Teleconnect Inc. - FORM 10-Q/A

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - Teleconnect Inc.	v232888_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Teleconnect Inc.	v232888_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Teleconnect Inc.	v232888_ex31-1.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q/A

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ________________

Commission File Number: 0-24857

Teleconnect Inc.

(Exact name of registrant issuer 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- (0)6 30048023

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 5,991,789 shares of common stock at August 18, 2011.

Teleconnect Inc.

Form 10-Q/A

(Amendment No. 1)

For the Quarterly Period Ended December 31, 2010

Our condensed consolidated financial statements as of December 31, 2010 and for the three months ended December 31, 2010 and related condensed footnote disclosures in the Amendment No. 1 to the Quarterly Report on Form 10-Q/A have been restated in accordance with the changes described below:

On July 20, 2011, management of Teleconnect Inc. (the “Company”) was advised by its independent public accountants that the financial statements filed in the Quarterly Reports on Form 10-Q for the quarters ended December 31, 2010 and March 31, 2011, filed with the Securities and Exchange Commission on February 22, 2011 and May 20, 2011, respectively, contain errors relating to amortization of certain intangibles. The Company has determined that the amortization of the intangibles related to the HEM purchase was improperly calculated resulting in $138,329 excess amortization being reported in the quarterly condensed consolidated statements ended December 31, 2010.

The condensed consolidated financial statements and other financial information included in the Amendment No. 1 have been restated accordingly. The public should no longer rely on our previously filed financial statements for the three months ended December 31, 2010. These matters have been discussed by our authorized executive officers and with our independent registered certified public accounting firm.

TELECONNECT INC.

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of December 31, 2010 (unaudited)(restated) and September 30, 2010	5

	Condensed Consolidated Statements of Operations for the three months ended December 31, 2010 (restated) and 2009 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2010 (restated) and 2009 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	17

Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	19

Item 4.	Submission of Matters to a Vote of Security Holders	19

Item 5.	Other Information	19

Item 6.	Exhibits	19

Signatures		20

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELECONNECT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

PAGE 1 of 2

	December 31,		September 30,
	2010		2010
	(Unaudited) (Restated)
ASSETS

CURRENT ASSETS:
Cash	$	99,707	$	17,420
Accounts receivable - trade		9,661		36,276
Other receivables		66,353		-
Due from Giga Matrix Holding, B.V.		597,472		361,441
Inventory, work in process (net of reserve for slow moving inventory of $229,422 and $187,478 at December 31, 2010 and September 30, 2010,respectively)		1,007,912		1,076,580
Prepaid taxes		86,614		8,278
Prepaid expenses		96,015		5,224

Total current assets		1,963,734		1,505,219

PROPERTY AND EQUIPMENT, NET		3,288,045		7,120

OTHER ASSETS:
Investment in Giga Matrix Holdings B.V.		-		-
Goodwill		415,454		424,346
Patents and tradenames, net		3,491,742		-
Long-term notes receivable (net of allowance for bad debts of $575,846 and $588,171 at December 31, 2010 and September 30, 2010, respectively)		-		-

	$	9,158,975	$	1,936,685

See accompanying Notes to Condensed Consolidated Financial Statements.

TELECONNECT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

PAGE 2 of 2

	December 31,			September 30,
	2010			2010
	(Unaudited) (Restated)
LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable - trade	$	344,457		$	111,576
Accrued liabilities
Related parties		-			127,619
Other		190,778			36,949
Notes payable		293,964			300,256
Income Taxes payable		-			80,000
Loans from related parties		8,349,200			2,790,765

Total current liabilities		9,178,399			3,447,165

STOCKHOLDERS' 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, 5,879,205 and 4,953,700 shares outstanding at December 31, 2010 and September 30, 2010, respectively		5,879			4,954
Additional paid-in capital		32,568,352			31,511,257
Accumulated deficit		(29,514,492	)		(30,019,592	)
Accumulated other comprehensive loss		(3,079,163	)		(3,007,099	)

Total stockholders' deficit		(19,424	)		(1,510,480	)

	$	9,158,975		$	1,936,685

See accompanying Notes to Condensed Consolidated Financial Statements.

TELECONNECT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31,

	2010			2009
	(Unaudited) (Restated)			(Unaudited)
SALES	$	11,971		$	234,399

COST OF SALES		77,343			170,133

GROSS LOSS		(65,372	)		64,266

OPERATING EXPENSES:
Selling, general and administrative expenses		734,966			368,091
Bad debt expense		-			7,509
Depreciation and amortization		247,325			693

Total operating expenses		982.291			376,293

LOSS FROM CONTINUING OPERATIONS		(1,047,663	)		(312,027	)

OTHER INCOME (EXPENSES):
Interest income		19			7,534
Gain on bargain purchase		1,487,531			-
Loss on investment		(12,626	)		-
Interest expense - related parties		(2,161	)		(4,430	)

LOSS FROM CONTINUING OPERTIONS BEFORE INCOME TAXES		425,100			(308,923	)

BENEFIT FROM INCOME TAXES		80,000			-

NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS		505,100			(308,923	)

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS		-			3,174,493

NET INCOME	$	505,100		$	2,865,570

BASIC AND DILUTED (LOSS) INCOME PER SHARE:
From continuing operations	$	0.09		$	(0.06	)
From discontiued operations		-			0.64
Total	$	0.09		$	0.58

AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING		5,597,872			4,953,617

THE COMPONENTS OF COMPREHENSIVE (LOSS) INCOME:
Net Income	$	505,100		$	2,865,570
Foreign currency translation adjustment		(109,188	)		(115,352	)
Tax effect on currency translation		37,124			39,220

COMPREHENSIVE INCOME	$	433,036		$	2,789,438

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

TELECONNECT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31,

	2010			2009
	(Unaudited) (Restated)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	505,100		$	2,865,570
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		247,325			693
Bad debt expense		-			7,509
Inventory allowance		46,629
Loss on equity investments		12,626			-
Gain on bargain purchase		(1,487,531	)
Gain on sale of subsidiaries		-			(3,200,137	)
Change in operating assets and liabilities
Accounts receivable - trade		31,380			(428	)
Accounts receivable - other		16,916			-
Accrued interest receivable					(7,509	)
Inventory		-			154,476
Prepaid expenses		(15,290	)		5,130
Prepaid taxes		(25,905	)		(1,900	)
Accounts payable		(61,047	)		61,205
Accrued liabilities and income taxes payable		(131,392	)		23,488

Net cash used in operating activities		(861,189	)		(91,903	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		(13,059	)		-
Repayments from equity investment		-			3,599
Proceeds from disposal of equipment		-			3,051

Net cash (used in) provided by investing activities		(13,059	)		6,650

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable		(4,687	)		-
Loan proceeds from related parties		954,500			213,878

Net cash provided by financing activities		949,813			213,878

EFFECT OF EXCHANGE RATE		6,722			4,832

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		82,287			133,457

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		17,420			15,652

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	99,707		$	149,109
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
675,505 shares of common stock issued for acquisition	$	709,280		$	-
250,000 shares of common stock issued for accrued interest	$	348,741		$	-

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

TELECONNECT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2010

1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of Teleconnect, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 2010 are not necessarily indicative of the results that may be expected for the full year.

The condensed consolidated financial statements include the accounts of Teleconnect, Inc. and its subsidiary PhotoWizz BV (“MediaWizz”) for the three months ended December 31, 2010 as well as its newly acquired subsidiaries Wilroot B. V. (Wilroot) and Hollandsche Exploitatie Maatschappij (HEM) since October 15, 2010; the date of acquisition. The consolidated financial statements for the three months ended December 31, 2009 include the accounts of the Company and its subsidiary PhotoWizz BV (“MediaWizz”) as well as those for its discontinued subsidiaries of Teleconnect Spain, Teleconnect Telecom and Recarganet for the two months ended November 25, 2009; date at which they were sold. All significant inter-company balances and transactions have been eliminated.

The balance sheet at September 30, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2010.

The carrying amounts of cash, accounts (and related party) receivables, accounts payable and notes payable, are considered by management to be their estimated fair values due to their short term or contractual maturities.

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.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2010, the FASB issued amendments to existing accounting guidance regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. These amendments require additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. Further, this amendment requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This amendment is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently evaluating the impact of these amendments; however, we do not expect the adoption of these amendments to have a material impact on our consolidated financial statements.

3 FAIR VALUE MEASUREMENT

Fair Value Measurements under GAAP clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy, as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

The carrying value of the Company’s cash, accounts and other receivables, prepayments, accounts payable, and other current assets and liabilities approximate fair value because of their short-term maturity. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the unaudited condensed consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

As of December 31, 2010, there were no financial assets or liabilities that were measured at fair value on a recurring basis.

4. BUSINESS COMBINATION

On October 15, 2010, the Company completed its acquisition of 100% of Wilroot and its wholly owned subsidiary HEM (Wilroot/HEM). Previously, Wilroot/HEM and the Company agreed for the purpose of the transaction to transfer effective control of Wilroot/HEM to the company as of October 1, 2010. The Company issued 675,505 shares of its restricted common stock valued at $709,280 along with the assumption of debt and other liabilities of $7,740,102 for a total purchase consideration of $8,449,382.

HEM developed the age validation system “Ageviewers”. The Company’s existing subsidiaries MediaWizz and Giga are important parts of the Ageviewers system supply chain and combining them with Wilroot/HEM allows further integration of the system.

The acquisition was accounted for as a purchase transaction. As required by the applicable guidance in effect at the time of the acquisition, the Company valued all assets and liabilities acquired at their fair values on the date of acquisition. An independent valuation expert assisted the Company in determining these fair values. Accordingly, the assets and liabilities of the acquired entity were recorded at their estimated fair values at the date of the acquisition. The Company is currently completing its review of the valuation methods and procedures that were used therefore the purchase price allocation is preliminary. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed, and based on their estimated fair values.

	Wilroot/HEM

Current assets	$	411,480
Amount due from Teleconnect, Inc		1,684,605
Amount due from MediaWizz		456,744
Total current assets		2,552,829
Ageviewers software		3,257,659
Property and equipment		350,485
Terminal and kiosk hardware design		690,347
Patents and processes		2,003,044
Tradenames		1,082,549
Net assets		9,936,913

Purchase consideration		8,449,382

Excess of net assets over purchase consideration (bargain purchase)	$	1,487,531

In connection with the acquisition the Company acquired the Ageviewers software and the Terminal and kiosk hardware designs. The Company valued the Ageviewers software based on replacement cost of development using current observable market rates for software engineers (level 2 inputs, see Note 3) which resulted in a fair market value of $3,257,659. The terminal and kiosk hardware designs were valued based on replacement cost of development using current observable market rates for engineers (level 2 inputs, see Note 3) which resulted in a fair market value of $690,347. The software and designs will be amortized over a useful life of 5 years.

The Company also acquired patents and processes associated with Ageviewers system as well as the Ageviewers trade name. The patents and processes were valued by the Company using the relief from royalty valuation technique (level 2 inputs, see Note 3) which resulted in a fair market value of $2,003,044. The Ageviewers trade name was valued by the Company using the relief from royalty valuation technique (level 2 inputs, see Note 3) which resulted in a fair market value of $1,082,549. The patents, processes and trade name are being amortized over a 10 year remaining life.

Total amortization of $223,342 was included in the condensed consolidated financial statements for the three months ended December 31, 2010. Amortization expense is expected to be $1,058,700 annually in each of the next five years.

The fair value of the net assets acquired was in excess of the consideration paid by the Company, resulting in a "bargain purchase gain." Upon the determination that the Company was going to recognize a gain related to the bargain purchase, the Company reassessed its valuation assumptions utilized as part of the acquisition accounting. No adjustments to the acquisition accounting valuations were identified as a result of management’s reassessment. The bargain purchase gain is included in the other income (expenses) in the condensed consolidated financial statements for the three months ended December 31, 2010. The events and circumstances allowing the Company to acquire Wilroot/HEM at a bargain were related to the ability of Wilroot/HEM to have access to public equity markets to raise funding for the rollout of Ageviewers in The Netherlands and the liquidity provided to the stockholders of Wilroot/HEM by gaining stock in the Company.

There is $9,462 of revenues and $659,807 of operating losses from Wilroot/HEM included in the condensed consolidated financial statements for the period October 15, 2010 to December 31, 2010.

Pro-forma financial information

The unaudited pro forma results presented below include the effects of the Company’s October 2010 acquisition of Wilroot/HEM as if the acquisitions and merger had been consummated as of October 1, 2009. The pro-forma earnings/(loss) for the three month periods ended December 31, 2010 and 2009 include the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and a reduction in the interest expense between the companies. However, the pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions and merger been consummated as of October 1, 2009.

	Three months Ended December 31,
	2010			2009

Revenues	$ 11,971			$ 299,870
(Loss)/earnings from continuing operations	$	(1,062,431	)	$	(1,460,834	)

Basic and diluted (loss)/earnings from continuing operations per share	$	(0.19	)	$	(0.29)

5. DISCONTINUED OPERATIONS

There was a purchase price adjustment made in the quarter ended September 30, 2010 of $54,492 which lowered the gain on sale of subsidiaries to $3,145,545 as of that date.

Summarized financial information (which consists principally of Teleconnect Spain) included in discontinued operations is as follows for the period October 1, 2009 to November 25, 2009:

Sales	$	586,479
Cost of sales		364,021
Gross profit		222,458
Selling, general and administrative expenses		218,695
Depreciation		7,466
Operating loss		(3,703	)
Gain on sale of subsidiaries		3,200,137
Other income (expense)		(21,941	)
Income (Loss) from discontinued operations	$	3,174,493

Substantially all interest expense is allocated to the ongoing operations of the parent company.

6. LOANS FROM RELATED PARTIES

During the three months ended December 31, 2010 and 2009 the Company obtained approximately $955,000 and $214,000, respectively, in additional short term loans from related parties, consisting principally of shareholders, net of currency translation adjustments. The Company also assumed $6,969,858 in related party notes from the acquisition of Wilroot/HEM (Note 4). These loans bear interest between 0% and 8% annually, are unsecured and due upon demand. The weighted average interest rate of the loans from related parties for the three months ended December 31, 2010 was 0.35%.

7. EQUITY TRANSACTIONS

On October 15, 2010 the company issued 675,505 shares of restricted common stock valued at $709,280 for the purchase of Wilroot/HEM (Note 3).

On December 2, 2010 the Company agreed with the holder of the loan from related party to issue 250,000 share of the Company’s restricted common stock for $348,741 in accrued interest.

8. INCOME TAXES

The Company recorded $80,000 of tax benefit for the three months ended December 31, 2010 due abatement of penalties and interest related to fiscal year 2007. For the three months ended December 31, 2009 income tax expense was offset by the use of net operating losses from prior periods. The Company continues to record an income tax valuation allowance equal to the benefit of any remaining income tax carry-forwards due to the uncertain nature of its realization.

9. EARNINGS (LOSS) PER SHARE

Basic earnings 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 December 31, 2010 or 2009.

The following reconciles the components of the earnings (loss) per share computation for the three months ended December 31:

	2010		2009
Basic and diluted loss per share computation
Numerator:
Net income (loss) from continuing operations	$	505,100	$	(308,923	)
Net income from discontinued operations	$	-	$	3,174,493
Net income	$	505,100	$	2,865,570

Denominator:
Weighted average common shares outstanding		5,597,872		4,953,617
Basic and diluted income (loss) per share:
From continuing operations	$	0.09	$	(0.06	)
From discontinued operations	$	-	$	0.64
Total	$	0.09	$	0.58

10. GIGA MATRIX HOLDING

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 $12,626 in losses on its equity investment during 2010.

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.

Results of operations of Giga for the three months ended December 31, 2010 and 2009 are as follows:

	2010			2009
	(Unaudited)			(Unaudited)
Results of operations
Net loss	$	(25,767	)	$	(49,324	)

11. RESTATEMENT

The Company has determined that the amortization of the intangibles related to the HEM purchase was improperly calculated resulting in $138,329 excess amortization being reported in the quarterly condensed consolidated statements ended December 31, 2010.

Condensed Consolidated Balance Sheet impact –

The following table sets forth the effects of the restatement adjustments on the Company’s December 31, 2010 condensed consolidated balance sheet:

	Balance December 31, 2010, as previously reported			Adjustment amounts			Balance December 31, 2010, as restated
Patents and tradenames, net	$	3,355,661		$	136,081		$	3,491,742
Total assets	$	9,022,894		$	136,081		$	9,158,975

Accumulated deficit	$	(29,652,821	)	$	138,329		$	(29,514,492	)
Accumulated other comprehensive loss		(3,076,915	)		(2,248	)		(3,079,163	)
Total stockholders’ deficit		(155,505	)		136,081			(19,424	)
Total liabilities and stockholders’ deficit	$	9,022,894		$	136,081		$	9,158,975

Condensed Consolidated Statement of Operations impact –

The following table set forth the effects of the restatement adjustments on the Company’s condensed consolidated statement of operations for the three months ended December 31, 2010:

	Balance December 31, 2010, as previously reported			Adjustment amounts			Balance December 31, 2010, as restated
Depreciation	$	385,654		$	(138,329	)	$	247,325
Total operating expenses		1,120,620			(138,329	)		982,291
Loss from operations		(1,185,992	)		138,329			(1,047,663	)
Income from continuing operations before income taxes		286,771			138,329			425,100
Net income		366,771			138,329			505,100
Basic and diluted income per share	$	0.07		$	0.02		$	0.09
Foreign currency translation adjustment		(105,782	)		(3,406	)		(109,188	)
Tax effect on currency translation		35,966			1,158			37,124
Comprehensive income	$	296,955		$	136,081		$	433,036

Condensed Consolidated Statement of Cash Flows impact –

The following table set forth the effects of the restatement adjustments on the Company’s condensed consolidated statement of cash flows for the three months ended December 31, 2010:

	Balance December 31, 2010, as previously reported		Adjustment amounts			Balance December 31, 2010, as restated
Net income	$	366,771	$	138,339		$	505,100
Depreciation	$	385,654	$	(138,339	)	$	247,325

12. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s recent losses and cash requirements, among other things, may indicate the Company will be unable to continue as a going concern for a reasonable period of time. Management anticipates that it will be able to convert certain outstanding debt into equity and that it will be able to raise additional working capital. 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. There can be no assurance that management's plan will be successful.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

Caution Regarding Forward-Looking Statements

The following information may contain certain forward-looking statements that are not historical facts. These statements represent our expectations or beliefs, including but not limited to, statements concerning future acquisitions, future operating results, statements concerning industry performance, capital expenditures, financings, as well as assumptions related to the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “shall,” “will,” “could,” “expect,” “estimate,” “anticipate,” “predict,” “should,” “continue” or similar terms, variations of those terms or the negative of those terms. Forward-looking statements are based on current expectations and involve various risks and uncertainties that could cause actual results and outcomes for future periods to differ materially from any forward-looking statement or view expressed herein. Our financial performance and the forward-looking statements contained in this report are further qualified by other risks including those set forth from time to time in documents filed by us with the SEC.

INTRODUCTION

At the time of this filing, the Company’s new business model is based on an innovative age validation system which verifies a consumers’ age when purchasing a product that is restricted from minors such as alcohol or tobacco. Revenues for this first fiscal quarter are derived from commercial services rendered in relation to the business of age validation. Management is currently creating an installed base of customers using the system, in order to evidence it’s acceptance in the marketplace. Our future revenues and operating results will depend upon the success of the four pillars of our new business model which are: the manufacturing and leasing of age validation equipment, the performance of age validation transactions, the performance of market surveys and the broadcasting of in-store commercial messages using age validation equipment between age checks. During the same three month period in 2009, we derived our continuing operations revenues primarily from the sale of multimedia terminals and hardware components to the suppliers of retail chains. These terminals and components were applied to different functions such as recharging prepaid telephone cards.

The rate of adoption of the Company’s age verification solution by retail chains will be influenced over time by government laws relating to the regulation and availability of alcohol and tobacco as well as the enforcement of the associated penalties for those caught infringing the law. The success of the Ageviewers’ solution will also be affected by the pricing of our products/services, the performance factors of the system as well as the degree of social awareness regarding the availability of alcohol and tobacco to under-aged youths. The Company is not reliant on any one specific customer for revenues.

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 from traditional methods of age verification or newcomers that may enter the market, 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. Though seasonality is not expected to affect the Company’s current business model, it is expected that there will be a higher number of age checks during festive seasons such as Christmas.

Cost of sales included in continuing operations 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. Cost of sales included in discontinued operations consists primarily of the costs associated with carriers which supply the telecom services for the Company to resell. We rely on third parties to offer the majority of the services we have in our portfolio.

Our gross profit will continue to be affected by a variety of factors, including: the resistance 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 stabilize or increase slightly as the Company expands its points of sale in Europe as well as when it prepares itself to raise funds for operations.

BALANCE SHEET COMPARISON AT DECEMBER 31, 2010 AND SEPTEMBER 30, 2010

Assets: Total assets at December 31, 2010 increased 373% to $9,158,975 compared to $1,936,685 at September 30, 2010. This increase is due primarily to property and equipment of nearly $3,300,000 and patents and trade names worth approximately $3,356,000 associated with our acquisition of Wilroot/HEM during the quarter ended December 31, 2010.

Liabilities: Current liabilities at December 31, 2010 increased 166% to $9,178,399 compared to $3,447,165 at September 30, 2010. This increase is due primarily to the loans from related parties acquired in the Wilroot/HEM acquisition of approximately $5.5 million net of approximately $1.8 million in loans from HEM to the Company which were eliminated by the acquisition.

COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009 (CONTINUING OPERATIONS)

We had net income of $505,100 for the three months ended December 31, 2010 as compared to net income of $2,865,570 during the comparable period in 2009. A comparison of revenues and expenses for the two periods is as follows:

REVENUES

Sales for the three months ended December 31, 2010, decreased by nearly 95% to $11,971from $234,399 for the quarter ended December 31, 2009. The decrease in sales is attributed to the fact that 2009 revenues were derived from the sales of calling credit through kiosks that Mediawizz custom built and installed in supermarkets for a Netherlands customer as well as sales for hardware components. This calling credit service was terminated by the Company in 2010 due to its associated low margin and debt risk. In addition, no new terminals were sold during the quarter ended December 31, 2010 since the Company redirected its efforts to carrying out installations of previously acquired equipment related to the age validation service rather than calling credit in order to create an installed base of customers using the age validation equipment.

At December 31, 2010, the Company had exceeded its objective of at least doubling the number of clients contracted to three-year service agreements from September 30, 2010 (from twenty to fifty). The installation of age validation equipment in connection to the agreements contracted through December 2010 is currently in process and due to be fulfilled before the end of March 2011. To date, in 23 stores installation has been completed of which 9 stores have commenced using the solution in practice and 14 plan to start using the system before end of March 2011. The Company expects to exceed its business plan objective related to the number of three-year service agreements signed by March 31, 2011. The new service agreements will allow the Company to receive revenues from narrowcasting services on our terminals and TV screens in retail stores. The Company is in the process of negotiation with a service provider to facilitate the generation of income from future narrowcasting services. All revenues recorded for the three-month period ended December 31, 2010, were therefore only in relation to professional services rendered.

COST OF SALES

Cost of sales decreased 55% or $92,790 to $77,343 during the three months ended December 31, 2010 from $170,133 during the same period in 2009. This decrease in cost of sales is associated with the decrease in sales discussed above.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses have doubled to $734,966 during the three months ended December 31, 2010 as compared to $368,091 for the comparable period in 2009. This increase in selling, general and administrative expenses is primarily due to the additional cost of outside professional services related to the Company’s acquisition of HEM.

COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2010 AND 2009 (DISCONTINUED OPERATIONS)

The discontinued operations were sold on November 25, 2009 at which time the Company recognized a gain of approximately $3.2 million.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2010 and September 30, 2010, Teleconnect Inc. had negative working capital of approximately $7,215,000 and $1,942,000, respectively. The increase of negative working capital, or further decrease of working capital, is a reflection of the increase in loans from related parties as a result of the acquisition of HEM during the three month period ended December 31, 2010.

The ability of the Company to satisfy its obligations and to continue as a going concern will depend upon its ability to raise funds through the sale of additional shares of its Common Stock, increasing borrowing, and in part upon its ability 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.

The Company intends to look for additional funding to pay debts and for working capital. However, there is no assurance that such capital will be raised, and the Company may seek bank financing and other sources of financing to complete the payment of additional debt. The Company is in the process of preparing a possible private placement offering to European investors.

DISCONTINUED OPERATIONS

In March 2009, the Company entered into an agreement to sell ITS Europe, Teleconnect Spain, Teleconnect Telecom and Recarganet to certain employees and officers of Teleconnect Spain with the Company retaining 10% of Teleconnect Spain. The results of operations of these subsidiaries were reported as “discontinued operations”. The Company will account for of its remaining interest in Teleconnect SA by the cost method. The sale of Teleconnect Spain, Teleconnect Telecom and Recarganet was completed on November 25, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the period of October 1, 2010 to December 31, 2010, a related party advanced the Company funds of approximately $955,000 to cover normal operating costs in the short term. The advances bear no interest.

On December 2, 2010 the Company agreed to issue 250,000 shares of Company common stock for approximately $349,000 in accrued related party interest.

On December 2, 2010, the Company reached an agreement that advances from a related party who has loaned the Company (including the newly acquired HEM) approximately $6.9 million will bear no interest for the period October 1, 2010 through September 30, 2011.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s Chief Executive Officer and Chief Financial Officer as of December 31, 2010, 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-Q for December 31, 2010, has concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures are still not sufficiently adequate nor 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 quarterly report on Form 10-Q was being prepared. The Company identified certain weaknesses in its control procedures during 2010 and is in the process of establishing the principles to correct these as well as to implement proper Corporate Governance; the first step of which was to name three members to the Board of Directors in October 2010 as well as having established an Audit Committee, and a Stock Bonus Plan Committee.

The Company has policies and procedures that require the financial statements and related disclosures be reviewed and that the financial statements are presented in accordance with accounting principles generally accepted in the United States of America. The Company, in certain circumstances, utilizes a third party consultant to assist with the preparation of the financial statements and related disclosures.

In order to mitigate this material weakness, management intends to implement procedures providing for the timely review of all subsidiary supplied financial statements, consolidated financial statements and the notes thereto.

The presence of these material weaknesses does not mean that a material misstatement has occurred in our financial statements, but only that our present controls might not be adequate to detect or prevent a material misstatement in a timely manner.

Management continues to design new internal controls and procedures to address our material weaknesses which will be implemented in this fiscal year.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its operations, the Company has been 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 Company's business or financial condition or results of operations.

ITEM 1A. RISK FACTORS

None

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 8, 2010, the meeting of shareholders of the Company approved the 2010 Stock Bonus Plan reserving 500,000 shares for Officers, Directors and Consultants of the Company.

On October 8, the Board of Directors appointed three new members to the Board of Directors; Mr. Les Pettitt, Mr. Kees Lenselink, and Mr. Gustavo Gómez. As well, at this same meeting, the Board appointed Mr. Les Pettitt to the position of Chief Financial Officer and Mr. Gustavo Gomez as Chief Compliance Officer. In addition, the following committees were established: Audit Committee consisting of Mr. Les Pettitt, Mr. Kees Lenselink and a third member to be named as soon as possible; the Stock Plan Committee consisting of Mr. Dirk Benschop, Mr. Jan Hovers and Mr. Gustavo Gomez.

On October 15, 2010, Teleconnect and Wilroot B.V. formalized a contract before a Public Notary in The Netherlands, whereby Teleconnect has purchased 100% of Wilroot and HEM in exchange for 675,505 shares of the Company’s common stock and assumption of the debt of Wilroot and HEM. The Company has performed, for this quarterly report submitted on Form 10Q, the preliminary valuation analysis and purchase allocation of HEM in accordance with accounting guidance.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31.1		Certification of Dirk L. Benschop,Director, Chief Executive Office, President, Treasurer
31.2		Certification of Les Pettitt, Director, Chief Financial Officer and principal accounting officer
32.1		Certification of Dirk L. Benschop and Les Pettitt

SIGNATURES

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

TELECONNECT INC.

		Teleconnect Inc.

Date: August 18, 2011	By:	/s/ Dirk L. Benschop
		Dirk L. Benschop
		Director, Chief Executive Officer, President and Treasurer

		Teleconnect Inc.

Date: August 18, 2011	By:	/s/ Leslie G. Pettitt
		Leslie G. Pettitt
		Director, Chief Financial Officer and principal accounting officer

INDEX TO EXHIBITS

Exhibit

No.	Description

31.1	Certification of Dirk Benschop, Director, Chief Executive Office, President, Treasurer
31.2	Certification of Les Pettitt, Director, Chief Financial Officer and principal accounting officer
32.1	Certification of Dirk Benschop and Les Pettitt

Teleconnect Inc. - FORM 10-Q/A - August 19, 2011

Attached files

Teleconnect Inc. Reports