be estimated with certainty, management does not expect, based upon consultation with legal counsel, that they will have a material effect on the Company's business or financial condition or results of operations.

 

Item 4.      (Removed and Reserved)

 

 

 

 

PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

General

 

There is no established public trading market for the Common Stock of the Company; however, the Common Stock is currently traded on the OTC Bulletin Board under the symbol TLCO.QB.  As of December 10, 2013, there were approximately 117 holders of Common Stock of the Company. The Company has not paid any dividends on its shares during the two most recent fiscal years.

 

Market Price

 

The following table sets forth the range of high and low closing bid prices per share of the Common Stock of the Company (reflecting inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions) as reported by OTC Bulletin Board for the periods indicated.

 

		High Closing Bid Price				Low Closing Bid Price
Fiscal Year Ended September 30, 2012
1 st Quarter		$	0.35			$	0.35
2 nd Quarter		$	0.35			$	0.20
3 rd Quarter		$	0.31			$	0.20
4 th Quarter		$	0.31			$	0.20
Fiscal Year Ended September 30, 2013
1 st Quarter		$	0.20			$	0.20
2 nd Quarter		$	0.20			$	0.20
3 rd Quarter		$	0.20			$	0.20
4 th Quarter		$	0.20			$	0.10

 

Stock Option, SAR and Stock Bonus Consultant Plan

 

On October 8, 2010, the shareholders approved the 2010 Stock Option, SAR and Stock Bonus Plan (the “Plan”) authorizing 500,000 shares of Common Stock to be reserved for issuance under the Plan. The Plan allows us to issue awards as determined by the stock committee of the Company’s board of directors of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to our consultants which may be subject to restrictions. This plan expired on December 31, 2012 with 18,864 shares unissued.

 

Sale of Unregistered Securities

 

During the fiscal year ended September 30, 2013, the Company sold 2,843,709 shares of its common stock for $1,943,297 to qualified investors, of which 1,724,627 shares ($746,695) are subscribed but unissued. The unissued shares were issued subsequent to year-end.

 

All shares were sold to accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended.  There were no underwriters involved and no underwriting discounts or commissions were paid.

Item 6. Selected Financial Data

 

The following table sets forth certain operating information regarding the Company.

 

		Year Ended				Year Ended
		September 30, 2013				September 30, 2012
Revenues		$	355,680			$	143,910
Cost of sales		$	372,093			$	199,089
Selling, general and administrative		$	1,866,089			$	2,208,092
Depreciation		$	1,237,535			$	1,229,934
Loss on investment		$	(35,600	)		$	(33,164	)
Interest expense – related parties		$	(322,938	)		$	(370,536	)
(Expense) benefit from income taxes		$	—			$	(330	)
Net loss		$	(3,479,332	)		$	(3,875,768	)
Comprehensive loss		$	(3,581,274	)		$	(3,755,439	)
Net loss per share		$	(0.36	)		$	(0.52	)

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere herein.

 

Forward Looking Statements

 

When used in this annual report on Form 10-K and in our other filings with the SEC, in our press releases and in oral statements made with the approval of one of our authorized executive officers, the words or phrases “will likely result”, “plans”, “will continue”, “is anticipated”, “estimated”, “expect”, “project” or “outlook” or similar expressions (including confirmations by one of our authorized executive officers of any such expressions made by a third party with respect to us) are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties, including but not limited to our history of losses, our limited operating history, our need for additional financing, rapid technological change, and an uncertain market, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the factors described below and in the Description of Business section of this annual report. We undertake no obligation to release publicly revisions we made to any forward-looking statements to reflect events or circumstances occurring after the date of such statements. All written and oral forward-looking statements made after the date of this annual report and/or attributable to us or persons acting on our behalf are expressly qualified in their entirety by this discussion.

 

Critical Accounting Policies

 

Our significant accounting policies are discussed in Note 2 to the financial statements. We consider the following accounting policies to be the most critical:

 

Estimates - The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the reselling and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We must make estimates of the collectability of accounts receivable. We analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or use difference estimates.

 

Impairment of Long-Lived Assets - The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Revenue Recognition - The Company recognizes revenue from narrowcasting and age validation services when services have been rendered and realization is assured. Revenue from the sale of multimedia hardware components from our Mediawizz subsidiary are recognized in the period in which title has passed and services have been rendered.

 

Accounting for Stock-Based Compensation - The Company accounts for employee equity awards under the fair value method. Accordingly, the Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock option awards, if any, are estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock awards, if any, are based on the fair value of the Company’s common stock on the date of the grant. The compensation expense for stock-based awards is reduced by an estimate of forfeitures and is recognized over the expected term of the award under a graded vesting method.

 

Variable Interest Entities - We analyze potential Variable Interest or Special-Purpose Entities in accordance with the guidance of FASB ASC 810-10, Consolidation of Variable Interest and Special-Purpose Entities. Once an entity is determined to be a Variable Interest Entity (VIE), the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. The Company has analyzed its investment in Giga and after analysis we have determined that, while Giga is a VIE as defined by FASB ASC 810-10, we are not the primary beneficiary, and therefore Giga is not required to be consolidated.

 

Overview

 

The Company’s business model involves the age validation of consumers when purchasing age restricted products, such as alcohol or tobacco. This age validation business is at the core of the Company’s strategic direction. Our revenues are derived from the sales and leasing of age validation equipment, the performance of age validation as well as the sale and maintenance of vending solutions (through Mediawizz), and the broadcasting of in-store commercial messages using the age validation equipment between age checks (through HEM). Our revenues and operating results will depend in the future upon government laws and mandates, performance and pricing of our products/services, relationships with the public and other factors.

 

Today, our existing revenues may be impacted by other factors including the length of our sales cycle, the timing of sales orders, budget cycles of our customers, competition, the timing and introduction of new versions of our products, the loss of, or difficulties affecting, key personnel and distributors, changes in market dynamics or the timing of product development or market introductions. These factors have affected our historical results to a greater extent than has seasonality. Combinations of these factors have historically influenced our growth rate and profitability significantly in one period compared to another, and are expected to continue to influence future periods, which may compromise our ability to make accurate forecasts.

 

Cost of sales consists of customer support costs, training and professional services expenses, and parts for the terminals; which consist of small display screens, metallic housings, PC’s, switches, small cameras similar to webcams, electronic components, cables, power supplies and software licenses amongst other items.

 

Our gross profit will continue to be affected by a variety of factors, including: the resistance from retailers to migrate from existing inefficient on-site age verification procedures, possible new competitors entering the market, the mix and average selling prices of products, maintenance and services, new versions of products, the cost of equipment, component shortages, and the mix of distribution channels to which our products and services are sold.  Our gross profit will be adversely affected if relevant laws and regulations are not readily adopted by the retail chains or are not enforced by local government.

 

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, legal and human resources personnel, professional fees and corporate expenses. We expect general and administrative expenses to increase as the Company expands its points of sale in Europe as well as when it prepares itself to enter the U.S. market.

 

Year Ended September 30, 2013, compared to year ended September 30, 2012

 

Assets - Total assets as of September 30, 2013 decreased by 16.1% or $1,033,465 to $5,388,233 from $6,421,698 at September 30, 2012. This decrease is due primarily to depreciation and amortization during the year of $1,237,535. Other notable changes in assets were a $146,821 decrease in inventory during the year related to the installation of equipment for a new vending customer offset by an increase in other receivables – related parties of $155,929 relating to payment of legal fees for application for patents held by Scipioo Holdings. The Company expects to purchase the patents or be repaid during the next fiscal year.

 

 

Liabilities  - Total liabilities as of September 30, 2013 decreased by $9,003,213 or 78.0% to $2,487,741 compared to $11,490,954 as of September 30, 2012. This result is due primarily to the decrease of $9,415,221 or 98.8% in related party loans as a consequence of the repurchase agreement of stock from a liquidator which includes the contribution of debt to capital.

 

Revenues - Revenues from continuing operations for the year ended September 30, 2013 amounted to $355,680 compared to $143,910 in the prior year; an increase of 147.2% or $211,770.

 

Current revenues were primarily derived from the sales of our vending solution, and to a lesser extent from the sales of calling credit through kiosks that Mediawizz custom built and installed in supermarkets for a Netherlands customer. Even though the Company decided to terminate calling credit business during the 2010 fiscal year, one contract continued to produce some revenue into the fiscal year ended September 30, 2013. Over the past year, the Company has focused on concluding the demonstration of the acceptance of the use of age validation by the general public.  The Company considers this an important investment in the future marketability of its age validation solution. As such, the Company did not anticipate generating significant revenue from this activity. In accordance with its business plan and after successfully demonstrating the effectiveness and acceptance of its age validation solution, the Company is now leading its marketing efforts towards a broad implementation of ageviewers in the home market. To date, 50 of the stores using Ageviewers, are equipped with narrowcasting equipment leading initial income from this activity. In addition, the sale of a vending solution for airports and railway stations contributed to the sales revenue this fiscal year.

 

Pricing Policies - The pricing for our products and services from continuing business may vary depending on which combination of services is provided, the speed of service, geographic location and capacity utilization. It is not the intention of the Company to enter “price wars”, but the Company will market its Ageviewers solution at reduced cost at strategically selected locations if the reduced revenues can be offset with revenue generated from in-store commercial messages or market surveys, for example. The Company strives to differentiate itself with the effectiveness of its service and by achieving more added value from the hardware and connectivity installed with regards to age validation.

 

Client Contracts - Our contracts with customers include an agreed-upon price schedule that details both fixed and variable prices for contracted services. Our sales representatives can add additional services to existing contracts, enabling clients to increase the number of locations, for instance. Recent contracts for the age-verification service have been for a 36-month period. Most contracts entered into in 2012 and 2013 provide the Ageviewer services in return for the rights to advertising revenue from the store.

 

Cost of Sales - Cost of sales for the year ended September 30, 2013 amounted to $372,093 as compared to $199,089 for the year ended September 30, 2012; an increase of $173,004 due to the costs of the sale of vending equipment associated to the increase in sales. Cost of sales increased by 86.9% while revenues increased by 147.2%, mainly due to the majority of the cost of our plan to evidence the effectiveness and acceptance of Ageviewers by the general public phasing out during FY 2012, and the sales of our vending solution ramping up. The cost of sales in 2013 included a charge for slow moving inventory of $47,322 compared to a charge of $44,343 in 2012.

 

The cost of sales are primarily derived from the cost of machines as well as from maintaining the contracts previously mentioned.  The allocation of such costs are in line with the Company’s strategic plan. These expenditures have been efficient in achieving the results to date in the area of technical adaptation to market requirements, market exposure and user acceptance. The Company expects its costs of sales to increase in line with the installations of Ageviewers in supermarkets under the new commercial conditions. Accordingly, we reflected a gross loss during fiscal 2013 of $16,413 compared to gross loss in 2012 of $55,179 .

 

Selling, General and Administrative - Selling, general and administrative expenses during 2013 were $1,866,089, a decrease of $342,003 or 15.5% from the prior year’s operating expenses of $2,208,092. This decrease in selling, general and administrative expenses is primarily due to the reduction in the cost of existing and ongoing professional services as well as management fees.

 

Interest Expense  -  Interest expense for the year ended September 30, 2013 was $322,938 compared to $370,536 for the prior year; a decrease of $47,598 or 12.8%. This decrease was due primarily to a decrease in related party interest bearing loans during 2013.

 

Liquidity

 

On July 31, 2013 the Company entered into an agreement with the Trustee of 2,293,067 shares, representing 24.14% of the Company’s issued and outstanding shares, in the name of Hombergh Holdings BV and Quick Holdings BV, such that these shares are to be repurchased by the Company for a total of €500,000 payable as described below.

 

 

In exchange, the Trustee agreed to irrevocably forgo his right to claim the return of 9,415,232 in loans made to the Company by Hombergh Holdings BV and Quick Holdings BV and the associated interest accrued up to the date of the agreement of $675,072 on receipt of a €200,000 installment which was paid with the signing of the agreement. The second installment of €200,000 was paid to the Trustee on September 30th, 2013 and the third installment of €100,000 was paid subsequent to year end. The trustee returned 1,667,733 share certificates to the Company and they were retired during the year ended September 30, 2013. The Company recorded the transaction as a contribution to capital by the Trustee.

 

During the year ended September 30, 2013 the Company sold promissory notes with a face value of $594,963 (€440,550) and 1,874,679 shares of its common stock together as a package to qualified Dutch investors for $1,189,926 (€881,100). The purchase price was allocated to the notes and stock based on the relative fair value of each with $779,583 allocated to the shares and $410,343 allocated to the promissory notes, therefore a discount on the notes of $184,620 was record and is being amortized over 1 year. Loan discount amortization of $28,705 is included in interest expense for the year ended September, 30, 2013. The promissory notes bear 6% interest and are due when the Company has positive cash flow from operations.

 

Discussion of the statement of cash flows:

 

Net cash used in operating activities

 

In 2013, the Company used $1,754,374 in operating activities, a 2.2% increase, as compared to $1,717,003 in 2012. During FY2013 the Company reduced general and administrative expenses, deferred paying related party accruals and reduced inventory to decrease the cash used in operating activities.

 

Net cash used in investing activities

 

The Company used $25,726 in its investing activities in 2013 for the purchase of patents and advances to Giga, offset by the disposal of equipment. In 2012 the majority of the cash used in investing activities was used to purchase fixed assets to be used in our HEM subsidiary.

 

Net cash provided by financing activities

 

The Company generated cash from financing activities of $1,843,967 in 2013 primarily from proceeds received from stock sales totaling $1,940,124, (net of syndication fees of $3,174), and through loans from related parties of $461,662 offset by the repurchase and cancellation of stock for $578,077. During 2012, the Company generated cash from financing activities of $1,850,108 in 2012 primarily through loans from related parties of $336,180 as well as from private placement totaling $1,294,118 to non-U.S. resident professional investors. As a result of the progress being made in the development of the business in The Netherlands, the Company was able to raise funds from stock sales and retire certain related party debt. As such, this change demonstrates less dependency on related parties for financing and a greater interest from third party investors.

 

The ability of the Company to satisfy its obligations and to continue as a going concern will depend in part upon its ability to raise funds through the sale of additional shares of its Common Stock, to increase borrowing, and to reach a profitable level of operations. The Company’s financial statements do not reflect adjustments that might result from its inability to continue as a going concern and these adjustments could be material.

 

The Company’s capital resources have been provided primarily by capital contributions from stockholders, stockholders’ loans, the conversion of outstanding debt into Common Stock of the Company, and services rendered in exchange for Common Stock.

 

Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (FASB) issued guidance to amend and simplify the rules related to testing indefinite-lived intangible assets.  The revised guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is more likely than not that the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

 

 

In March 2013, FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters (Topic 830)-Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, (“ASU 2013-05”).  This amendment clarifies the applicable guidance for the release of cumulative translation adjustment into net earnings. When an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the entity is required to apply the guidance in FASB Accounting Standards Codification (ASC) Topic 830-30 to release any related cumulative translation adjustment into net earnings.  ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

During the year ended September 30, 2013, related parties advanced the Company $285,778 to cover short-term normal operating costs. The advances bear interest at the rate of 6%.

 

During the year ended September 30, 2013, the Company sold 2,843,709 shares of its common stock for $1,943,297 to qualified investors. Of these shares, 1,724,627 were issued subsequent to year end and the remaining issued before year-end.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 8.   Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Teleconnect Inc.

 

We have audited the accompanying consolidated balance sheets of Teleconnect Inc. and its subsidiaries (the “Company”) as of September 30, 2013 and 2012, and the related consolidated statements of comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two year period ended September 30, 2013. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teleconnect Inc. and its subsidiaries as of September 30, 2013 and 2012, and the consolidated results of its operations and its consolidated cash flows for each of the years in the two year period ended September 30, 2013 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 18 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency in addition to a working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 18. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/Coulter & Justus, P.C.

 

December 27, 2013

 

Knoxville, Tennessee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TELECONNECT, INC.

CONSOLIDATED BALANCE SHEET

 

		September 30,				September 30,
		2013				2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	83,886			$	38,067
Accounts receivable – trade			36,373				29,187
Other receivables – related party			155,929				—
Inventory, work in process (net of reserve for slow moving inventory
of $186,851 and $132,258 at September 30, 2013 and 2012,respectively)			65,460				212,281
Prepaid taxes			25,528				28,931
Prepaid expenses			33,249				50,363
Total current assets			400,425				358,829
PROPERTY AND EQUIPMENT, NET			1,587,033				2,419,386
OTHER ASSETS:
Due from Giga Matrix Holding, B.V.			567,345				565,044
Investment in Giga Matrix Holdings B.V.			—				—
Goodwill			419,900				402,022
Patents and tradenames, net			2,413,530				2,676,417
Long-term notes receivable (net of allowance for bad debts
of $568,420 and $544,219 at September 30, 2013 and 2012, respectively)			—				—
		$	5,388,233			$	6,421,698
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable – trade		$	239,644			$	328,904
Accounts payable – related party			305,781				305,154
Accrued liabilities:
Related parties			474,819				669,731
Other			67,158				100,044
Deferred Revenue			4,401				56,745
Notes payable			546,953				504,270
Loans from related parties (net of loan discount of $168,685 and $0 at September 30, 2013 and 2012, respectively).			848,985				9,526,106
Total current liabilities			2,487,741				11,490,954
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; par value of $0.001, 5,000,000 shares authorized, no shares outstanding			—				—
Common stock; par value of $0.001, 500,000,000 shares authorized, 8,148,631 and 8,167,415 shares outstanding at September 30, 2013 and 2012, respectively, 1,724,627 and 500,067 shares subscribed and unissued ($746,695) and ($230,886) at September 30, 2013 and 2012, respectively			9,873				8,667
Additional paid-in capital			46,451,208				34,944,026
Accumulated deficit			(40,637,258	)			(37,157,926	)
Accumulated other comprehensive loss			(2,923,331	)			(2,864,023	)
Total stockholders' equity (deficit)			2,900,492				(5,069,256	)
		$	5,388,233			$	6,421,698

 

The accompanying notes are an integral part of these financial statements.

 

TELECONNECT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED SEPTEMBER 30, 2013 and 2012

 

		2013				2012
SALES		$	355,680			$	143,910
COST OF SALES
Cost of sales			324,771				154,746
Inventory allowance			47,322				44,343
Total cost of sales			372,093				199,089
GROSS LOSS			(16,413	)			(55,179	)
OPERATING EXPENSES:
Selling, general and administrative expenses			1,866,089				2,208,092
Depreciation and amortization			1,237,535				1,229,934
Total operating expenses			3,103,624				3,438,026
LOSS FROM OPERATIONS			(3,120,037	)			(3,493,205	)
OTHER INCOME (EXPENSES):
Loss on investment			(35,600	)			(33,164	)
Other income			(757	)			21,467
Interest expense – related parties			(322,938	)			(370,536	)
LOSS BEFORE INCOME TAXES			(3,479,332	)			(3,875,438	)
(EXPENSE) BENEFIT FOR INCOME TAXES							(330	)
NET INCOME (LOSS)		$	(3,479,332	)		$	(3,875,768	)
BASIC AND DILUTED LOSS PER SHARE:		$	(0.36	)		$	(0.52	)
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING			9,555,465				7,434,666
THE COMPONENTS OF COMPREHENSIVE LOSS:
Net loss		$	(3,479,332	)		$	(3,875,768	)
Foreign currency translation adjustment			(89,861	)			182,317
Tax effect on currency translation			30,553				(61,988	)
COMPREHENSIVE LOSS		$	(3,538,640	)		$	(3,755,439	)

 

The accompanying notes are an integral part of these financial statements.

 

 

TELECONNECT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

 

		Common Stock																Accumulated
		Number				$ 0.001				Additional								Other				Total
		of				par				Paid-In				Accumulated				Comprehensive				Stockholders'
		Shares				Value				Capital				Deficit				Loss				Equity (Deficit)
Balance, October 1, 2011			6,599,133				6,599				33,579,766				(33,282,158	)			(2,984,352	)			(2,680,145	)
Common stock issued for services			361,052				361				71,849				—				—				72,210
Sale of common stock			1,207,230				1,207				1,062,025				—				—				1,063,232
Commons stock subscribed but unissued			500,067				500				230,386				—				—				230,886
Foreign currency translation adjustment, net of tax			—				—				—				—				120,329				120,329
Net loss			—				—				—				(3,875,768	)			—				(3,875,768	)
Balance, September 30, 2012			8,667,482			$	8,667			$	34,944,026			$	(37,157,926	)		$	(2,864,023	)		$	(5,069,256	)
Common stock issued for services			50,000				50				55,988				—				—				56,038
Sale of common stock			1,119,082				1,119				1,195,483				—				—				1,196,602
Common stock subscribed but unissued			1,724,627				1,725				744,970				—				—				746,695
Repurchase of Common stock			(1,842,733	)			(1,843	)			(576,234	)			—				—				(578,077	)
Issuance of stock related to repurchase agreement			150,000				150				(150	)			—				—				—
Stock issued due to anti-dilution rights			4,800				5				(5	)			—				—				—
Syndication fees			—				—				(3,174	)			—				—				(3,174	)
Loans contributed as capital			—				—				10,090,304				—				—				10,090,304
Foreign currency translation
adjustment net of tax			—				—				—				—				(59,308	)			(59,308	)
Net loss			—				—				—				(3,479,332	)			—				(3,479,332	)
Balance, September 30, 2013			9,873,258			$	9,873			$	46,451,208			$	(40,637,258	)		$	(2,923,331	)		$	2,900,492

  

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

TELECONNECT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2013 and 2012

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,479,332	)		$	(3,875,768	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,237,535				1,229,934
Loan discount amortization			28,705				—
Stock-based compensation			56,038				72,210
Inventory allowance			47,323				44,343
Loss on sale and disposal of fixed assets			95,534				—
Loss on equity investments			35,600				33,164
Change in operating assets and liabilities
Accounts receivable – trade			(5,888	)			75,729
Accounts receivable – other			(155,929	)			54,982
Inventory			108,938				(111,379	)
Prepaid expenses			19,354				(18,557	)
Prepaid taxes			4,690				55,925
Accounts payable			(116,830	)			112,606
Accrued liabilities and income taxes payable			413,040				553,063
Deferred revenue			(43,152	)			56,745
Net cash used in operating activities			(1,754,374	)			(1,717,003	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment on loan to Giga Matrix			—				647
Advances to Giga Matrix			(12,773	)			(22,562	)
Purchase of patents			(35,743	)			(3,462	)
Purchase of property and equipment			—				(175,496	)
Proceeds from disposal of equipment			22,790				—
Net cash provided by (used in) investing activities			(25,726	)			(200,873	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock			1,940,124				1,294,118
Repurchase and cancellation of stock			(578,077	)			—
Loan proceeds			20,258				219,810
Loan proceeds from related parties			461,662				336,180
Net cash provided by financing activities			1,843,967				1,850,108
EFFECT OF EXCHANGE RATE			(18,048	)			(11,310	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			45,819				(79,078	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			38,067				117,145
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	83,886			$	38,067

 

The accompanying notes are an integral part of these financial statements.

 

TELECONNECT INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2013

 

1. THE COMPANY

 

Teleconnect Inc. (the “Company”, “Teleconnect”, “we”, “us” or “our”) was incorporated under the laws of the State of Florida on November 23, 1998. The Company is engaged in remotely performing age verification checks for retail stores and supermarkets in order to reduce the possibilities of selling alcohol and tobacco to under aged youths. Substantially all operations of the Company are conducted in The Netherlands.

 

2. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

 

The consolidated financial statements include the accounts of Teleconnect, Inc. and its subsidiaries MediaWizz, Wilroot, B.V. (Wilroot) and Hollandsche Exploitatie Maatschappij (HEM).  All significant inter-company balances and transactions have been eliminated.

 

Accounts and notes receivable -

 

Trade accounts receivable and notes receivable are recorded at their estimated net realizable values using the allowance method. The Company generally does not require collateral. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. When accounts are determined to be uncollectible they are charged off against an allowance for doubtful accounts. Also, accounts determined to be uncollectible are put in nonaccrual status whereby interest is not accrued on those accounts. Credit losses, when realized, have been within the range of the Company’s expectations. As of September 30, 2013, one customer accounted for 68% of accounts receivable.  As of September 30, 2012, one customer accounted for 63% of accounts receivables. One customer accounted for 71% and 39% of sales in the year ended September 30, 2013 and 2012, respectively.

 

Advertising Costs -

 

Advertising and sales promotion costs are expensed as incurred. There were $53,384 in advertising and sales promotion costs in 2013 and $69,393 in 2012.

 

Cash Equivalents -

 

The Company considers deposits that can be redeemed on demand and highly liquid investments that have original maturities of less than three months, when purchased, to be cash equivalents. Substantially all cash on hand at September 30, 2013 was held in European financial institutions and are insured by the Dutch Central Bank, “De Nederlandsche Bank (DNB)” which, under its Deposit Guarantee Scheme,  guarantees deposits up to € 100,000 held by accountholders of a Dutch bank that becomes unable to meet its obligations.

  

Revenue Recognition -

 

The Company recognizes revenue from the sale of multimedia hardware components in the period in which title has passed and services have been rendered. The Company recognizes revenue from narrowcasting and age validation services when services have been rendered and realization is assured.

 

Earnings per Share -

 

Basic net income (loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents, because their exclusion would be anti-dilutive.

 

Estimates -

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

 

Foreign Currency Adjustments -

 

The financial position and results of substantially all foreign operations are consolidated using the local currency (the Euro) in which the Company operates as a functional currency. The financial statements of foreign operations are translated using exchange rates in effect at year-end for assets and liabilities and average exchange rates during the year for results of operations. The related translation adjustments are reported as a separate component of shareholders’ equity.

 

Income Taxes -

 

The Company uses the asset/liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company’s policy is to classify the penalties and interest associated with uncertain tax positions, if required, as a component of its income tax provision.

 

Inventories -

 

Inventories are stated at the lower of cost or market with cost determined on the first in, first out basis.

 

Property and equipment -

 

Property and equipment is stated at cost except for assets acquired using purchase accounting, which are recorded at fair value. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expenses as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gains or losses included in the results of operation for the respective period. Depreciation is computed on a straight line basis over the useful life which is 3 to 5 years.

 

Goodwill -

 

Goodwill on acquisition is initially measured as the excess of the cost of the business acquired, including directly related professional fees, over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. The Company’s acquisitions of the assets of MediaWizz, in 2007 resulted in recording goodwill of $419,900 (€310,922).

 

The Company evaluates the carrying value of goodwill at least annually, based on qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that goodwill is impaired.  If, after assessing the totality of events and circumstances, the Company concludes that it is more likely than not that goodwill is impaired, the Company will compare the fair value of the operating business to its carrying value, including goodwill. The Company typically uses a discounted cash flow model to determine the fair value of an operating business, using assumptions in the model it believes to be consistent with those used by hypothetical market participants. If the carrying amount of the operating businesses goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to the carrying amount of the goodwill, less its implied fair value. Any impairment charge is recognized immediately in the income statement and is not subsequently reversed. For the years ended September 30, 2013 and 2012, the Company did not incur any charges for impairment.

 

Intangible Assets

 

The Company identifies intangible assets as identifiable non-monetary assets that cannot be physically measured. The amounts recorded as intangible assets will be amortized over the useful lives or contractual commitments of these assets. Impairment to the values of these assets will be measured on a regular basis and if there is an identifiable impairment, it will be recognized immediately.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Variable Interest Entities -

 

The Company analyzes any potential variable interest or special-purpose entities in accordance with the guidance of FASB ASC 810-10, Consolidation of Variable Interest and Special-Purpose Entities. Once an entity is determined to be a variable interest entity (VIE), the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. The Company has analyzed its investment in Giga (see Note 17) and after analysis we have determined that, while Giga is a VIE as defined by FASB ASC 810-10, we are not the primary beneficiary, and therefore Giga is not required to be consolidated.

 

Fair value of financial instruments –

 

The Company applies accounting guidance that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. The guidance defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2013 and 2012 the fair value of cash, accounts receivable, other receivables, accounts payable, notes payable, and accrued expenses approximated carrying value due to the short maturity of these instruments.

 

Accounting for Stock-Based Compensation –

 

The Company accounts for employee equity awards under the fair value method. Accordingly, the Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock option awards, if any, are estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock awards, if any, are based on the fair value of the Company’s common stock on the date of the grant. The compensation expense for stock-based awards is reduced by an estimate of forfeitures and is recognized over the expected term of the award under a graded vesting method.

 

3. RECENTLY ISSUED ACCOUNTING STANDARDS

 

In July 2012, The Financial Accounting Standards Board (FASB) issued guidance to amend and simplify the rules related to testing indefinite-lived intangible assets.  The revised guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is more likely than not that the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

 

In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters (Topic 830)-Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, (“ASU 2013-05”).  This amendment clarifies the applicable guidance for the release of cumulative translation adjustment into net earnings. When an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the entity is required to apply the guidance in FASB Accounting Standards Codification (ASC) Topic 830-30 to release any related cumulative translation adjustment into net earnings.  ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

4. OTHER RECEIVABLES – RELATED PARTY

 

Other receivables – related party consists of legal fees for a patent application for Scipioo Holdings, a Company controlled by an officer of the Company. The Company will be purchasing the patents from Scipioo Holdings in the next fiscal year or the legal fees will be repaid to the Company.

 

5.  NOTES RECEIVABLE

 

In February 2007, the Company loaned $568,420 to a business development firm with a maturity date of February 2009. The note is in default and the Company has pursued legal action for collection. The amount (including unpaid interest) was reserved as uncollectible as of September 30, 2013 and 2012.

 

6. PROPERTY AND EQUIPMENT

 

Property and equipment was comprised of the following as of September 30:

 

		2013				2012
Software		$	3,161,629			$	3,021,826
Kiosks & terminals			714,142				900,316
Computers			46,793				64,351
Office equipment			18,830				18,065
			3,941,394				4,004,558
Less: Accumulated depreciation			(2,354,361	)			(1,585,172	)
Net property and equipment		$	1,587,033			$	2,419,386

 

 

Depreciation and amortization of $821,620 and $818,521 were included in the consolidated financial statements for the years ended September 30, 2013 and 2012, respectively.

 

7. PATENTS AND TRADE NAMES

 

The components of patents and trade name assets as of September 30, 2013:

 

		Weighted- Average Useful Life (in years)				Gross Carrying Amount				Accumulated Amortization				Net
September 30, 2013
Finite-lived intangible assets
Terminal and kiosk hardware designs			5			$	661,731			$	(391,880	)		$	269,851
Patents and processes			10				1,981,765				(568,513	)			1,413,252
Trade names			10				1,037,677				(307,250	)			730,427
Total						$	3,681,173			$	(1,267,643	)		$	2,413,530

 

The components of patents and trade name assets as of September 30, 2012:

 

		Weighted- Average Useful Life (in years)				Gross Carrying Amount				Accumulated Amortization				Net
September 30, 2012
Finite-lived intangible assets
Terminal and kiosk hardware designs			5			$	633,557			$	(248,481	)		$	385,076
Patents and processes			10				1,853,143				(360,479	)			1,492,664
Trade names			10				993,496				(194,819	)			798,677
Total						$	3,480,196			$	(803,779	)		$	2, 676,417

 

Total amortization of $415,915 and $424,869 was included in the consolidated financial statements for the year ended September 30, 2013 and 2012. Amortization expense for these intangible assets in each of the next five years is expected to be approximately 2014:$416,000, 2015:$416,000, 2016:$292,000, 2017:$287,000 and 2018:$287,000 annually.

 

8. LOANS FROM RELATED PARTIES

 

During the years ended September 30, 2013 and 2012, the Company received $51,319 and $336,180, respectively, in additional short term loans from related parties, consisting principally of shareholders, net of currency translations adjustments. These loans are due on demand and do not accrue interest.

 

In connection with the Company’s stock repurchase agreement detailed in Note 13 the Trustee agreed to irrevocably forgo his right to claim the return of $9,415,232 in loans made to the Company by Hombergh Holdings BV and Quick Holdings BV and the associated interest accrued up to the date of the agreement of $675,072 on receipt of a €200,000 installment which was paid with the signing of the agreement on July 31, 2013. The Company recorded the transaction as a contribution to capital by the Trustee.

 

During the year ended September 30, 2013 the Company sold promissory notes with a face value of $594,963 (€440,550) and 1,874,679 shares of its common stock together as a package to qualified investors for $1,189,926 (€881,100). The purchase price was allocated to the notes and stock based on the relative fair value of each with $779,583 allocated to the shares and $410,343 allocated to the promissory notes, therefore a discount on the notes of $184,620 was record and is being amortized over 1 year. Loan discount amortization of $28,705 is included in interest expense for the year ended September, 30, 2013. The promissory notes bear 6% interest and are due when the Company has positive cash flow from operations.

 

The weighted average interest rate of the loans from related parties for the year ended September 30, 2013 was 4.4%.  

 

9. NOTE PAYABLE

 

As of September 30, 2013 and 2012 the Company has three short-term bridge loans totaling $546,953 and $504,270, respectively, from potential investors. The notes bear interest between 0% and 8% per year and are due on demand.

 

10. LEASES

 

The Company leases its office, warehouse space and vehicles under leases expiring 2014 through 2016.  The future minimum lease payments required under the lease in the next three years are $58,014, $32,973, and $8,243.  Total rent expense for the years ended September 30, 2013 and 2012 were $79,994 and $77,375, respectively.

 

11. LITIGATION AND CONTINGENT LIABILITIES

 

In the normal course of its operations, the Company may, from time to time, be named in legal actions seeking monetary damages. While the outcome of these matters cannot be estimated with certainty, management does not expect, based upon consultation with legal counsel, that they will have a material effect on the amounts recorded in the consolidated financial statements.

 

12. PREFERRED STOCK

 

The Company has 5,000,000 shares of authorized and unissued Preferred Stock with par value of $0.001, which is noncumulative and nonparticipating. No shares of preferred stock were issued and outstanding as of September 30, 2013 or 2012.

 

13. EQUITY TRANSACTIONS

 

During the year ended September 30, 2013 the Company sold 969,030 shares of its common stock for $1,163,714 to qualified investors of which 194,030 shares ($169,187) are subscribed but unissued.

 

During the year ended September 30, 2013 the Company issued 50,000 shares of its common stock valued at $56,038 for services.

 

During the year ended September 30, 2013 the Company issued 1,874,679 shares of its common stock in relation to the sale of common stock and promissory note packages to qualified investors (See Note 8). The purchase price was allocated to the notes and stock based on the relative fair value of each with $779,583 allocated to the shares and $410,343 allocated to the promissory notes.

 

On July 1, 2013 the Company repurchased 175,000 shares of its common stock for $42,476.

 

On July 31, 2013 the Company entered into an agreement with the Trustee of 2,293,067 shares, representing 24.14% of the Company’s issued and outstanding shares, in the name of Hombergh Holdings BV and Quick Holdings BV, such that these shares are to be repurchased by the Company for a total of €500,000 payable as described below.

 

In exchange, the Trustee has agreed to irrevocably forgo his right to claim the return of €7,608,938 in loans made to the Company by Hombergh Holdings BV and Quick Holdings BV and the associated interest accrued up to the date of the agreement on receipt of a €200,000 installment which was paid with the signing of the agreement. The second installment of €200,000 was paid to the Trustee on September 30th, 2013 and the third installment of €100,000 subsequent to year end. The trustee has returned 1,667,733 share certificates to the Company and these were retired during the year ended September 30, 2013.

 

During the year ended September 30, 2012 the Company sold 1,707,297 shares of its common stock for $1,294,118 to qualified investors of which 500,067 shares ($230,886) are subscribed but unissued. The subscribed shares were issued subsequent to September 30, 2012.

 

See note 14 for details of common stock issued under the 2010 Stock Option, SAR and Stock Bonus Plan during the year ended September 30, 2012.

 

14. 2010 STOCK OPTION, SAR AND STOCK BONUS PLAN

 

On October 8, 2010, the shareholders approved the 2010 Stock Option, SAR and Stock Bonus Plan (the “Plan”) authorizing 500,000 shares of Common Stock to be reserved for issuance under the Plan. The Plan allows us to issue awards as determined by the stock committee of the Company’s board of directors of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to our consultants which may be subject to restrictions. The Plan expired December 31, 2012.

 

On February 25, 2011, the Company issued 112,584 shares of its common stock with a grant date fair value of $67,550 ($0.60 per share) based on quoted bid prices of our common stock for director’s compensation from the Plan.

 

On July 24, 2012, the Company issued 361,052 shares of its common stock with a grant date fair value of $72,210 ($0.20 per share) based on quoted bid prices of our common stock for compensation for services from the Plan.

 

On November 12, 2012, the Company issued 7,500 shares of its common stock with a grant date fair value of $1,500 ($0.20 per share) based on quoted bid prices of our common stock for compensation for services from the Plan.

 

 

15. INCOME TAXES

 

The tax effects of temporary differences giving rise to the Company's deferred tax assets are as follows as of September 30:

 

		2013				2012
Bad debt allowances		$	221,329			$	221,329
Litigation reserve and other reserves			(6,623	)			(4,967	)
Equity method investment loss			(79,477	)			(91,957	)
Capital loss carry-forwards			4,686,165				4,686,164
Operating loss carryovers			8,404,603				7,665,365
Valuation allowance			(13,225,997	)			(12,475,934	)
Net deferred tax assets		$	—			$	—

 

A reconciliation of the Company’s income tax provision (benefit) computed at the statutory U.S. Federal rate and the actual tax provision is as follows for the years ended September 30:

 

		2013				2012
Income tax (benefit) provision at U.S Federal statutory rate		$	(1,326,491	)		$	(1,458,451	)
Foreign losses taxed at rates other than 37.63%			508,019				564,325
Permanent differences			13,396				12,480
Increase (decrease) in penalties and interest on delinquent tax returns			—				330
Increase (decrease) in valuation allowance, net of foreign currency adjustments			805,076				881,646
Tax provision (benefit)		$	—			$	330

 

The following table summarizes the amount and expiration dates of our operating loss carryovers as of September 30, 2013:

 

		Expiration Dates				Amounts
U.S. federal and state net operating loss carryovers			2022-2033			$	15,362,325
Non-U.S. net operating loss carryovers			2017-2022				13,118,789
Total						$	28,481,114

  

Also as of September 30, 2013, the Company has capital loss carryovers available to offset future US Federal and state income taxes. These capital loss credit carryovers expire as follows:

 

Year Generated				Year of Expiration				Amount
	2009				2014			$	4,113,997
	2010				2015				8,339,270
								$	12,453,267

 

As a result of significant pre-tax losses, the Company cannot conclude that it is more likely than not that the deferred tax assets will be realized.  Accordingly a full valuation allowance has been established against our deferred tax assets.  During 2013, the Company increased its valuation allowance by $750,062 and $1,498,634 in 2013 and 2012, respectively, to reflect additional losses generated; the effect of adjustments from the income tax returns and currency translation effects.

 

With respect to the fiscal year 2009 returns, $330 of penalties and interest have been included in the 2012 income tax provision.  

 

Tax returns for the years ended September 30, 2010 through September 30, 2013 are subject to examination by the Internal Revenue Service.

 

16. LOSS PER SHARE

 

Basic loss per share amounts are computed based on the weighted average number of shares outstanding on that date during the applicable periods. There were no stock options outstanding as of September 30, 2013 or 2012.

 

 

The following reconciles the components of the earnings (loss) per share computation for the years ended September 30:

 

		2013				2012
Basic and diluted loss per share computation
Numerator:
Net loss		$	(3,479,332	)		$	(3,875,768	)
Denominator:
Weighted average common shares outstanding			9,555,465				7,434,666
Basic and diluted loss per share:		$	(0.36	)		$	(0.52	)

 

17. GIGA MATRIX HOLDING

 

Giga Matrix provides performance of market surveys and the broadcasting of in-store commercial messages using the age validation equipment between age checks. The Company accounts for its investment in Giga Matrix Holding, BV (“Giga”), including amounts due from Giga, under the equity method.  Pursuant to accounting guidance the Company has combined its investment in Giga and amounts due from Giga for purposes of determining the amount of losses to be recognized under the equity method; accordingly, the Company recognized $35,600 and $33,164 in losses on its equity investment during the years ended September 30, 2013 and 2012, respectively.  As of September 30, 2013, the Company’s maximum exposure to further losses is limited to the amount due from Giga of $567,345.

 

The Company has analyzed its investment in Giga and determined that, while Giga is a variable interest entity the Company is not the primary beneficiary due to the fact that the Company has no further financial obligations to support Giga, and therefore it is not required to be consolidated.

 

Assets and liabilities of Giga at September 30, 2013 and 2012 are as follows:

 

		2013				2012
		(Unaudited)				(Unaudited)
Assets:
Current assets		$	80,618			$	79,906
Financial assets – non-current			265,627				240,264
Fixed assets			—				—
Intangible assets			40,919				39,177
		$	387,164			$	359,347
Liabilities:
Current liabilities		$	662,110			$	549,296
Long-term debt			677,689				648,835
		$	1,339,799			$	1,198,131

 

Results of operations of Giga for the years ended September 30, 2013 and 2012 are as follows:

 

		2013				2012
		(Unaudited)				(Unaudited)
Net loss		$	(74,787	)		$	(67,682	)

 

18. GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

 

As shown in the accompanying consolidated financial statements, the Company incurred net losses of $3,479,332 for the year ended September 30, 2013 and $3,875,768 in 2012.  In addition, the Company has incurred substantial losses since its inception. 

 

As of September 30, 2013, the Company had a working capital deficit of $2,087,316 as compared to its working capital deficit as of September 30, 2012 of $11,132,125.  These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. The ability of the Company to continue as a going concern is dependent upon

 

the Company’s ability to attain a satisfactory level of profitability and obtain suitable and adequate financing.  Management anticipates that additional financing through long-term borrowing and equity placements will be necessary in the future.  There can be no assurance that management's plan will be successful.

 

19. SUBSEQUENT EVENTS

 

Subsequent to September 30, 2013 the Company made the final €100,000 payment to the Trustee according to the repurchase agreement, see note 13.

 

Subsequent to September 30, 2013 the Company has sold 814,894 shares of its common stock and $262,081 of promissory notes as packages for $517,242 (€383,000). The purchase price will be allocated to the shares and promissory notes based on their relative fair value as of the date of purchase.

  

Subsequent to September 30, 2013, foreign exchange rates have changed; it is not practicable to determine the effect of these changes on these financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 9.       Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

There have been no disagreements regarding accounting and financial disclosure matters with the independent certified public accountants of the Company.

 

Item 9(A).    Controls and Procedures

 

A.      Evaluation of Disclosure Controls and Procedures .

 

The Company’s Chief Executive Officer and Chief Financial Officer as of September 30, 2013, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rule 13a-14(c)and 15d-14(c) as of a date within 90 days of the filing date of this report on Form 10-K for September 30, 2013, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company and the Company’s consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this annual report on Form 10-K was being prepared.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13A-15(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP). Our internal control over financial reporting includes those policies and procedures that:

 

(1)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets;

 

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management, and

 

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2013.  Our management has concluded that during the period covered by this report that our internal control over financial reporting was effective.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

 

B. Changes in Internal Controls . There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date.   

 

Item 9B.    Other Information

 

None

 

 

 

PART III

 

Item 10.     Directors, Executive Officer and Corporate Governance

 

At September 30, 2013, the directors and officers of the Company are as follows:

Name		Age		Position
Mr. Dirk L. Benschop		46		Director, Chief Executive Officer, President and Treasurer
Mr. Jan Hovers		70		Director, Supervisory Board
Mr. Les Pettitt		52		Director, Chief Financial Officer
Mr. Gustavo Gomez		50		Director, Chief Compliance Officer
Mr. Ralph Kröner		63		Director

 

The term of office of the directors continues until their successors are elected and accept office.

 

The background and principal occupations of each director and officer of the Company are as follows:

 

Mr. Benschop became Chief Executive Officer, President, Treasurer and Secretary and a director of the Company on December 11, 2008, upon the resignation of  Mr. Geeris. Mr. Benschop is a seasoned businessman and entrepreneur, a major stakeholder and Director in Giga Matrix BV since 2006,  director and shareholder in dlb finance & consultancy BV, the Netherlands since 1993, Director and former shareholder in HEM, the Netherlands (2009 -2010), and President and CEO of Teleconnect Inc since 2008.

 

Mr. Hovers became a Director on February 23, 2010. Mr. Hovers is a seasoned successful executive board member with extensive experience in corporate governance, expansion and publically traded companies. Mr. Hovers, former CEO of Stork NV and former member of the Supervisory Board of the Dutch Central Bank (DNB NV), obtained his Ph.D. in Econometrics from Tilburg University, The Netherlands in 1972. Mr. Hovers oversees and advises on all corporate governance issues as well as provides recommendations on the Company’s current intentions to expand its business.

 

Mr. Pettitt, CPA, is a certified public accountant with twenty-seven years of public accounting experience in audit, tax and management advisory services. Since 1998, he has owned and operated, Leslie G. Pettitt, PC, which consults with SEC registrants on preparation of their regulatory filings as well as providing contract controllership assistance. Mr. Pettitt is a member of the American Institute of Certified Public Accountants and the Oklahoma Society of Certified Public Accountants.  Mr. Pettitt became Chief Financial Officer and a director of the Company on October 8, 2011.

 

Mr. Gomez has an Electrical Engineering degree from McGill University in Canada as well as an Exec-MBA from Spain’s Instituto de Empresa. Mr. Gomez has been an advisor to the Company since December 2008. When Mr. Gomez became an officer and director of the Company on October 8, 2010, he was a full time consultant to the Company.  From March 2002 to October 2007, Mr. Gómez had been President and CEO of Teleconnect Inc.  From October 2007 to December 2008, Mr. Gomez was providing management consulting to third parties and he co-founded the Canada-Spain Chamber of Commerce in Madrid.

 

Mr. Ralph Kröner was appointed as a member of the Board of Directors of Teleconnect Inc. (the “Company”) on December 14^th, 2012. Mr. Ralph Kröner was appointed Of Counsel at Eversheds Faasen (the “Firm”) on September 15th, 2010. After a long service record at Simmons & Simmons and its legal predecessors, Ralph Kröner joined the international law firm of Eversheds in Rotterdam where it is strategically positioned for the future. He is chairman of the Rotterdam Eye Hospital.

 

Committees of the Board of Directors

 

The Board of Directors at September 30, 2013, was comprised of Mr. Benschop, Mr. Hovers, Mr. Pettitt, Mr Gomez, and Mr. Kröner.

 

The Company currently has active the following three committees: audit, compensation, and stock plan. The audit committee is comprised of Mr. Les Pettitt, considered a financial expert based on his curriculum described above in addition to his extensive SEC filing experience with public listed companies. There are two empty positions on the audit committee. The Company is looking to fill these vacancies on the audit committee. The compensation committee is comprised of Mr. Dirk Benschop and Mr. Jan Hovers. The Company’s Stock Plan Committee was established to administer the stock option, SAR and stock bonus plans of the Company and is comprised of Mr. Benschop, Mr. Hovers and Mr. Gomez.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who beneficially own more than ten percent of the Company’s equity securities, to file reports of ownership and changes in ownership with

 

the Securities and Exchange Commission. Officers, directors and greater than 10% percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.  Based solely upon a review of the forms and amendments thereto furnished to the Company, management believes that Form 3 and Form 4 should be filed by directors of the Company as well as Form 4 by shareholders with over 10% stakeholding.

 

Code of Ethics

 

The Company currently is studying various models of existing “Codes of Ethics" to determine which to adapt to the philosophy of the Company. The Company expects to approve and implement a code of ethics before the end of fiscal year 2014.

 

Item 11.     Executive Compensation

 

All executive officers, for services in all capacities to the Company, received the following compensation during the fiscal year ended September 30, 2013:   

  

Name and Principal Position		Fiscal Year				Salary(1)(2)				Bonus				Stock Awards(3)				Option Awards				Nonequity incentive plan compensation				Nonqualified deferred Compensation earnings				All other compensation				Total
Dirk L. Benschop			2013			$	97,626			$	0			$	0			$	0			$	0			$	0			$	0			$97,626
Chief Executive Officer, President,			2012			$	210,383			$	0			$	21,908			$	0			$	0			$	0			$	0			$232,291
Secretary and Treasurer
Gustavo Gomez			2013			$	78,603			$	0			$	0			$	0			$	0			$	0			$	0			$78,603
Chief Compliance Officer			2012			$	98,839			$	0			$	20,000			$	0			$	0			$	0			$	0			$118,839
Les Pettitt			2013			$	46,108			$	0			$	0			$	0			$	0			$	0			$	0			$46,108
Chief Financial Officer			2012			$	46,688			$	0			$	20,000			$	0			$	0			$	0			$	0			$66,688

 

All executive officers as a group $222,337 in fiscal 2013 as compared to $417,818 in fiscal 2012

 

(1)	Mr. Benschop received no bonus during fiscal 2013. Mr. Gomez and Mr. Pettitt were appointed to their positions in 2011. Includes accrueed compensation to Mr. Benchop, Mr. Gomez and Mr. Pettitt of $58,167, $10,129 and $7,250, respectively.

 

(2)     (3)

Personal benefits received by the Company’s executive officers are valued below the levels which would otherwise require disclosure under the rules of the U.S. Securities and Exchange Commission.   Grant date fair value based on quoted market price of the Company common stock.

 

The Company does not currently provide any contingent or deferred forms of compensation arrangements, annuities, pension or retirement benefits.

 

2010 Stock Option, SAR and Stock Bonus Plan

 

Effective on October 8, 2010, the Company adopted and approved its 2010 Stock Option, SAR and Stock Bonus Plan (the “Plan”) which reserved 500,000 shares of Common Stock for issuance. This Plan allows us to issue awards of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to Officers, Directors or consultants to the Company. 481,136 shares were issued under this 2010 Plan to officers and directors of the Company. This plan expired on December 31, 2012 with 18,864 shares unissued.

 

Benefit Plans

 

The Company does not have any pension plan, profit sharing plan, or similar plans for the benefit of its officers, directors or employees. However, the Company may establish such plans in the future.

 

 

 

Director Compensation

 

Name

Fees earned or paid in cash ($)

Stock awards (1) ($)

Option awards ($)

Non-equity incentive plan compensation ($)

Nonqualified deferred compensation earnings ($)

All other compensation ($)

Total ($)

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

D. Benschop

$

—

$

—

$

—

$

—

$

—

$

—

$

—

J. Hovers

$

—

$

—

$

—

$

—

$

—

$

—

$

—

G. Gomez

$

—

$

—

$

—

$

—

$

—

$

—

$

—

L. Pettitt

$

—

$

—

$

—

$

—

$

—

$

—

$

—

R. Kröner

$

—

$

—

$

—

$

—

$

—

$

—

$

—

 

(1)  During the fiscal year ended September 30, 2013, there were no stock awards issued.

 

Director and Officer Indemnification and Limitations on Liability

 

Article X of our Articles of Incorporation and Article VI of our Bylaws limit the liability of directors, officers and employees to the fullest extent permitted by Florida law. Consequently, our directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except in the following circumstances:

 

	*	A violation of the criminal law, unless the director, officer, employee or agent had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful;
	*	A transaction from which the director, officer, employee, or agent derived an improper personal benefit;
	*	In the case of a director, a circumstance under which the liability provisions of Section 607.0834 under the Florida Business Corporation Act are applicable; or
	*	Willful misconduct or a conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor on in a proceeding by or in the right of a shareholder.

 

This limitation of liability does not apply arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and, is therefore, unenforceable.

 

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The total number of shares of Common Stock of the Company, as adjusted to record effects of stock splits, beneficially owned by each of the officers and directors, and all of such directors and officers as a group and holders of 5% or more of the Company’s Common Stock as of December 19, 2013 are as follows:

 

		Shares				Percent of
Names and Addresses of Beneficial Owners		Beneficially Owned (1)				Class (16)
Dirk L. Benschop (2) Address: Laakseweg 24, Etten-Leur 4874 LV, The Netherlands			372,543				4.1	%
DLB Finance and Consultancy BV (3) Address: Laakseweg 24, Etten-Leur, 4874 LV, The Netherlands			372,543				4.1	%
Kees Lenselink (4) Address: Jan Tooropstraat 13, Oosterhout 4907 PB, The Netherlands			598,511				6.6	%
Quack Holding BV (5) Address: Jan Tooropstraat 13, Oosterhout 4907 PB, The Netherlands			598,511				6.6	%
Hombergh Holding BV (6) Address: Sophiastraat 22-29, Breda, 4811EM, The Netherlands			133,334				1.5	%
Quick Holding BV (7) Address: Sophiastraat 22-29, Breda, 4811EM, The Netherlands			492,000				5.5	%
The Trustee of Quick Holding BV and Hombergh Holding BV, Mr. Bart van Logtestijn (8) Address: Sophiastraat 22-29, Breda, 4811EM, The Netherlands			625,334				7.0	%
CCR Beheer BV (9) Address: Claudius Prinsenlaan 128, Breda, 4818 CP The Netherlands			2,514,840				27.9	%
Leonardus Geeris (10) Address: Oude Vest 4, Breda, 4811 HT, The Netherlands			1,574,136				17.5	%
Jan Hovers (11) Address: Oude Vest 4, Breda 4811 HT, The Netherlands			112,584				1.2	%
Les Pettitt (12 ) Address: 4603 N College Ave, Bethany, OK 73008, USA			100,000				1.1	%
Gustavo Gomez (13) Address: C/Rio Tambre 8, Boadilla del Monte, 28660 Madrid, Spain			100,000				1.1	%
Ralph Kröner (14) Address: Julianalaan 54, 3062 DJ Rotterdam, The Netherlands			52,500				0.6	%
Directors, officers  as a group, including the above persons ( 15)			7,933,181				86.5	%

 

(1)	Except as otherwise noted, it is believed by the Company that all persons have full voting and investment power with respect to the shares indicated. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security which that person has the right to acquire within 60 days, such as options or warrants to purchase the Common Stock of the Company.
(2)	The number of shares listed for Dirk L. Benschop are the 372,543 shares owned by DLB Finance and Consultancy BV.
(3)	DLB Finance and Consultancy BV is owned by Dirk L. Benschop, the director, Chief Executive Officer and Treasurer of the Company.
(4)	The number of shares listed for Kees Lenselink are the 598,511 shares owned by Quack Holding BV
(5)	Quack Holding BV is owned by Mr. Kees Lenselink, who is an over 5% shareholder and ex-director
(6)	Hombergh Holdings BV is in receivership, administred by Mr. Bart van Logtestijn, the Trustee
(7)	Quick Holding BV is in receivership, administred by Mr. Bart van Logtestijn, the Trustee
(8)	The number of shares listed for the Trustee, Mr. Bart van Logtestijn,  are the 492,000 shares owned by Quick Holding BV and 133,334 shares  owned by Hombergh Holding BV.
(9)	CCR Beheer BV is wholly owned by Mr. Henk Schipper and the largest single shareholder of the Company
(10)	Mr. Leonardus Geeris is an ex-director and ex-President of the Company
(11)	Mr. Jan Hover is a director of the Company
(12)	Mr. Les Pettitt is a director and officer of the Company occupying the position of Chief Financial Officer
(13)	Mr. Gustavo Gomez is a director and officer of the Company and occupies the position of Chief Compliance Officer
(14)	Mr. Ralph Kröner is a director of the company as of December 14, 2012.  See Subsequent Events section 21
(15)	As of September 30, 2013 Directors and Officers as a group include Mr. Benschop, Mr Pettitt, Mr Gomez, Mr. Hovers and Mr. Kröner.
(16)	As of September 30, 2013, there were 9,046,631 shares of common stock issued and outstanding while at December 10, 2013 there were 9,016,183 shares of common stock outstanding.

 

Item 13.    Certain Relationships and Related Transactions, and Director Independence

 

Loans from related parties - During the years ended September 30, 2013 and 2012, the Company obtained $285,778 and $336,180, respectively, in additional short term loans from related parties, consisting principally of shareholders, net of currency translation adjustments.

 

In connection with the Company’s stock repurchase agreement detailed in Note 13 the Trustee agreed to irrevocably forgo his right to claim the return of $9,415,221 in loans made to the Company by Hombergh Holdings BV and Quick Holdings BV and the associated interest accrued up to the date of the agreement of $675,143 on receipt of a €200,000 installment which was paid with the signing of the agreement on July 31, 2013. The Company recorded the transaction as a contribution to capital by the Trustee.

 

Item 14.     Principal Accounting Fees and Services

 

The aggregate fees billed by our principal accounting firm, for fees billed for fiscal years ended September 30, 2013 and 2012 are as follows:

 

Name		Audit Fees(1)				Audit Related Fees				Tax Fees (2)		All Other Fees
Coulter & Justus PC for fiscal year ended September 30, 2013		$	103,850			$	0			$52,743			0
Coulter & Justus PC for fiscal year ended September 30, 2012		$	145,865			$	0			$41,920		$	0	\

 

(1)

Includes professional services for the audit of the Company’s annual financial statements, reviews of financial statements included in the Company’s Form 10-Q filings, services that are normally provided by the Company’s independent registered public accounting firm in connection with statutory and regulatory filings or engagements and services that generally only the independent registered public accounting firm can reasonably provide, such as assistance with and review of documents filed with the SEC.

 

(2)

Includes fees associated with tax compliance, tax advice, and domestic and international tax planning.

 

The Company's Board of Directors has evaluated and approved in advance, the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services.

 

 

 

 

 

 

 

PART IV

 

Item 15.     Exhibits, Financial Statement Schedules

 

Financial Statement Schedules

 

(a) Financial Statements

 

  (b) Exhibits

1(i) Articles of Incorporation of the Company		The Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Form SB-2 registration statement of the Company (File No. 333-93583)
1(ii) Amendment to Articles of Incorporation		An Amendment to the Articles of Incorporation of the Company is incorporated herein by reference to Exhibit 99.1 to the Form 8-K current report of the Company dated January 29, 2001.
1(iii) Amendment to Articles of Incorporation		An Amendment to the Articles of Incorporation of the Company filed on February 26, 2003, is incorporated hereby by reference to Exhibit 1 (iii) to the Form 10-K annual report of the Company for its fiscal year ended September 30, 2009.
1(iv) By-Laws of the Company		The By-Laws of the Company are incorporated herein by reference to Exhibit 3.2 to the Form SB-2 registration statement of the Company (File No. 333-93583)
10. Material Contracts
11. Statement re: computation of per share earnings
		Reference is made to the Consolidated Statements of Operations of the Consolidated Financial Statements which are incorporated by reference herein.
21. A description of the subsidiaries of the Company		A description of the subsidiaries of the Company.

 

 

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

		Teleconnect Inc.
Date: December 30, 2013	By:	/s/ Dirk L. Benschop
		Dirk L. Benschop
		Chief  Executive Officer, President and Treasurer

 

		Teleconnect Inc.
Date: December 30, 2013	By:	/s/ Leslie G. Pettitt
		Leslie G. Pettitt
		Chief  Financial Officer and principal accounting officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

		Teleconnect Inc.
Date: December 30, 2013	By:	/s/ Dirk L. Benschop
		Dirk L. Benschop
		Director

 

		Teleconnect Inc.
Date: December 30, 2013	By:	/s/ Leslie G. Pettitt
		Leslie G. Pettitt
		Director

 

		Teleconnect Inc.
Date: December 30, 2013	By:	/s/ Gustavo Gomez
		Gustavo Gomez
		Director

 

 

 

INDEX OF EXHIBITS ATTACHED

 

Exhibit		Description
21		Description of subsidiaries
31.1		Certification of  Dirk L. Benschop
31.2		Certification of  Les Pettitt
32.1		Certification of  Dirk L. Benschop and Les Pettitt