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, 2014

 

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, 2014: 9,912,140 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, 2014 (unaudited) and September 30, 2013		1
		Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended March 31, 2014 and 2013 (Unaudited)		3
		Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2014 and 2013 (Unaudited)		4
		Notes to Condensed Consolidated Financial Statements (Unaudited)		5
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.		Quantitative and Qualitative Disclosure About Market Risk		12
Item 4.		Controls and Procedures		12
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings		13
Item 1A.		Risk Factors		13
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		13
Item 3.		Defaults Upon Senior Securities		13
Item 4.		Submission of Matters to a Vote of Security Holders		14
Item 5.		Other Information		15
Item 6.		Exhibits		15
		Signatures		16
		Index to Exhibits		17

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TELECONNECT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

PAGE 1 of 2

 

		March 31,				September 30,
		2014				2013
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	39,961			$	83,886
Accounts receivable – trade			26,171				36,373
Other receivables - related parties			222,076				155,929
Inventory, work in process (net of reserve for slow moving inventory of $213,629 and $186,851 at March 31, 2014 and September 30, 2013, respectively)			40,196				65,460
Prepaid taxes			24,020				25,528
Prepaid expenses			49,998				33,249
Total current assets			402,422				400,425
PROPERTY AND EQUIPMENT, NET			1,191,754				1,587,003
OTHER ASSETS:
Due from Giga Matrix Holding, B.V.			576,285				567,345
Investment in Giga Matrix Holdings B.V.			—				—
Goodwill			428,699				419,900
Patents and tradenames, net			2,262,240				2,413,530
Long-term notes receivable (net of allowance for bad debts of $580,331 and $568,420 at March 31, 2014 and September 30, 2013, respectively)			—				—
		$	4,861,400			$	5,388,233

 

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

 

TELECONNECT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED

 

PAGE 2 of 2

 

		March 31,				September 30,
		2014				2013
		(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable – trade		$	421,505			$	239,644
Accounts payable - related parties			267,571				305,781
Accrued liabilities:
Related parties			665,534				474,819
Other			104,700				67,158
Deferred revenue			3,673				4,401
Notes payable			558,414				546,953
Loans from related parties (net of loan discount of $130,497 and $168,685 at March 31, 2014 and September 30, 2013, respectively)			1,395,904				848,985
Total current liabilities			3,417,301				2,487,741
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, 9,286,806 and 8,148,631 shares outstanding at March 31, 2014 and September 30, 2013, respectively, 776,012 ($350,548) and 1,724,627 ($746,695) shares subscribed and unissued at March 31, 2014 and September 30, 2013, respectively			10,063				9,873
Additional paid-in capital			46,663,014				46,451,208
Accumulated deficit			(42,317,537	)			(40,637,258	)
Accumulated other comprehensive loss			(2,911,441	)			(2,923,331	)
Total stockholders' equity			1,444,099				2,900,492
TOTAL LIABILITIES		$	4,861,400			$	5,388,233

 

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, 2014 AND 2013

 

		For the three months ended								For the six months ended
		March 31,								March 31,
		2014				2013				2014				2013
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
SALES		$	99,911			$	79,171			$	130,588			$	284,507
COST OF SALES			111,093				85,321				167,494				248,345
GROSS (LOSS) INCOME			(11,182	)			(6,150	)			(36,906	)			36,162
OPERATING EXPENSES:
Selling, general and administrative expenses			392,068				510,360				854,946				1,225,745
Depreciation and amortization			312,597				318,857				627,326				632,509
Total operating expenses			704,665				829,217				1,482,272				1,858,254
LOSS FROM OPERATIONS			(715,847	)			(835,367	)			(1,519,178	)			(1,822,092	)
OTHER INCOME (EXPENSES):
Loss on investment			(3,638	)			(8,788	)			(7,247	)			(18,884	)
Other (expense) income			(627	)			(178	)			(811	)			(178	)
Interest expense - related parties			(85,422	)			(95,278	)			(153,043	)			(189,026	)
LOSS BEFORE INCOME TAXES			(805,534	)			(939,611	)			(1,680,279	)			(2,030,180	)
(EXPENSE) BENEFIT FROM INCOME TAXES			—				—				—				—
NET LOSS		$	(805,534	)		$	(939,611	)		$	(1,680,279	)		$	(2,030,180	)
BASIC AND DILUTED LOSS PER SHARE:		$	(0.08	)		$	(0.10	)		$	(0.17	)		$	(0.22	)
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING			10,062,818				9,334,923				10,022,807				9,172,631
THE COMPONENTS OF COMPREHENSIVE LOSS:
Net loss		$	(805,534	)		$	(939,611	)		$	(1,680,279	)		$	(2,030,180	)
Foreign currency translation adjustment			(74,833	)			241,170				18,015				94,429
Tax effect on currency translation			25,460				(81,998	)			(6,125	)			(32,106	)
COMPREHENSIVE LOSS		$	(857,907	)		$	(780,439	)		$	(1,668,389	)		$	(1,967,857	)

 

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,

		2014				2013
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,680,279	)		$	(2,030,180	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			627,326				632,509
Loan discount amortization			123,447				—
Stock-based compensation			—				17,638
Inventory allowance			22,638				21,918
Loss on disposal of fixed assets			442				—
Loss on investment			7,247				18,884
Change in operating assets and liabilities:
Accounts receivable - trade			10,964				(12,606	)
Accounts receivable - other			(62,879	)			—
Inventory			3,998				101,507
Prepaid expenses			(16,052	)			(19,539	)
Prepaid taxes			2,043				(10,353	)
Accounts payable			132,222				(24,020	)
Accrued liabilities and income taxes payable			216,900				425,305
Deferred revenue			(15	)			(42,857	)
Net cash used in operating activities			(611,998	)			(921,794	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Giga Matrix			(4,298	)			(1,781	)
Purchase of patents			(16,276	)			(49,990	)
Purchase of property and equipment			—				(11,933	)
Proceeds from disposal of equipment			17,174				—
Net cash used in investing activities			(3,400	)			(63,704	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock			349,441				991,353
Repurchase and cancellation of stock			(137,446	)			—
Loan proceeds			—				32,013
Loan proceeds from related parties			402,223				12,806
Net cash provided by financing activities			614,218				1,036,172
EFFECT OF EXCHANGE RATE			(42,745	)			6,040
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(43,925	)			56,714
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			83,886				38,067
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	39,961			$	94,781

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

 

 TELECONNECT INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

 

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, 2014 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, 2013 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, 2013.

 

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.

 

2. LOANS FROM RELATED PARTIES

 

During the six months ended March 31, 2014 the Company sold promissory notes with a face value of $262,081 (€191,500) and 814,894 shares of its common stock together as a package to qualified investors for $524,161 (€383,000). An outstanding loan €28,000 to related party was applied to the purchase of these stock and note packages. The purchase price was allocated to the notes and stock based on the relative fair value of each with $349,441 allocated to the shares and $174,721 allocated to the promissory notes, therefore a discount on the notes of $87,360 was recorded and is being amortized over 1 year.

 

Loan discount amortization of $68,154 and $123,447 is included in interest expense for the three and six months ended March, 31, 2014, respectively. The promissory notes bear 6% interest and are due when the Company has positive cash flow from operations.

 

During the six months ended March 31, 2014 the Company issued promissory notes of $227,502 which are due in one year and bear 8% interest. If the notes are not paid at the due date, the principal plus accrued interest will convert to shares of Company common stock at the rate of €0.30 ($0.41) per share.

 

The weighted average interest rate of the loans from related parties for the six months ended March 31, 2014 was 4.89%.  

 

3. NOTE PAYABLE

 

As of March 31, 2014 and September 30, 2013 the Company has three short-term bridge loans totaling $558,414 and $546,953, respectively, from potential investors. The notes bear interest between 0% and 8% per year and are due on demand.

4. 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.

 

5. EQUITY TRANSACTIONS

 

During the six months ended March 31, 2014 the Company issued 814,894 shares of its common stock in relation to the sale of common stock and promissory note packages to qualified investors (See Note 2). The purchase price was allocated to the notes and stock based on the relative fair value of each with $349,440 allocated to the shares and $174,721 allocated to the promissory notes.

 

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 were 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 €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 was paid in December 2013. The trustee returned the last 625,334 share certificates to the Company in December 2013.

 

6. INCOME TAXES

 

The Company has not recorded any federal income tax expense or benefit for the three and six months ended March 31, 2014 and 2013, 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, 2014 or 2013.

 

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

 

		2014				2013
Basic and diluted loss per share computation
Numerator:
Net loss		$	(805,534	)		$	(939,611	)
Denominator:
Weighted average common shares outstanding			10,062,818				9,334,923
Basic and diluted loss per share:		$	(0.08	)		$	(0.10	)

 

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

 

		2014				2013
Basic and diluted loss per share computation
Numerator:
Net loss		$	(1,680,279	)		$	(2,030,180	)
Denominator:
Weighted average common shares outstanding			10,022,807				9,172,631
Basic and diluted loss per share:		$	(0.17	)		$	(0.22	)

 

 

8. 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 $3,638 and $8,788 in losses on its equity investment during the three months ended March 31, 2014 and 2013, respectively and $7,247 and $18,884 during the six months ended March 31, 2014 and 2013, Respectively.  As of March 31, 2014, the Company’s maximum exposure to further losses is limited to the amount due from Giga of $576,285.

 

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, 2014 and 2013 are as follows:

 

		2014				2013
		(Unaudited)				(Unaudited)
Net loss		$	(14,789	)		$	(38,539	)

 

9. 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 $1,680,279 for the six months ended March 31, 2014 and $2,030,180 for the six months ended March 31, 2013.  In addition, the Company has incurred substantial losses since its inception. 

 

As of March 31, 2014, the Company had a working capital deficit of $3,014,879 as compared to its working capital deficit as of September 30, 2013 of $2,087,316.  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.  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.

 

10. SUBSEQUENT EVENTS

 

Subsequent to March 31, 2014 the Company received $144,744 (€105,000) for 350,000 shares of the Company’s common stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 amended Alcohol and Catering Act took effect in The Netherlands as of January 1, 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. It was expected that the enforcement of this change would generate a significant demand for Ageviewers. Political resistance, however, has delayed the enforcement of the Act. With public awareness increasing, it is expected that the retail outlet demand for Ageviewers will commence shortly.

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.

During the three month period ended on March 31, 2014, 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 Annual Board meeting of the Company held on March 27, 2014, this subject was mentioned though no vote was taken. After members of the Advisory Board are selected, the Company will file an 8K disclosing the newly appointed members of the Advisory Board.

 

BALANCE SHEET COMPARISON AT MARCH 31, 2014 AND SEPTEMBER 30, 2013

 

Assets: Total assets at March 31, 2014 decreased $526,833 or 9.8% to $4,861,400 compared to $5,388,233 at September 30, 2013.  This decrease is due primarily to the depreciation and amortization of fixed assets and intangible assets during the six months ended March 31, 2014.

 

Liabilities: Current liabilities at March 31, 2014 increased $929,560 or 37.4% to $3,417,301 compared to $2,487,741 at September 30, 2013. This increase is due primarily to an increase in accounts payable trade of $181,861, an increase in accrued liabilities to related parties of $190,715 related to both the accrued interest of related party notes and additional unpaid management fees, increase in other accrued liabilities of $37,542 and loans from related parties of $546,919. The increase in accounts payable trade is a consequence of the decrease in working capital.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

 

We had net loss of $805,534 for the three months ended March 31, 2014 as compared to net loss of $939,611 during the comparable period in 2013, a decrease of 14.2% or $134,077. A comparison of revenues and expenses for the two periods is as follows:

 

REVENUES

 

Revenues for the three months ended March 31, 2014 were $99,911 as compared to revenues for the same period in 2013 of $79,171; an increase of $20,740 or 26.2%.

 

Current revenues were derived from sales of kiosk equipment. The breakdown of revenues for the three months ended March 31, 2014 consists of revenues of $97,288 from sale of kiosk equipment, $655 from age verification, $983 from narrowcasting, and $985 from miscellaneous. 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.

 

COST OF SALES

 

Cost of sales for the three month period ended March 31, 2014 was $111,093 as compared to $85,321 for the same period of 2013; an increase of 30.2% or $25,772. During three month period ended March 31, 2014, the breakdown of costs of sales consists of telecommunications costs of $12,316, vending machine costs of $74,322, kiosk support costs of $13,139 and inventory write-downs of $11,316. The breakdown of 2013 costs consisted of telecommunications costs of $13,573, kiosk costs of $50,525, kiosk support costs of $4,033, inventory write-downs of $11,035 and other miscellaneous costs of $6,155.

 

During three month periods ended March 31, 2014 and 2013, 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 decreased by $118,292 or 23.2% to $392,068 during the three months ended March 31, 2014 as compared to $510,360 for the comparable period in 2013.  This decrease in selling, general and administrative expenses is primarily due to a decrease in the cost of outside professional services and management fees. 

COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2014 AND 2013

 

We had net loss of $1,680,279 for the six months ended March 31, 2014 as compared to net loss of $2,030,180 during the comparable period in 2013, a decrease of 17.2% or $349,901. A comparison of revenues and expenses for the two periods is as follows:

 

REVENUES

 

Revenues for the six months ended March 31, 2014 were $130,588 as compared to revenues for the same period in 2013 of $284,507; a decrease of $153,919 or 54.1%.

 

Current revenues were derived from sales of kiosk equipment. The breakdown of revenues for the six months ended March 31, 2014 consists of revenues of $127,411 from the sale of kiosk equipment, $655 from age verification, $983 from narrowcasting, and $1,539 from miscellaneous. 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.

 

COST OF SALES

 

Cost of sales for the six month period ended March 31, 2014 were $167,494 as compared to $248,345 for the same period of 2013; a decrease of 32.6% or $80,851. The breakdown of 2014 costs consisted of telecommunications costs of $24,566, kiosk costs of $103,767, kiosk support costs of $16,523 and inventory write-downs of $22,638. 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 write-downs of $21,919 and other miscellaneous costs of $6,379.

 

During the six month period ended March 31, 2014, 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 decreased by $370,799 or 30.3% to $854,946 during the six months ended March 31, 2014 as compared to $1,225,745 for the comparable period in 2013.  This difference is due to less reliance on professional services and management fees.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2014 and September 30, 2013, Teleconnect Inc. had negative working capital of approximately $3,014,879 and $2,087,316, respectively.  This decrease of working capital, $927,563 or 44.4%, is primarily a result of the increase in total current liabilities of $929,560 as detailed previously.

 

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, 2014 the Company issued 814,894 shares of its common stock in relation to the sale of common stock and promissory note packages to qualified investors (See Note 2).

 

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 were to be repurchased by the Company for a total of €500,000 payable as described below. The trustee returned the last 625,334 share certificates to the Company in December 2013.

 

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, 2014 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, 2014, 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, 2014 the Company issued 814,894 shares of its common stock in relation to the sale of common stock and promissory note packages to qualified investors (See Note 2).

 

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 were to be repurchased by the Company for a total of €500,000 payable as described below. The trustee returned the last 625,334 share certificates to the Company in December 2013.

 

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

 

On March 27, 2014, at a validly called annual meeting of the stockholders of the Company, where there were present 94.59% (or 9,417,988) of the total outstanding voting shares of Common Stock. The matters submitted to a vote of the common stockholders at the meeting and the voting results therefore are as follows:

Proposal 1: Election of Directors

 

To elect directors to serve until the next annual meeting of shareholders and until their successors are elected and qualified.

 

Name of Nominee	For	Against	Abstain	Broker Non-Votes
Dirk Benschop	9,417,988	0	0	0
Gustavo Gomez	9,417,988	0	0	0
Les Pettitt	9,417,988	0	0	0
Jan M. Hovers	9,417,988	0	0	0
Ralph Kröner	9,417,988	0	0	0

 

Proposal 2: Ratify the appointment of independent auditors

 

To ratify the appointment of Coulter & Justus, P.C. as the independent auditors of Teleconnect Inc. for the fiscal year ending September 30, 2014.

 

For	Against	Abstain	Broker Non-Votes
9,417,988	0	0	0

 

Proposal 3: Non-binding approval of executive compensation

 

To obtain non-binding advisory approval of the compensation paid to Teleconnect’s executive officers.

 

For	Against	Abstain	Broker Non-Votes
9,417,988	0	0	0

 

Proposal 4: To obtain a non-binding advisory vote on the frequency of future votes regarding executive compensation.

 

Nº of years	For	Against	Abstain	Broker Non-Votes
1	106,383	9,311,605	0	0
2	9,311,605	106,383	0	0
3	0	9,417,988	0	0

 

Based on the results of the voting in relation to Proposal 4 regarding the frequency of future votes on the compensation of executives, the Board has decided to include a non-binding advisory shareholder vote on the compensation of executives in its proxy materials each 2 year period.

 

Proposal 5: Ratification of the Board of Directors’ actions and decisions since the last shareholder meeting.

 

For	Against	Abstain	Broker Non-Votes
9,417,988	0	0	0

 

 

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, 2014	By:	/s/ Dirk L. Benschop
		Dirk L. Benschop
		Director, Chief  Executive Officer, President and Treasurer

 

		Teleconnect Inc.
Date: May 14, 2014	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