United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 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: 0-24857

 

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 ¨

 

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  x   No ¨

 

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 Exchange Act).  Yes  ¨   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  ¨ No ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the last practicable date: May 14, 2013: 9,497,215 shares of common stock, $.001 par value

 

 

TELECONNECT INC.

 

INDEX

 

PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and September 30, 2012		3
		Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended March 31, 2013 and 2012 (Unaudited)		5
		Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and 2012 (Unaudited)		6
		Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.		Quantitative and Qualitative Disclosure About Market Risk		13
Item 4.		Controls and Procedures		13
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings		14
Item 1A.		Risk Factors		14
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		14
Item 3.		Defaults Upon Senior Securities		14
Item 4.		Submission of Matters to a Vote of Security Holders		14
Item 5.		Other Information		14
Item 6.		Exhibits		14
Signatures				15

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TELECONNECT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

PAGE 1 of 2

 

		March 31,				September 30,
		2013				2012
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	94,781			$	38,067
Accounts receivable – trade			41,511				29,187
Inventory, work in process (net of reserve for slow moving inventory of $152,429 and $132,258 at March 31, 2013 and September 30, 2012, respectively)			86,804				212,281
Prepaid taxes			39,004				28,931
Prepaid expenses			69,415				50,363
Total current assets			331,515				358,829
PROPERTY AND EQUIPMENT, NET			1,982,823				2,419,386
OTHER ASSETS:
Due from Giga Matrix Holding, B.V.			542,478				565,044
Investment in Giga Matrix Holdings B.V.			-				-
Goodwill			398,136				402,022
Patents and tradenames, net			2,491,395				2,676,417
Long-term notes receivable (net of allowance for bad debts of $538,957 and $544,219 at March 31, 2013 and September 30, 2012, respectively)			-				-
		$	5,746,347			$	6,421,698

 

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

 

 

TELECONNECT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

PAGE 2 of 2

 

		March 31,				September 30,
		2013				2012
		(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable – trade		$	228,980			$	328,904
Accounts payable - related parties			374,928				305,154
Accrued liabilities
Related parties			1,019,567				669,731
Other			168,071				100,044
Deferred revenue			4,696				56,745
Notes payable			531,408				504,270
Loans from related parties			9,446,819				9,526,106
Total current liabilities			11,774,469				11,490,954
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, 9,467,215 and 8,167,415 shares outstanding at March 31, 2013 and September 30, 2012, respectively, 67 ($67) and 500,067 ($230,866) shares subscribed and unissued at March 31, 2013 and September 30, 2012, respectively			9,467				8,667
Additional paid-in capital			35,952,217				34,944,026
Accumulated deficit			(39,188,106	)			(37,157,926	)
Accumulated other comprehensive loss			(2,801,700	)			(2,864,023	)
Total stockholders' deficit			(6,028,122	)			(5,069,256	)
TOTAL LIABILITIES		$	5,746,347			$	6,421,698

 

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

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012

 

		For the three months ended								For the six months ended
		March 31,								March 31,
		2013				2012				2013				2012
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
SALES		$	79,171			$	92,481			$	284,507			$	111,866
COST OF SALES			85,321				81,096				248,345				125,114
GROSS (LOSS) INCOME			(6,150	)			11,385				36,162				(13,248	)
OPERATING EXPENSES:
Selling, general and administrative expenses			510,360				424,413				1,225,745				1,211,793
Depreciation and amortization			318,857				318,455				632,509				641,782
Total operating expenses			829,217				742,868				1,858,254				1,853,575
LOSS FROM OPERATIONS			(835,367	)			(731,483	)			(1,822,092	)			(1,866,823	)
OTHER INCOME (EXPENSES):
Interest income			-				-				-				20
Loss on investment			(8,788	)			(8,240	)			(18,884	)			(17,825	)
Other (expense) income			(178	)			20,860				(178	)			21,005
Interest expense - related parties			(95,278	)			(91,430	)			(189,026	)			(185,571	)
LOSS BEFORE INCOME TAXES			(939,611	)			(810,293	)			(2,030,180	)			(2,049,194	)
(EXPENSE) BENEFIT FROM INCOME TAXES			-				-				-				-
NET LOSS		$	(939,611	)		$	(810,293	)		$	(2,030,180	)		$	(2,049,194	)
BASIC AND DILUTED LOSS PER SHARE:		$	(0.10	)		$	(0.11	)		$	(0.22	)		$	(0.29	)
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING			9,334,923				7,429,413				9,172,631				7,186,302
THE COMPONENTS OF COMPREHENSIVE LOSS:
Net Loss		$	(939,611	)		$	(810,293	)		$	(2,030,180	)		$	(2,049,194	)
Foreign currency translation adjustment			241,170				(158,968	)			94,429				24,618
Tax effect on currency translation			(81,998	)			54,049				(32,106	)			(8,370	)
COMPREHENSIVE LOSS		$	(780,439	)		$	(915,212	)		$	(1,967,857	)		$	(2,032,946	)

 

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

 

 

TELECONNECT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31,

 

		2013				2012
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(2,030,180	)		$	(2,049,194	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			632,509				641,782
Stock-based compensation			17,638				-
Inventory allowance			21,918				22,732
Loss on equity investments			18,884				17,825
Change in operating assets and liabilities:
Accounts receivable - trade			(12,606	)			24,248
Accounts receivable - other			-				22,639
Inventory			101,507				222
Prepaid expenses			(19,539	)			(7,350	)
Prepaid taxes			(10,353	)			54,405
Accounts payable			(24,020	)			65,651
Accrued liabilities and income taxes payable			425,305				274,325
Deferred Revenue			(42,857	)			-
Net cash used in operating activities			(921,794	)			(932,715	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Giga Matrix			(1,781	)			-
Purchase of patents			(49,990	)			-
Purchase of property and equipment			(11,933	)			(196,713	)
Net cash used in investing activities			(63,704	)			(196,713	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock			991,353				842,081
Loan proceeds			32,013				200,340
Loan proceeds from related parties			12,806				-
Net cash provided by financing activities			1,036,172				1,042,421
EFFECT OF EXCHANGE RATE			6,040				(15,508	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			56,714				(102,515	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			38,067				117,145
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	94,781			$	14,630

 

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

 

TELECONNECT INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2013

 

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 and six months ended March 31, 2013 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 subsidiaries PhotoWizz BV (“MediaWizz”), Wilroot B. V. (Wilroot) and Hollandsche Exploitatie Maatschappij (“HEM”). All significant inter-company balances and transactions have been eliminated.

 

The balance sheet at September 30, 2012 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, 2012.

 

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.

 

Recently Issued Accounting Pronouncements –

 

In March 2013, the Financial Accounting Standards Board (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.

 

2. 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 condensed consolidated financial statements.

 

3. NOTES PAYABLE

 

During the six months ended March 31, 2013 the Company received $32,013 in bridge loans from potential investors. The loans are due on demand and do not accrue interest.

 

4. LOANS FROM RELATED PARTIES

 

During the six months ended March 31, 2013 the Company received $12,806 in loans from related parties. The loans are due on demand and do not accrue interest.

 

5. EQUITY TRANSACTIONS

 

During the six months ended March 31, 2013 the Company sold 775,000 shares of its common stock for $991,353 to qualified investors.

 

The purchase agreement for 150,000 of the shares carries anti-dilution rights for 180 days and the right to purchase up to 150,000 additional shares for the same price for 180 days from the date of purchase. 4,800 shares of the Company’s common stock have been issued under these anti-dilution rights.

 

 

During the six months ended March 31, 2013 the Company issued 20,000 shares of its common stock valued at $17,638 for services.

 

6. INCOME TAXES

 

The Company has not recorded any federal income tax expense or benefit for the three and six months ended March 31, 2013 and 2012, mainly due to available net operating loss carryforwards. The Company has recorded an income tax valuation allowance equal to the benefit of any deferred tax asset because of the uncertain nature of realization.

 

7. 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 March 31, 2013 or 2012.

 

The following reconciles the components of the loss per share computation for the three months ended March 31 2013 and 2012:

 

		2013				2012
Basic and diluted loss per share computation
Numerator:
Net loss		$	(939,611	)		$	(810,293	)
Denominator:
Weighted average common shares outstanding			9,334,923				7,429,413
Basic and diluted loss per share:		$	(0.10	)		$	(0.11	)

 

The following reconciles the components of the loss per share computation for the six months ended March 31 2013 and 2012:

 

		2013				2012
Basic and diluted loss per share computation
Numerator:
Net loss		$	(2,030,180	)		$	(2,049,194	)
Denominator:
Weighted average common shares outstanding			9,172,631				7,186,302
Basic and diluted loss per share:		$	(0.22	)		$	(0.29	)

 

8. GIGA MATRIX HOLDING

 

Giga Matrix Holding, BV (“Giga”), 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, 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 $18,884 and $17,825 in losses on its equity investment during the six months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the Company’s maximum exposure to further losses is limited to the amount due from Giga of $542,478.

 

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 six months ended March 31, 2013 and 2012 are as follows:

 

		2013				2012
		(Unaudited)				(Unaudited)
Net loss		$	(38,539	)		$	(36,376	)

 

 

9. GOING CONCERN

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2013, the Company had a working capital deficit of $11,442,954 and a net loss of $2,016,542 for the six months then ended. These factors raise substantial doubt about the Company's ability to continue as a going concern. The condensed 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. The Company intends to look for additional equity 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 debt and for working capital.

 

10. SUBSEQUENT EVENTS

 

Subsequent to March 31, 2013, investors purchased 175,000 shares of the Company’s common stock for $224,088, (€175,000).

 

Subsequent to March 31, 2013, the Company issued 30,000 shares of the Company’s common stock with a fair value of $38,520 for services.

 

 

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

 

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. The Company is not reliant on any one specific customer for revenues.

 

The changed Alcohol and Catering Act took effect in The Netherlands as of January 1, 2013. After this date, Dutch law enforcement authorities can temporarily close the alcohol section of supermarkets when they are repeatedly caught selling alcohol to minors. It is expected that this change will generate a significant demand for Ageviewers.

 

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 slightly as the Company expands its points of sale in Europe as well as when it prepares itself to enter the U.S. market.

 

During the three month period ended on March 31, 2013, directors of the Company concluded that it is in the best interest of the Company to create an Advisory Board with senior industry members. At the next Board meeting of the Company, this proposal should be approved and the Advisory Board formally established. After members of the Advisory Board are selected, the Company will file an 8K disclosing the members of the Advisory Board.

 

 

BALANCE SHEET COMPARISON AT MARCH 31, 2013 AND SEPTEMBER 30, 2012

 

Assets: Total assets at March 31, 2013 decreased $675,351 or 10.5% to $5,746,347 compared to $6,421,698 at September 30, 2012.  This decrease is due primarily to the sale by Mediawizz of vending units to a specific customer to be placed in airports and train stations for the sale of travel products during the quarter ended March 31, 2013 which were on hand at fiscal year end as well as a decrease in prepaid legal expense used during the quarter for work on patents and the use of prepaid expenses in subsidiaries.

 

Liabilities: Current liabilities at March 31, 2013 increased $283,515 or 2.5% to $11,774,469 compared to $11,490,954 at September 30, 2012. This increase is due primarily to an increase in accounts payable and accrued liabilities associated to related parties as well as an increase in other accrued liabilities offset by a decrease in deferred revenue. Specifically, the increase of $69,774 in accounts payable related parties is due to the additional accrual of compensation for officers and management; the increase in accrued liabilities other of $68,027 is due to the increase in HEM of accrued payroll taxes, accrued employee leave and accrued rent; and the increase of accrued liabilities related parties of $349,836 is related to both the accrued interest of a related party note and additional unpaid management fees. The decrease of $99,924 in accounts payable trade is due to payments made using funds raised from sales of stock and sales of vending machines by Mediawizz.

 

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

 

We had net loss of $939,611 for the three months ended March 31, 2013 as compared to net loss of $810,293 during the comparable period in 2012, an increase of 16.0% or $129,318. A comparison of revenues and expenses for the two periods is as follows:

 

REVENUES

 

Revenues for the three months ended March 31, 2013 were $79,171 as compared to revenues for the same period in 2012 of $92,481; a decrease of $13,310 or 14.4%.

 

Current revenues were derived from sales of a vending solution for airports and railway stations. The breakdown of revenues for the three months ended March 31, 2013 consists of revenues of $63,426 from sale of vending machines, $1,335 from age verification, $4,465 from narrowcasting, and $9,945 from miscellaneous. The breakdown of revenues for the three months ended March 31, 2012 consists of revenues of $14,949 from installation and service, $532 from age verification, $2,252 from narrowcasting, $5,747 from calling credits, $68,321 from kiosk sales and $680 from miscellaneous.

 

COST OF SALES

 

Cost of sales for the three month period ended March 31, 2013 was $85,321 as compared to $81,096 for the same period of 2012; an increase of 5.2% or $4,225 The breakdown of 2012 costs consisted of telecommunication costs of $10,616, kiosk support costs of $19,573, calling credit costs and other costs of $5,597, costs of kiosks of $34,094 and inventory write down of $11,216. During three month period ended March 31, 2013, the breakdown of costs of sales consists of telecommunications costs of $13,573, vending machine costs of $50,525, kiosk support costs of $4,033, inventory writdowns of $11,035 and other miscellaneous costs of $6,155.

 

During three month periods ended March 31, 2013 and 2012, the cost of sales included costs derived from maintaining the contracts in relation to its age-validation business which provide the Company with the technical acceptance, market exposure and credibility required upon which to base the service offering. 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.  

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses have increased by $85,947 or 20.3% to $510,360 during the three months ended March 31, 2013 as compared to $424,413 for the comparable period in 2012.  This increase in selling, general and administrative expenses is primarily due to an increase in the cost of outside professional services.

 

COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2013 AND 2012

 

We had net loss of $2,030,180 for the six months ended March 31, 2013 as compared to net loss of $2,049,194 during the comparable period in 2012, a decrease of 0.9% or $19,014. A comparison of revenues and expenses for the two periods is as follows:

 

REVENUES

 

Revenues for the six months ended March 31, 2013 were $284,507 as compared to revenues for the same period in 2012 of $111,866; an increase of $172,641 or 154.3%.

 

 

Current revenues were derived from sales of a vending solution for airports and railway stations. The breakdown of revenues for the six months ended March 31, 2013 consists of revenues of $267,456 from the sale of vending machines, $1,335 from age verification, $4,610 from narrowcasting, and $11,106 from miscellaneous. The breakdown of revenues for the six months ended March 31, 2012 consists of revenues of $28,126 from installation and service, $532 from age verification, $2,252 from narrowcasting, $10,673 from narrowcasting, $68,321 from kiosk sales and $1,962 from miscellaneous.

 

COST OF SALES

 

Cost of sales for the six month period ended March 31, 2013 were $248,345 as compared to $125,114 for the same period of 2012; an increase of 98.5% or $123,231. The breakdown of 2012 costs consisted of telecommunication costs of $26,347, kiosk support costs of $30,454, calling credit costs of $10,647, photoprint costs of $840, costs of kiosks of $34,094, and inventory write downs of $22,732. During six month period ended March 31, 2013, the breakdown of costs of sales consists of telecommunications costs of $27,207, vending machine costs of $186,130, kiosk support costs of $6,710, inventory writdowns of $21,919 and other miscellaneous costs of $6,379.

 

During the six month period ended March 31, 2013, the cost of sales also included costs derived from maintaining the contracts in relation to its age-validation business which provide the Company with the technical acceptance, market exposure and credibility required upon which to base the service offering. 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.  

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative expenses have increased by $13,952 to $1,225,745 during the six months ended March 31, 2013 as compared to $1,211,793 for the comparable period in 2012.  There were no significant changes in selling, general and administrative expenses period to period.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2013 and September 30, 2012, Teleconnect Inc. had negative working capital of approximately $11,443,000 and $11,132,000, respectively.  This decrease of working capital is primarily a result of the change in the Euro/US Dollar exchange rate during the quarter.

 

The ability of the Company to satisfy its obligations and to continue as a going concern will depend on raising funds through the sale of additional shares of its common stock, increase borrowing, and 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 the sale of Common Stock.

 

 

The Company intends to look for additional equity 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 debt and for working capital.  

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

During the six months ended March 31, 2013 the Company sold 775,000 shares of its common stock for $991,353 to qualified investors.

 

The purchase agreement for 150,000 of the shares carries anti-dilution rights for 180 days and the right to purchase up to 150,000 additional shares for the same price for 180 days from the date of purchase. 4,800 shares of the Company’s common stock have been issued under these anti-dilution rights.

 

During the six months ended March 31, 2013 the Company issued 20,000 shares of its common stock valued at $17,638 for services.

 

Subsequent to March 31, 2013, investors purchased 175,000 shares of the Company’s common stock for $224,088, (€175,000).

 

Subsequent to March 31, 2013, the Company issued 30,000 shares of the Company’s common stock with a fair value of $38,520 for services.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures and internal controls that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures and internal controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures and internal controls.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.  

 

As required by the Securities and Exchange Commission Rule 13a-15(e) and Rule 15d-15(e), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Controls over Financial Reporting

 

There have not been any changes in our internal controls over financial reporting during the six months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 

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. During the six month period ended March 31, 2013, the Company continued 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 developments 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 1A. RISK FACTORS

 

None

 

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

 

During the six months ended March 31, 2013 the Company sold 775,000 shares of its common stock for $991,353 to qualified investors.

 

The purchase agreement for 150,000 of the shares carries anti-dilution rights for 180 days and the right to purchase up to 150,000 additional shares for the same price for 180 days from the date of purchase. 4,800 shares of the Company’s common stock have been issued under these anti-dilution rights.

 

During the six months ended March 31, 2013 the Company issued 20,000 shares of its common stock valued at $17,638 for services.

 

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 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

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

 

None

 

ITEM 5. OTHER INFORMATION

 

  None

 

ITEM 6. EXHIBITS

 

31.1		Certification of  Dirk L. Benschop, Director,  Chief  Executive Officer, President, Treasurer
31.2		Certification of  Leslie G. Pettitt, Director, Chief Financial Officer and principal accounting officer
32.1		Certification of  Dirk L. Benschop and Leslie G. 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: May 14, 2013	By:	/s/ Dirk L. Benschop
		Dirk L. Benschop
		Director, Chief  Executive Officer, President and Treasurer

 

		Teleconnect Inc.
Date: May 14, 2013	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 L. Benschop, Director, Chief  Executive Office, President, Treasurer
31.2		Certification of Leslie G. Pettitt, Director, Chief Financial Officer and principal accounting officer
32.1		Certification of Dirk L. Benschop and Leslie G. Pettitt