U.S. Securities and Exchange Commission

 

Washington, D.C. 20549

 

Form 10-K

 

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

 

For the fiscal year ended September 30, 2012

 

or

 

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

 

For the transition period from ______________ to ______________

 

Commission File Number: 0-30611

 

Teleconnect Inc.

(Exact name of registrant as specified in its charter)

 

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

 

Oude Vest 4

4811 HT, Breda

The Netherlands

(Address of principal executive offices)

 

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

 

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

 

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

 

Common Stock, $0.001 par value

Title of Class

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

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

 

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

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter ended March 31, 2012: aggregate market value of $1,299,827 with 6,499,133 shares outstanding at $0.20.

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the last practicable date: December 20, 2012: 9,174,915 shares of common stock, $.001 par value

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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

 

 
 

 

TABLE OF CONTENTS

 

PART I
     
Item 1 Business 3
Item 1A Risk Factors 6
Item 1B Unresolved Staff Comments 9
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Mine Safety Disclosure 9
     
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 9
Item 6 Selected Financial Data 10
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk 14
Item 8 Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28
Item 9A Controls and Procedures 28
Item 9B Other Information 28
     
PART III
Item 10 Directors, Executive Officers and Corporate Governance 29
Item 11 Executive Compensation 30
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 32
Item 13 Certain Relationships and Related Transactions, and Director Independence 33
Item 14 Principal Accounting Fees and Services 33
     
PART IV
Item 15 Exhibits, Financial Statements, Schedules 34
     
Signatures 35

 

2
 

 

PART I

 

Item 1. Business

 

General

 

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

 

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

 

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

 

Products and service offering

 

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

 

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

 

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

 

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

 

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

 

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

 

Market

 

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

 

3
 

 

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

 

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

 

Management and personnel

 

At September 30, 2012, the Teleconnect Board of Directors consisted of three officers Dirk Benschop, (President and CEO); Gustavo Gomez, (Chief Compliance Officer) and Les Pettitt, (Chief Financial Officer) and one non-executive director (Jan Hovers, Supervisory Director). Mr. Kees Lenselink resigned from the Board of Directors on August 9th, 2012 due to other professional commitments. On December 14th, 2012, Mr. Ralph Kröner was named to the Board of Directors.

 

The Dutch wholly owned subsidiaries HEM and Mediawizz, along with Giga Matrix, in which we hold an equity interest, are managed by a team of five managers, with a staff of two part-time administrative assistants. In addition, four external specialists support our automation processes on a contract basis. The age validation center currently employs 14 operators, seven of whom have temporary contracts.  There are 26 people involved in the operation as of September 30, 2012, none of whom are represented by a labor union with respect to his or her employment by the Company. All personnel, except for management, work on a part–time basis.

 

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

 

Stage of development of business

 

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

 

After executing this millionth age check in December 2011, both effectiveness and acceptance had been evidenced and all earlier set development stage targets had been met. The Company hereafter launched its current marketing plan, which aims at a broad implementation of the system in Dutch supermarkets and coincides with changes in the Alcohol and Catering Act in The Netherlands as of the 1 st of January 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. When sufficient progress is made in the execution of its current marketing plan, for which the next target is to reach an expansion rate of over 16 new installations per month, the Company believes it will be able to start the next phase of its business plan: the implementation of Ageviewers in the United States and EU countries. Depending on the pace with which we develop our home market, we anticipate that we will be in a position to start exploring these markets in the course of 2013.

 

As we expect independent, smaller retail organizations to take the lead in the use of Ageviewers, it is unlikely that a significant percentage of the Company’s revenue will be derived from just one or few customers during fiscal year 2013.The Company expects, however, that larger supermarket chains will gradually leave the concept of traditional age validation and chose the Ageviewers solution. In such cases, the Company intends to take the necessary precautions to prevent credit risks.

 

Research and Development

 

The Company spent approximately $23,000 and $176,000 on research and development in the fiscal years ended September 30, 2012 and 2011 respectively. In addition HEM expended significant resources on research and development prior to its acquisition by the Company.

 

Suppliers

 

We depend on the supply of electronic components and parts from various suppliers. They have from time to time experienced short-term delays in providing the requested parts, however we have been able to order from other suppliers when needed.

 

4
 

 

Patents

 

The Company has various patents related to the Ageviewer systems which are generally effective for 10 to 20 years from the of filing an application. The Company believes that its business is not significantly dependent on patent protection. The Company does continuously develop intellectual property and in 2012 filed an application for additional products and techniques used in age verification.

 

Discontinued operation

 

Even though the Company has discontinued its majority share in telecommunications in Spain, it has maintained a 10% stake in Teleconnect SA. During the fiscal year 2012, Teleconnect SA continued to provide prepaid voice telephone services to its customers.

 

5
 

 

Item 1A Risk Factors

 

Lack of profitability

 

We may not achieve or sustain profitability in the future. We have incurred substantial net losses and negative cash flow from operations since our inception. As of September 30, 2012, we had an accumulated deficit of $37,157,926 and had a stockholders' deficit of $5,069,256. As shown in the accompanying consolidated financial statements, the Company had a net loss of $3,875,768 in 2012 and $3,262,566 in 2011. As of September 30, 2012, the Company had a working capital deficit of $11,132,125 as compared to its working capital deficit as of September 30, 2011 of $10,107,484.

 

Going concern

 

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

 

Need for additional funds

 

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

 

Exit for investors

 

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

 

The market: resistance

 

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

 

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

 

Success dependent on success of Ageviewers

 

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

 

Management and personnel

 

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

 

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

 

6
 

 

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

 

Sales Relationships

 

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

 

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

 

Suppliers

 

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

 

Service Disruptions

 

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

 

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

 

Competition.

 

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

 

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

 

Variable Revenues and Operating Results

 

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

 

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

 

7
 

 

  * our success in expanding our sales force and expanding our distribution channels.

 

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

 

Governmental Regulation

 

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

 

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

 

Consumer susceptibility for privacy issues

 

Abuse of personal data in any other system, such as camera systems or body scanners, might affect the public opinion on the automated processing of personal data and images. If the public opinion would turn against systems that process these data, this might severely affect our continuity. The Ageviewers system has been registed with the Dutch Data Protection Authority as complying with the Dutch Act on Protection of Personal Data. The system does not use personal information for any longer than what is needed to approve or disapprove a transaction. As we expand in other markets additional additional approvals of other goverments could be required in regards to privacy.

 

Penny Stock Trading Rules.

 

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

 

Future Sales of Our Common Stock May Depress Our Stock Price

 

The market price of our Common Stock could decline as a result of sales of substantial amounts of our Common Stock in the public market in the future. In addition, it is more difficult for us to raise funds through future offerings of Common Stock. There were 8,167,415 shares of our Common Stock outstanding as “restricted securities” as defined in Rule 144 as of September 30, 2012, which will be available for sale in the future. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

Technological Changes

 

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

 

Voting Control

 

The largest single shareholder of the Company as of September 30, 2012, Mr. Hendrik van den Hombergh, owned directly and beneficially approximately 24.7% of the Company’s outstanding Common Stock as of that date. During 2012, this stockholder has financially made possible the change in course described earlier. As of September 30, 2012, Queck Holdings BV and Mr. Leo Geeris remained significant shareholders of the Company with 20.4% and 19.2% of the common stock of the Company, respectively. Subsequent to September 30, 2012, with the issuance of stock in relation to the closing of four independent private placements, the percentage ownership of Mr. van den Hombergh decreased to 23.8%, that of Mr. Geeris decreased 17.2% while that of Queck Holdings BV increased to 27.4%.

 

8
 

 

Item 1B    Unresolved Staff Comments

 

None

 

Item 2.      Properties

 

The Company’s principal executive offices were located during fiscal 2012 at Oude Vest 4, 4811 HT, Breda, The Netherlands. These facilities are leased at commercial rates under standard commercial leases in the geographic area. We believe that suitable space for these operations is generally available on commercially reasonable terms as needed.

 

Item 3.      Legal Proceedings

 

In the normal course of its operations, the Company, has been named in legal actions seeking monetary damages. During fiscal 2012, the Company continues its legal actions in The Netherlands against parties which owe money to the Company. In one of these cases, relating to the Company’s past telecommunications business, a party filed during fiscal 2010, in defense, a counterclaim against the Company. There have been no new events in this area. While the outcome of these matters cannot be estimated with certainty, management does not expect, based upon consultation with legal counsel, that they will have a material effect on the Company's business or financial condition or results of operations.

 

Item 4.   Mine Safety Disclosure

 

Not Applicable

 

PART II

 

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

 

General

 

There is no established public trading market for the Common Stock of the Company; however, the Common Stock is currently traded on the OTC Bulletin Board under the symbol TLCO.QB.  As of December 19, 2012, there were approximately 105 holders of Common Stock of the Company. The Company has not paid any dividends on its shares during the two most recent fiscal years.

 

Market Price

 

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

 

    High Closing
Bid Price 		    Low Closing
Bid Price 		 
Fiscal Year Ended September 30, 2011                
1 st Quarter   $ 1.05     $ 1.05  
2 nd Quarter   $ 1.05     $ 0.60  
3 rd Quarter   $ 0.60     $ 0.60  
4 th Quarter   $ 1.01     $ 0.35  
                 
Fiscal Year Ended September 30, 2012                
1 st Quarter   $ 0.35     $ 0.35  
2 nd Quarter   $ 0.35     $ 0.20  
3 rd Quarter   $ 0.31     $ 0.20  
4 th Quarter   $ 0.31     $ 0.20  

 

Stock Option, SAR and Stock Bonus Consultant Plan

 

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

 

9
 

 

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

 

On July 24, 2012, the Company issued the following shares of its common stock with a grant date fair value of $0.20 per share based on quoted bid prices of our common stock for director’s compensation from the Plan: 109,542 shares ($21,908) to DLB Finance and Consultancy BV, 28,553 shares ($5,711) to Sciarone Intermim Sales BV, 22,957 shares ($4,591) to Marcus Cummunicatie BV, 100,000 shares ($20,000) to Mr. Les Pettitt and 100,000 shares ($20,000) to Mr. Gustavo Gomez.

 

As of September 30, 2012 there are 26,364 shares of common stock remaining in the Plan. This Plan expires on December 31, 2012.

 

Plan Category   Number of shares to be issued
upon exercise of outstanding
option, warrants and rights 		    Weighted-average exercise price
of outstanding options, warrants
and rights 		    Number of shares remaining
available for future issuance
under equity compensation plans 		 
Equity compensation plans approved by common stock holders     -       -       26,634  
Equity compensation plans not approved by common stock holders     -       -       -  

 

Sale of Unregistered Securities

 

Item 6. Selected Financial Data

 

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

 

    Year Ended     Year Ended  
    September 30, 2012     September 30, 2011  
Revenues   $ 143,910     $ 112,722  
Cost of sales   $ 199,089     $ 766,742  
Selling, general and administrative   $ 2,208,092     $ 2,883,521  
Depreciation   $ 1,229,934     $ 1,190,871  
Gain on bargain purchase   $ -     $ 1,434,694  
Loss on investment   $ (33,164 )   $ (39,172 )
Interest expense – related parties   $ (370,536 )   $ (8,071 )
(Expense) benefit for income taxes   $ (330 )   $ 80,000  
Net income (loss)   $ (3,875,768 )   $ (3,262,566 )
Comprehensive income (loss)   $ (3,755,439 )   $ (3,239,819 )
Net income (loss) per share   $ (0.52 )   $ (0.55 )

 

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

 

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

 

Forward Looking Statements

 

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

 

10
 

 

Critical Accounting Policies

 

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

 

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

 

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

 

Property and equipment are evaluated for impairment whenever indicators of impairment exist. Accounting standards require that if an impairment indicator is present, the Company must assess whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is less than the recoverable amount, an impairment charge must be recognized based on the fair value of the asset. Management assumed the Company was a going concern for purposes of evaluating the possible impairment of its property and equipment. Should the Company not be able to continue as a going concern, there may be significant impairment in the value of the Company’s property and equipment.

 

Revenue Recognition - Our revenue recognition policies are based on the requirements of SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Revenue from the sale of multimedia hardware components from our Mediawizz subsidiary are recognized in the period in which title has passed and services have been rendered.

 

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

 

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

 

Overview

 

The Company’s business model involves the age validation of consumers when purchasing age restricted products, such as alcohol or tobacco. This age validation business is at the core of the Company’s strategic direction. Our revenues are derived from the sales and leasing of age validation equipment, the performance of age validation as well as the sale and maintenance of vending solutions (through Mediawizz), and the broadcasting of in-store commercial messages using the age validation equipment between age checks (through HEM). Our revenues and operating results will depend in the future upon government laws and mandates, performance and pricing of our products/services, relationships with the public and other factors. The Company is not reliant on any one specific customer for revenues.

 

The changed Alcohol and Catering Act takes effect in The Netherlands as of the 1 st of January 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.

 

11
 

 

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.

 

Results of Operations

 

Year Ended September 30, 2012, compared to year ended September 30, 2011

 

Assets - Total assets as of September 30, 2012 decreased by $1,563,283 to $6,421,698 from $7,984,981 at September 30, 2011. This decrease is due primarily to depreciation and amortization during the year of $1,229,934. Other notable changes in assets were a $60,599 increase in inventory during the year related to buildup for a new vending customer and the collection of $80,378 of accounts receivable in comparison to 2011.

 

Liabilities  - Total liabilities as of September 30, 2012 increased by $825,828 or 7.7% to $11,490,954 compared to $10,665,126 as of September 30, 2011. This increase is due primarily to an increase of $627,882 in related party accrued liabilities and an increase of $207,204 of notes payable.

 

Revenues - Revenues from continuing operations for the year ended September 30, 2012 amounted to $143,910 compared to $112,722 in the prior year; an increase of 27.7%.

 

Current revenues were partially derived from the sales of our vending solution, and the sales of calling credit through kiosks that Mediawizz custom built and installed in supermarkets for a Netherlands customer. Even though the Company decided to terminate calling credit business during the 2010 fiscal year, one contract continued to produce some revenue into the fiscal year ended September 30, 2012. Over the past year, the Company has focused on demonstrating the acceptance of the use of age validation by the general public.  The Company considers this an important investment in the future marketability of its age validation solution . As such, the Company did not anticipate generating revenue from this activity. In accordance with its business plan and after successfully demonstrating the effectiveness and acceptance of its age validation solution, the Company is now leading its marketing efforts towards a broad implementation of Ageviewers in the home market. To date, 50 of the stores using Ageviewers, are equipped with narrowcasting equipment leading initial income from this activity. In addition, the sale of a vending solution for airports and railway stations contributed to the sales revenue during the fourth quarter.

 

Gain on bargain purchase - In 2011, we purchased Wilroot with assets of $9,884,076 for 675,505 shares of our Common Stock valued at $709,280 and the assumption of $7,740,102 in liabilities resulting in a gain on the bargain purchase of $1,434,694. Further information on this transaction is at Note 5 to the consolidated financial statements.

 

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

 

Client Contracts - Our contracts with customers include an agreed-upon price schedule that details both fixed and variable prices for contracted services. Our sales representatives can add additional services to existing contracts, enabling clients to increase the number of locations, for instance. Recent contracts for the age-verification service have been for a 36-month period. Most contracts entered into in 2011 and 2012 provide the Ageviewer services in return for the rights to advertising revenue from the store.

 

12
 

 

Cost of Sales - Cost of sales for the year ended September 30, 2012 amounted to $199,089 as compared to $766,742 for the year ended September 30, 2011; a decrease of $567,653 or 74.0% due to the costs of the sale of slow moving vending equipment included in FY2011 which did not occur in FY2012. Cost of sales decreased while revenues increased by 27.7%, mainly due to the majority of the cost of our plan to evidence the effectiveness and acceptance of Ageviewers by the general public phasing out during FY 2012, and the sales of our vending solution ramping up. The cost of sales in 2012 includes a charge for slow moving inventory of $44,343 compared to $155,545 in 2011.

 

The cost of sales are primarily derived from the cost of machines as well as from maintaining the contracts previously mentioned.  The allocation of such costs are in line with the Company’s strategic plan. These expenditures have been efficient in achieving the results to date in the area of technical adaptation to market requirements, market exposure and user acceptance. The Company expects its costs of sales to increase in line with the installations of Ageviewers in supermarkets under the new commercial conditions. Accordingly; we reflected a gross loss during fiscal 2012 of $55,179 compared to gross loss in 2011 of $654,020.

 

Selling, General and Administrative - Selling, general and administrative expenses during 2012 were $2,208,092, a decrease of $675,429 or 23.4% from the prior year’s operating expenses of $2,883,521. This decrease in selling, general and administrative expenses is primarily due to the reduction in the cost of existing and ongoing professional services as well as management fees.

 

Interest Expense   -  Interest expense for the year ended September 30, 2012 was $370,536 compared to $8,071 for the prior year; an increase of $362,465. This increase was due primarily to an increase in the interest rate on a related party loan during 2012, no interest was charged during the previous year.

 

Liquidity and Capital Resources

 

Net cash used in operating activities

 

In 2012, the Company used $1,717,003 in operating activities, a 36% decrease, as compared to $2,681,210 in 2011. During FY2012 the Company reduced general and administrative expenses and deferred paying related party accruals to decrease the cash used in operating activities.

 

Net cash used in investing activities

 

The Company used cash in investing activities in 2012 of $200,873, the majority of which was used to purchase fixed assets to be used  in our HEM subsidiary compared to $342,161 of fixed asset purchases in 2011.

 

Net cash provided by financing activities

 

The Company generated cash from financing activities of $1,850,108 in 2012 primarily through loans from related parties of $336,180 as well as from private placement totaling $1,294,118. During 2011, the Company generated cash from financing activities of $3,040,075 primarily through loans from related parties of $2,330,167 and from private placements of $714,400 to non-U.S. resident professional investors.

 

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

 

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

 

Recent Accounting Pronouncements .

 

In 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. The adoption of these amendments did not have a material impact on our consolidated financial statements.

 

13
 

 

In May 2011, the FASB issued amendments to existing accounting guidance regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. The amendments improve comparability of fair value measurements presented and disclosed in financial statements prepared with accounting principles generally accepted in the United States of America and International Financial Reporting Standards. The amendments clarify the application of existing fair value measurement requirements including (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3. The amendments also provide guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement. In addition, the amendments require additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The amendments in this guidance are to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011. The Company does not expect that the adoption of this standard will have a material effect on its financial statements. 

 

In December 2011, the FASB issued updated authoritative guidance to amend the presentation of comprehensive income in financial statements.  The guidance becomes effective on a retroactive basis for the Company’s first quarter of fiscal 2013.  This new guidance allows companies the option to present other comprehensive income in either a single continuous statement or in two separate but consecutive statements.  It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under both alternatives, companies will be required to present each component of net income and comprehensive income. The adoption of this updated authoritative guidance will impact the presentation of the Company’s Consolidated Financial Statements, but it will have no effect on the Company’s financial condition, results of operations or cash flow.

 

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

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable 

 

14
 

 

Item 8.   Financial Statements and Supplementary Data

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Teleconnect Inc.

 

We have audited the accompanying consolidated balance sheets of Teleconnect Inc. and its subsidiaries (the “Company”) as of September 30, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years in the two year period ended September 30, 2012. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teleconnect Inc. and its subsidiaries as of September 30, 2012 and 2011, and the consolidated results of its operations and its consolidated cash flows for each of the years in the two year period ended September 30, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 19 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency in addition to a working capital deficiency. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 19. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/Coulter & Justus, P.C.

 

December 20, 2012

 

Knoxville, Tennessee

 

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TELECONNECT, INC.

CONSOLIDATED BALANCE SHEETS

 

    September 30,     September 30,  
    2012     2011  
ASSETS                
                 
CURRENT ASSETS:                
Cash and cash equivalents   $ 38,067     $ 117,145  
Accounts receivable – trade     29,187       109,565  
Other receivables     -       57,419  
Inventory, work in process (net of reserve for slow moving inventory of $132,258 and $91,982 at September 30, 2012 and 2011,respectively)     212,281       151,682  
Prepaid taxes     28,931       88,616  
Prepaid expenses     50,363       33,215  
                 
Total current assets     358,829       557,642  
                 
PROPERTY AND EQUIPMENT, NET     2,419,386       3,198,123  
                 
OTHER ASSETS:                
Due from Giga Matrix Holding, B.V.     565,044       601,832  
Investment in Giga Matrix Holdings B.V.     -       -  
Goodwill     402,022       419,838  
Patents and tradenames, net     2,676,417       3,207,546  
Long-term notes receivable (net of allowance for bad debts of $544,219 and $568,336 at September 30, 2012 and 2011, respectively)     -       -  
    $ 6,421,698     $ 7,984,981  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
                 
CURRENT LIABILITIES:                
Accounts payable – trade   $ 328,904     $ 414,270  
Accounts payable – related party     305,154       130,290  
Accrued liabilities:                
Related parties     669,731       41,849  
Other     100,044       184,467  
Deferred Revenue     56,745       -  
Notes payable     504,270       297,066  
Loans from related parties     9,526,106       9,597,184  
                 
Total current liabilities     11,490,954       10,665,126  
                 
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, 8,167,415 and 6,499,133 shares outstanding at September 30, 2012 and 2011, respectively, 500,067 shares subscribed and unissued ($230,886) at September 30, 2012     8,667       6,599  
Additional paid-in capital     34,944,026       33,579,766  
Accumulated deficit     (37,157,926 )     (33,282,158 )
Accumulated other comprehensive loss     (2,864,023 )     (2,984,352 )
                 
Total stockholders' deficit     (5,069,256 )     (2,680,145 )
                 
    $ 6,421,698     $ 7,984,981  

 

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

 

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TELECONNECT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2012 and 2011

 

    2012     2011  
                 
SALES   $ 143,910     $ 112,722  
                 
COST OF SALES                
Cost of sales     154,746       611,197  
Inventory allowance     44,343       155,545  
                 
Total cost of sales     199,089       766,742  
                 
GROSS LOSS     (55,179 )     (654,020 )
                 
OPERATING EXPENSES:                
Selling, general and administrative expenses     2,208,092       2,883,521  
Depreciation and amortization     1,229,934       1,190,871  
                 
Total operating expenses     3,438,026       4,074,392  
                 
OTHER INCOME (EXPENSES):                
Gain on bargain purchase     -       1,434,694  
Loss on investment     (33,164 )     (39,172 )
Other income (expense)     21,467       (1,605 )
Interest expense – related parties     (370,536 )     (8,071 )
                 
LOSS BEFORE INCOME TAXES     (3,875,438 )     (3,342,566 )
                 
(EXPENSE) BENEFIT FOR INCOME TAXES     (330 )     80,000  
                 
NET LOSS   $ (3,875,768 )   $ (3,262,566 )
                 
BASIC AND DILUTED LOSS PER SHARE:   $ (0.52 )   $ (0.55 )
                 
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING     7,434,666       5,959,443  
                 
THE COMPONENTS OF COMPREHENSIVE LOSS:                
Net loss   $ (3,875,768 )   $ (3,262,566 )
Foreign currency translation adjustment     182,317       34,465  
Tax effect on currency translation     (61,988 )     (11,718 )
                 
COMPREHENSIVE LOSS   $ (3,755,439 )   $ (3,239,819 )

 

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

 

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TELECONNECT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

 

    Common Stock                 Accumulated        
    Number     $0.001     Additional           Other     Total  
    of     par     Paid-In     Accumulated     Comprehensive     Stockholders'  
    Shares     Value     Capital     Deficit     Loss     Deficit  
Balance, October 1, 2010     4,953,700     $ 4,954     $ 31,511,257     $ (30,019,592 )   $ (3,007,099 )   $ (1,510,480 )
                                                 
Common stock issued for purchase of subsidiary     675,505       676       708,604       -       -       709,280  
Common stock issued for conversion of accrued interest     250,000       250       348,491       -       -       348,741  
Common stock issued for services     112,584       112       67,438       -       -       67,550  
Sale of common stock     507,344       507       615,643       -       -       616,150  
Commons stock subscribed but unissued     100,000       100       98,150       -       -       98,250  
Forgiveness of related party debt  as capital contribution     -       -       230,183       -       -       230,183  
Foreign currency translation adjustment, net of tax     -       -       -       -       22,747       22,747  
Net loss     -       -       -       (3,262,566 )     -       (3,262,566 )
Balance, September 30, 2011     6,599,133     $ 6,599     $ 33,579,766     $ (33,282,158 )   $ (2,984,352 )   $ (2,680,145 )
                                                 
Common stock issued for services     361,052       361       71,849       -       -       72,210  
Sale of common stock     1,207,230       1,207       1,062,025       -       -       1,063,232  
Common stock subscribed but unissued     500,067       500       230,386       -       -       230,886  
Foreign currency translation adjustment net of tax     -       -       -       -       120,329       120,329  
Net loss     -       -       -       (3,875,768 )     -       (3,875,768 )
Balance, September 30, 2012     8,667,482     $ 8,667     $ 34,944,026     $ (37,157,926 )   $ (2,864,023 )   $ (5,069,256 )

  

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

 

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TELECONNECT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2012 and 2011

 

    2012     2011  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (3,875,768 )   $ (3,262,566 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     1,229,934       1,190,871  
Stock-based compensation     72,210       67,550  
Inventory allowance     44,343       155,545  
Loss on equity investments     33,164       39,172  
Gain on bargain purchase     -       (1,434,694 )
Change in operating assets and liabilities                
Accounts receivable – trade     75,729       (68,090 )
Accounts receivable – other     54,982       26,729  
Inventory     (111,379 )     601,056  
Prepaid expenses     (18,557 )     (2,278 )
Prepaid taxes     55,925       (27,267 )
Accounts payable     112,606       134,851  
Accrued liabilities and income taxes payable     553,063       (102,089 )
Deferred revenue     56,745       -  
                 
Net cash used in operating activities     (1,717,003 )     (2,681,210 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Repayment on loan to Giga Matrix     647       -  
Advances to Giga Matrix     (22,562 )     -  
Purchase of patents     (3,462 )     -  
Purchase of property and equipment     (175,496 )     (342,161 )
                 
Net cash used in investing activities     (200,873 )     (342,161 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from sale of common stock     1,294,118       714,400  
Payments on notes payable     -       (4,492 )
Loan proceeds     219,810       -  
Loan proceeds from related parties     336,180       2,330,167  
                 
Net cash provided by financing activities     1,850,108       3,040,075  
                 
EFFECT OF EXCHANGE RATE     (11,310 )     83,021  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     (79,078 )     99,725  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     117,145       17,420  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 38,067     $ 117,145  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:                
Debt and liabilities from acquisition of HEM   $ -     $ 7,740,102  
Forgiveness of related party debt as a capital contribution   $ -     $ 230,183  
675,505 shares of common stock issued for acquisition   $ -     $ 709,280  
250,000 shares of common stock issued to accrued interest   $ -     $ 348,741  

 

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

 

19
 

 

TELECONNECT INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2012

 

1. THE COMPANY

 

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

 

2. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

 

The consolidated financial statements include the accounts of Teleconnect, Inc. and its subsidiaries MediaWizz, Wilroot, B.V. (Wilroot) and Hollandsche Exploitatie Maatschappij (HEM).  Wilroot and HEM were acquired on October 15, 2010. All significant inter-company balances and transactions have been eliminated.

 

Accounts and notes receivable -

 

Trade accounts receivable and notes receivable are recorded at their estimated net realizable values using the allowance method. The Company generally does not require collateral. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. When accounts are determined to be uncollectible they are charged off against an allowance for doubtful accounts. Also, accounts determined to be uncollectible are put in nonaccrual status whereby interest is not accrued on those accounts. Credit losses, when realized, have been within the range of the Company’s expectations. As of September 30, 2012, one customer accounted for 63% of accounts receivable.  As of September 30, 2011, one customer accounted for 73% of accounts receivables.

 

Advertising Costs -

 

Advertising and sales promotion costs are expensed as incurred. There were $69,393 in advertising and sales promotion costs in 2012 and $82,658 in 2011.

 

Cash Equivalents -

 

The Company considers deposits that can be redeemed on demand and highly liquid investments that have original maturities of less than three months, when purchased, to be cash equivalents. Substantially all cash on hand at September 30, 2012 was held in European financial institutions and are insured by the Dutch Central Bank, “De Nederlandsche Bank (DNB)” which, under its Deposit Guarantee Scheme,  guarantees deposits up to € 100,000 held by accountholders of a Dutch bank that becomes unable to meet its obligations.

  

Revenue Recognition -

 

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

 

Earnings per Share -

 

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

 

Estimates -

 

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

 

20
 

 

Foreign Currency Adjustments -

 

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

 

Income Taxes -

 

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

 

Inventories -

 

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

 

Property and equipment -

 

Property and equipment is stated at cost except for assets acquired using purchase accounting, which are recorded at fair value (see Note 4). Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expenses as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gains or losses included in the results of operation for the respective period. Depreciation is computed on a straight line basis over the useful life which is 3 to 5 years.

 

Goodwill -

 

Goodwill is calculated as the difference between the cost of acquisition and the fair value of the net assets acquired of any business that is acquired. The Company performs impairment tests of the intangible assets at least annually and impairment losses are recognized if the carrying value of the intangible exceeds its fair value. For the years ended September 30, 2012 and 2011, the Company did not incur any charges for impairment.

 

Variable Interest Entities -

 

The Company analyzes any potential variable interest or special-purpose entities in accordance with the guidance of FASB ASC 810-10, Consolidation of Variable Interest and Special-Purpose Entities. Once an entity is determined to be a variable interest entity (VIE), the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. The Company has analyzed its investment in Giga (see Note 18) and after analysis we have determined that, while Giga is a VIE as defined by FASB ASC 810-10, we are not the primary beneficiary, and therefore Giga is not required to be consolidated.

 

Fair value of financial instruments  –

 

The Company applies accounting guidance that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. The guidance defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2012 and 2011 the fair value of cash, accounts receivable, other receivables, accounts payable, notes payable, and accrued expenses approximated carrying value due to the short maturity of these instruments.

 

Accounting for Stock-Based Compensation –

 

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

 

3. RECENTLY ISSUED ACCOUNTING STANDARDS

 

In 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. The adoption of these amendments did not have a material impact on our consolidated financial statements.

 

21
 

 

In May 2011, the FASB issued amendments to existing accounting guidance regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. The amendments improve comparability of fair value measurements presented and disclosed in financial statements prepared with accounting principles generally accepted in the United States of America and International Financial Reporting Standards. The amendments clarify the application of existing fair value measurement requirements including (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3. The amendments also provide guidance on measuring the fair value of financial instruments managed within a portfolio, and application of premiums and discounts in a fair value measurement. In addition, the amendments require additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The amendments in this guidance are to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011. The Company does not expect that the adoption of this standard will have a material effect on its financial statements.

  

In December 2011, the FASB issued updated authoritative guidance to amend the presentation of comprehensive income in financial statements.  The guidance becomes effective on a retroactive basis for the Company’s first quarter of fiscal 2013.  This new guidance allows companies the option to present other comprehensive income in either a single continuous statement or in two separate but consecutive statements.  It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under both alternatives, companies will be required to present each component of net income and comprehensive income. The adoption of this updated authoritative guidance will impact the presentation of the Company’s Consolidated Financial Statements, but it will have no effect on the Company’s financial condition, results of operations or cash flow.

 

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

 

4. 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 following assets were valued on a non-recurring basis as of September 30, 2011 using Level 3 inputs.  The assets are still held by the Company as of September 30, 2012 :

 

    September 30, 2011  
    Total     Level 1     Level 2     Level 3  
       
Ageviewers Software   $ 3,257,659     $ -     $ -     $ 3,257,659  
Terminal and Kiosk Designs     690,347       -       -       690,347  
Patents and processes     2,003,044       -       -       2,003,044  
Tradenames     1,082,549       -       -       1,082,549  
                                 
Total   $ 7,033,599     $ -     $ -     $ 7,033,599  

 

22
 

 

5. 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 following table presents the 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     1,631,768  
Amount due from MediaWizz     456,744  
Total current assets     2,499,992  
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     9,884,076  
         
Purchase consideration     8,449,382  
         
Excess of net assets over purchase consideration (bargain purchase)   $ 1,434,694  

 

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 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 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 the Ageviewers system as well as its trade name. The patents and processes were valued by the Company using the relief from royalty valuation technique which resulted in a fair market value of $2,003,044. The Ageviewers trade name was also valued by the Company using the relief from royalty valuation technique 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.

 

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 consolidated financial statements for the year ended September 30, 2011. 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 $38,940 of revenues and $1,757,522 of operating losses from Wilroot/HEM included in the consolidated financial statements for the period October 15, 2010 to September 30, 2011.

 

6.  NOTES RECEIVABLE

 

In February 2007, the Company loaned $544,219 to a business development firm with a maturity date of February 2009. The note is in default and the Company has pursued legal action for collection. The amount (including unpaid interest) was reserved as uncollectible of September 30, 2012 and 2011.

 

23
 

 

7. PROPERTY AND EQUIPMENT

 

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

 

    2012     2011  
Software   $ 3,021,826     $ 3,155,740  
Kiosks & terminals     900,316       784,021  
Computers     64,351       77,031  
Office equipment     18,065       26,885  
      4,004,558       4,043,677  
Less: Accumulated depreciation     (1,585,172 )     (845,554 )
Net property and equipment   $ 2,419,386     $ 3,198,123  

 

Depreciation and amortization of $818,521 and $766,002 were included in the consolidated financial statements for the years ended September 30, 2012 and 2011, respectively.

 

8. PATENTS AND TRADE NAMES

 

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

 

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

 

The components of patents and trade name assets as of September 30, 2011:

 

    Weighted-
Average
Useful
Life
(in years) 		    Gross
Carrying
Amount 		    Accumulated
Amortization 		    Net  
September 30, 2011                                
Finite-lived intangible assets                                
Terminal and kiosk hardware designs     5     $ 661,633     $ (127,163 )   $ 534,470  
Patents and processes     10       1,919,732       (184,479 )     1,735,253  
Trade names     10       1,037,524       (99,701 )     937,823  
Total           $ 3,618,889     $ (411,343 )   $ 3,207,546  

 

Total amortization of $411,413 and $424,869 was included in the consolidated financial statements for the year ended September 30, 2011 and 2012. Amortization expense for these intangible assets is expected to be approximately $411,000 annually in each of the next five years.

 

9. LOANS FROM RELATED PARTIES

 

During the years ended September 30, 2012 and 2011, the Company obtained $336,180 and $2,330,167, 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 5).  These loans bear interest between 0% and 4% annually, are unsecured and due when the Company has established consistent positive cash flow.  The weighted average interest rate of the loans from related parties for the year ended September 30, 2012 was 3.86%.  During the year ended September 30, 2011, the Company settled $237,287 (€167,021) of loans from a related party for $7,104 (€5,000) which has been accounted for as a component of stockholders’ deficit in the accompanying consolidated financial statements.

 

10. NOTE PAYABLE

 

As of September 30, 2012 and 2011 the Company has three short-term bridge loans totaling $504,270 and $297,066, respectively, from potential investors. The notes bear interest between 0% and 8% per year and are due on demand.

 

24
 

 

11. LEASES

 

The Company leases its office, warehouse space and vehicles under leases expiring 2013 through 2016.  The future minimum lease payments required under the lease in the next four years are $71,603, $55,544, $31,569 and $7,892.  Total rent expense for the years ended September 30, 2012 and 2011 were $77,375 and $133,531, respectively.

 

12. LITIGATION AND CONTINGENT LIABILITIES

 

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

 

13. PREFERRED STOCK

 

The Company has 5,000,000 shares of authorized and unissued Preferred Stock with par value of $0.001, which is noncumulative and nonparticipating. No shares of preferred stock were issued and outstanding as of September 30, 2012 or 2011.

 

14. 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 5).

 

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

 

During the year ended September 30, 2011 the Company sold 607,344 shares of its common stock for $714,400 to qualified investors of which 100,000 shares ($98,250) are subscribed but unissued.

 

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

 

See note 15 for details of common stock issued under the 2010 Stock Option, SAR and Stock Bonus Plan during the year ended September 30, 2012.

 

15. 2010 STOCK OPTION, SAR AND STOCK BONUS PLAN

 

On October 8, 2010, the shareholders approved the 2010 Stock Option, SAR and Stock Bonus Plan (the “Plan”) authorizing 500,000 shares of Common Stock to be reserved for issuance under the Plan.  The Plan allows us to issue awards as determined by the stock committee of the Company’s board of directors of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to our consultants which may be subject to restrictions. As of September 30, 2012 there are 26,364 shares remaining in the Plan.

 

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

 

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

 

16. INCOME TAXES

 

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

 

    2012     2011  
Bad debt allowances   $ 221,329     $ 199,978  
Litigation reserve and other reserves     (4,967 )     (2,992 )
Equity method investment loss     (91,957 )     120,998  
Capital loss carry-forwards     4,686,164       4,348,004  
Operating loss carryovers     7,665,365       6,311,312  
Valuation allowance     (12,475,934 )     (10,977,300 )
Net deferred tax assets   $ -     $ -  

 

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

 

    2012     2011  
Income tax (benefit) provision at U.S Federal statutory rate   $ (1,458,451 )   $ (1,136,472 )
Foreign losses taxed at rates other than 37.63%     564,325       372,551  
Permanent differences     12,480       26,191  
Increase (decrease) in penalties and interest on delinquent tax returns     330       (80,000 )
Increase (decrease) in valuation allowance, net of foreign currency adjustments     881,646       737,730  
Tax provision (benefit)   $ 330     $ (80,000 )

 

25
 

 

The following table summarizes the amount and expiration dates of our operating loss carryovers as of September 30, 2012:

 

    Expiration Dates     Amounts  
U.S. federal and state net operating loss carryovers     2022-2032     $ 14,773,143  
Non-U.S. net operating loss carryovers     2017-2021       10,531,155  
Total           $ 25,304,298  

  

Also as of September 30, 2012, the Company has capital loss carryovers available to offset future US Federal and state income taxes. These capital loss credit carryovers expire as follows:

 

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

 

As a result of significant pre-tax losses, the Company cannot conclude that it is more likely than not that the deferred tax assets will be realized.  Accordingly a full valuation allowance has been established against our deferred tax assets.  During 2012, the Company increased its valuation allowance by $1,498,634 to reflect the effect of adjustments from the 2011 income tax returns and currency translation effects.

 

The Company was delinquent in filing tax returns with the Internal Revenue Service and state taxing authorities in 2007. With respect to the fiscal year 2007 returns, $80,000 of penalties and interest have been abated and are included in the 2011 income tax benefit. With respect to the fiscal year 2009 returns, $330 of penalties and interest have been included in the 2012 income tax provision.  

 

Tax returns for the years ended September 30, 2009 through September 30, 2012 are subject to examination by the Internal Revenue Service.

 

17. LOSS PER SHARE

 

Basic loss per share amounts are computed based on the weighted average number of shares outstanding on that date during the applicable periods. There were no stock options outstanding as of September 30, 2012 or 2011.

 

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

 

    2012     2011  
Basic and diluted loss per share computation                
Numerator:                
Net loss   $ (3,875,768 )   $ (3,262,566 )
                 
Denominator:                
Weighted average common shares outstanding     7,434,666       5,959,443  
                 
Basic and diluted loss per share:   $ (0.52 )   $ (0.55 )

 

18. 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 $33,164 and $39,172 in losses on its equity investment during the years ended September 30, 2012 and 2011, respectively.  As of September 30, 2012, the Company’s maximum exposure to further losses is limited to the amount due from Giga of $565,044.

 

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.

 

26
 

 

Assets and liabilities of Giga at September 30, 2012 and 2011 are as follows:

 

    2012     2011  
    (Unaudited)     (Unaudited)  
Assets:                
Current assets   $ 79,906     $ 80,710  
Financial assets – non-current     240,264       233,245  
Fixed assets     -       59  
Intangible assets     39,177       40,913  
    $ 359,347     $ 354,927  
                 
Liabilities:                
Current liabilities   $ 549,296     $ 479,500  
Long-term debt     648,835       680,964  
    $ 1,198,131     $ 1,160,464  

 

Results of operations of Giga for the years ended September 30, 2012 and 2011 are as follows:

 

    2012     2011  
    (Unaudited)     (Unaudited)  
Net loss   $ (67,682 )   $ (79,943 )

 

19. GOING CONCERN

 

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

 

As shown in the accompanying consolidated financial statements, the Company incurred net losses of $3,875,768 for the year ended September 30, 2012 and $3,262,566 in 2011.  In addition, the Company has incurred substantial losses since its inception. 

 

As of September 30, 2012, the Company had a working capital deficit of $11,132,125 as compared to its working capital deficit as of September 30, 2011 of $10,107,484.  These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to attain a satisfactory level of profitability and obtain suitable and adequate financing.  Management anticipates that additional financing through long-term borrowing and equity placements will be necessary in the future.  There can be no assurance that management's plan will be successful.

 

20. SUBSEQUENT EVENTS

 

Subsequent to September 30, 2012 investors purchased 500,000 shares of the Company’s common stock for $626,743. 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.

 

On November 13, 2012, 7,500 shares of the Company’s common stock were issued for services with a grant date fair value of $1,500.

 

Subsequent to September 30, 2012, foreign exchange rates have changed; it is not practicable to determine the effect of these changes on these financial statements.

 

27
 

 

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

 

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

 

Item 9(A).    Controls and Procedures

 

A. Evaluation of Disclosure Controls and Procedures .

 

The Company’s Chief Executive Officer and Chief Financial Officer as of September 30, 2012, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rule 13a-14(c)and 15d-14(c) as of a date within 90 days of the filing date of this report on Form 10-K for September 30, 2012, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective as of September 30, 2012. 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.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

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

 

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

 

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

 

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

 

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

 

Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2012. During this fiscal year 2012, management implemented procedures providing for the review of all subsidiary supplied financial statements, consolidated financial statements and the notes thereto to assure they are in compliance with accounting principles generally accepted in the United States of America.

 

Our management has concluded that during the period covered by this report that our internal control over financial reporting was effective at the reasonable assurance level.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permits the Company to provide only management's report in this annual report

 

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

 

Item 9B.    Other Information

 

None

 

28
 

 

PART III

Item 10.     Directors, Executive Officer and Corporate Governance

 

At December 20, 2012, the directors and officers of the Company are as follows:

 

Name   Age   Position
         
Mr. Dirk L. Benschop   45   Director, Chief Executive Officer, President and Treasurer
Mr. Jan Hovers   69   Director, Supervisory Board
Mr. Ralph Kröner   62   Director
Mr. Les Pettitt   51   Director, Chief Financial Officer
Mr. Gustavo Gomez   49   Director, Chief Compliance Officer

 

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

 

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

 

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

 

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

 

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

 

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

 

Effective August 8, 2012, Mr. Kees Lenselink resigned from his position on the Board of Directors of the Company as well as from his position on the Audit Committee since his duties on other Boards of Directors were requesting more of his time than expected. Mr. Lenselink had been appointed to these positions effective October 8, 2010.

 

On December 14th, 2012, Mr. Ralph Kröner was named to the Board of Directors. Ralph Kröner (62), of Dutch nationality, is well known for his expertise and experience in corporate governance, (international) litigation and space law (former member of the European center for Space law in Paris), and has served as non-executive director on a number of boards of commercial business. After a long service record at Simmons & Simmons and its legal predecessors, Ralph Kröner was appointed Of Counsel at the international law firm Eversheds Faasen in Rotterdam on September 15th, 2010. He is chairman of the Rotterdam Eye Hospital. Mr. Kröner is considered to be a great source of knowledge for the Company and his experience will be of great value to help position Teleconnect’s age validation business both in The Netherlands and internationally.

 

Committees of the Board of Directors

 

The Board of Directors at September 30, 2012, was comprised of Mr. Benschop, Mr. Hovers, Mr. Pettitt and Mr Gomez.

 

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

 

29
 

 

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

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who beneficially own more than ten percent of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.  Based solely upon a review of the forms and amendments thereto furnished to the Company, management believes that Form 3 and Form 4 should be filed by directors of the Company as well as Form 4 by shareholders with over 10% stakeholding.

 

Code of Ethics

 

The Company currently is studying various models of existing “Codes of Ethics" to determine which to adapt to the philosophy of the Company. The Company expects to approve and implement a code of ethics before the end of fiscal year 2013.

 

Item 11.     Executive Compensation

 

All executive officers, for services in all capacities to the Company, received the following compensation during the fiscal year ended September 30, 2012:   

  

Name and

Principal

Position

 

Fiscal

Year

  Salary(1)(2)     Bonus     Stock
Awards(3) 		   Option
Awards 		   

Nonequity

incentive plan

compensation

   

Nonqualified

deferred

Compensation

earnings

   

All other

compensation

    Total  
Dirk L. Benschop   2012   $ 210,383     $ 0     $ 21,908   $  0     $ 0     $ 0     $ 0     $ 232,291  
Chief Executive Officer, President,   2011   $ 167,364     $ 0     $ 0   $  0     $ 0     $ 0     $ 0     $ 167,364  
Secretary and Treasurer                                                                  
                                                                   
Gustavo Gomez   2012   $ 98,839     $ 0     $ 20,000   $  0     $ 0     $ 0     $ 0     $ 118,839  
Chief Compliance Officer   2011   $ 168,244     $ 0     $ 0   $  0     $ 0     $ 0     $ 0     $ 168,244  
                                                                   
Les Pettitt   2012   $ 46,688     $ 0     $ 20,000   $  0     $ 0     $ 0     $ 0     $ 66,688  
Chief Financial Officer   2011   $ 71,185     $ 0     $ 0   $  0     $ 0     $ 0     $ 0     $ 71,185  

 

All executive officers as a group $417,818

 

(1) Mr. Benschop received no bonus during fiscal 2011. Mr. Gomez and Mr. Pettitt were appointed to their positions in 2011. Includes compensation accrued during the year to Mr. Benschop, Mr. Gomez and Mr. Pettitt of $174,885, $12,930 and $13,205, respectively.
   
(2) Personal benefits received by the Company’s executive officers are valued below the levels which would otherwise require disclosure under the rules of the U.S. Securities and Exchange Commission.
   
(3) Grant date fair value based on quoted market price of the Company common stock on July 24, 2012.
   
  The Company does not currently provide any contingent or deferred forms of compensation arrangements, annuities, pension or retirement benefits.

 

2010 Stock Option, SAR and Stock Bonus  Plan

 

Effective on October 8, 2010, the Company adopted and approved its 2010 Stock Option, SAR and Stock Bonus Plan (the “Plan”) which reserved 500,000 shares of Common Stock for issuance. This Plan allows us to issue awards of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to Officers, Directors or consultants to the Company. As of the date of this filing, 473,636 shares have been issued under this 2010 Plan to officers and directors of the Company; leaving 26,364 remaining available.

 

30
 

 

Benefit Plans

 

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

 

Director Compensation

 

Name  

Fees
earned or
paid in
cash

($)

   

Stock
awards

(1)

($)

   

Option
awards

($)

   

Non-equity
incentive plan
compensation

($)

   

Nonqualified
deferred

compensation
earnings

($)

   

All other
compensation

($)

   

Total

($)

 
(a)   (b)     (c)     (d)     (e)     (f)     (g)     (h)  
J. Hovers   $ 56,591     $ 0     $ 0     $ 0     $ 0     $ 0     $ 56,591  

  

Director and Officer Indemnification and Limitations on Liability

 

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

 

  * 

A violation of the criminal law, unless the director, officer, employee or agent had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful;

     
  *

A transaction from which the director, officer, employee, or agent derived an improper personal benefit;

 

  *

In the case of a director, a circumstance under which the liability provisions of Section 607.0834 under the Florida Business Corporation Act are applicable; or

 

  * Willful misconduct or a conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor on in a proceeding by or in the right of a shareholder.

 

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

 

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

 

31
 

 

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

The total number of shares of Common Stock of the Company, as adjusted to record effects of stock splits, beneficially owned by each of the officers and directors, and all of such directors and officers as a group and holders of 5% or more of the Company’s Common Stock as of December 19, 2012 are as follows:

 

    Shares      
Names and Addresses of
Beneficial Owners 		  Beneficially
Owned (1) 		    Percent of
Class (16) 		 
Dirk L. Benschop (2)
Address: Laakseweg 24, Etten-Leur 4874 LV, The Netherlands 		    412,543       4.5 %
DLB Finance and Consultancy BV (3)
Address: Laakseweg 24, Etten-Leur, 4874 LV, The Netherlands 		    412,543       4.5 %
Kees Lenselink (4)
Address: Jan Tooropstraat 13, Oosterhout 4907 PB, The Netherlands 		    769,345       8.4 %
Quack Holding BV (5)
Address: Jan Tooropstraat 13, Oosterhout 4907 PB, The Netherlands 		    598,511       6.5 %
Hombergh Holding BV (6)
Address: Hertenroep 10, Teteringen 4847 DC, The Netherlands 		    683,334       7.4 %
Quick Holding BV (7)
Address: Hertenroep 10, Teteringen 4847 DC, The Netherlands 		    1,784,733       19.5 %
Hendrik van den Hombergh (8)
Address: Hertenroep 10, Teteringen 4847 DC, The Netherlands 		    2,297,234       25.0 %
QUECK Holdings BV (9)
Address: Warandelaan 29, 4904 PB, Oosterhout, The Netherlands 		    2,514,840       27.4 %
Leonardus Geeris (10)
Address: Zandpad 29, Maarssen 3601 NA, The Netherlands 		    1,574,136       17.2 %
Jan Hovers (11)
Address: Oude Vest 4, Breda 4811 HT, The Netherlands 		    112,584       1.2 %
Les Pettitt (12 )
Address: 4603 N College Ave, Bethany, OK 73008, USA 		    100,000       1.1 %
Gustavo Gomez (13)
Address: C/Rio Tambre 8, Boadilla del Monte, 28660 Madrid, Spain 		    100,000       1.1 %
Ralph Kröner (14)
Address: Julianalaan 54, 3062 DJ Rotterdam, The Netherlands 		    52,500       0.6 %
Directors, officers  as a group, including the above persons ( 15)     7,933,182       86.5 %

 

(1) Except as otherwise noted, it is believed by the Company that all persons have full voting and investment power with respect to the shares indicated. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security which that person has the right to acquire within 60 days, such as options or warrants to purchase the Common Stock of the Company.
   
(2) The number of shares listed for Dirk L. Benschop are the 412,543 shares owned by DLB Finance and Consultancy BV.
   
(3) DLB Finance and Consultancy BV is owned by Dirk L. Benschop, the director, Chief Executive Officer and Treasurer of the Company.
   
(4) The number of shares listed for Kees Lenselink are the 598,511 shares owned by Quack Holding BV and 170,834 shares, which is 25% of the shares owned by Hombergh Holding BV for a total of 769,345 shares of common stock.
   
(5) Quack Holding BV is owned by Mr. Kees Lenselink, who is an over 5% shareholder and ex-director
   
(6) Hombergh Holdings BV is owned 75% by Hendrik van den Hombergh and 25% by Kees Lenselink
   
(7) Quick Holding BV is wholly owned by Hendrik van den Hombergh
   
(8) The number of shares listed for Hendrik van den Hombergh are the 1,784,733 shares owned by Quick Holding BV and 512,501 shares, which is 75% of the shares owned by Hombergh Holding BV for a total of 2,297,234 shares of common stock.
   
(9) Queck Holdings BV is wholly owned by Mr. Henk Schipper and the largest single shareholder of the Company
   
(10) Mr. Leonardus Geeris is an ex-director and ex-President of the Company

 

32
 

 

(11) Mr. Jan Hover is a director of the Company
   
(12) Mr. Les Pettitt is a director and officer of the Company occupying the position of Chief Financial Officer
   
(13) Mr. Gustavo Gomez is a director and officer of the Company and occupies the position of Chief Compliance Officer
   
(14) Mr. Ralph Kröner is a director of the company as of December 14, 2012.  See Subsequent Events section 21
   
(15) As of September 30, 2012 Directors and Officers as a group include Mr. Benschop, Mr Pettitt, Mr Gomez, and Mr. Hovers.
   
(16) As of September 30, 2012, there were 8,167,415 shares of common stock issued and outstanding while at December 19, 2012 there were 9,174,915 shares of common stock outstanding.

 

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

 

Loans from related parties - During the years ended September 30, 2012 and 2011, the Company obtained $336,180 and $2,330,167, 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 5).  These loans bear interest between 0% and 4% annually, are unsecured and due when the Company has established consistent positive cash flow.  The weighted average interest rate of the loans from related parties for the nine months ended September 30, 2011 was 3.86%.  During the year ended September 30, 2011, the Company settled $237,287 (€167,021) of loans from a related party for $7,104 (€5,000) which has been accounting for as a component of stockholders’ deficit in the accompanying consolidated financial statements.

 

Item 14.     Principal Accounting Fees and Services

 

The aggregate fees billed by our principal accounting firm, for fees billed for fiscal years ended September 30, 2011 and 2010 are as follows:

 

Name   Audit Fees(1)     Audit Related
Fees 		    Tax Fees
(2) 		    All Other
Fees 		 
Coulter & Justus PC for fiscal year ended September 30, 2012   $ 167,959     $ 0     $ 26,032       0  
Coulter & Justus PC for fiscal year ended September 30, 2011   $ 145,865     $ 0     $ 41,920     $ 0  

 

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

 

The Company's Board of Directors has evaluated and approved in advance, the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services. At the Board Meeting held on October 8, 2010, an audit committee was established and its initial two members were: Les Pettitt, Director and Chief Financial Officer and Mr. Kees Lenselink, Director. Mr. Lenselink resigned during August 2012 due to the little time he had available after attending other business obligations. The Company is currently searching to fill the position available on this audit committee.

 

33
 

 

PART IV

 

Item 15.     Exhibits, Financial Statement Schedules

 

Financial Statement Schedules

 

  (a) Financial Statements

  a. Consolidated Balance Sheets at September 30, 2012 and 2011
  b. Consolidated Statement of Operations for the years ended September 30, 2012 and 2011
  c. Consolidated Statement of Stockholders’ Equity for the years ended September 30, 2012 and 2011
  d. Consolidated Statement of Cash Flows for the years ended September 30, 2012 and 2011
  e. Notes to Consolidated Financial Statements

 

(b) Exhibits 

1(i) Articles of Incorporation of the Company   The Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Form SB-2 registration statement of the Company (File No. 333-93583)
     
1(ii) Amendment to Articles of Incorporation   An Amendment to the Articles of Incorporation of the Company is incorporated herein by reference to Exhibit 99.1 to the Form 8-K current report of the Company dated January 29, 2001.
1(iii) Amendment to Articles of Incorporation   An Amendment to the Articles of Incorporation of the Company filed on February 26, 2003, is incorporated hereby by reference to Exhibit 1 (iii) to the Form 10-K annual report of the Company for its fiscal year ended September 30, 2009.
1(iv) By-Laws of the Company   The By-Laws of the Company are incorporated herein by reference to Exhibit 3.2 to the Form SB-2 registration statement of the Company (File No. 333-93583)
10. Material Contracts    
     
Exhibit 10.1   Contract dated November 25, 2009 selling Spanish subsidiaries to Alfonso de Borbon is incorporated by reference to the Schedule 14A proxy statement of the Company filed August 27, 2009.
11. Statement re: computation of per share earnings    
    Reference is made to the Consolidated Statements of Operations of the Consolidated Financial Statements which are incorporated by reference herein.
     
21. A description of the subsidiaries of the Company   A description of the subsidiaries of the Company.

 

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

 

34
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Teleconnect Inc.
     
Date: December 28, 2012 By:  /s/ Dirk L. Benschop
    Dirk L. Benschop
    Chief  Executive Officer, President and Treasurer

 

    Teleconnect Inc.
     
Date: December 28, 2012 By:  /s/ Leslie G. Pettitt
    Leslie G. Pettitt
    Chief  Financial Officer and principal accounting officer

 

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

 

    Teleconnect Inc.
     
Date: December 28, 2012 By:  /s/ Dirk L. Benschop
    Dirk L. Benschop
    Director

 

    Teleconnect Inc.
     
Date: December 28, 2012 By:  /s/ Leslie G. Pettitt
    Leslie G. Pettitt
    Director

 

    Teleconnect Inc.
     
Date: December 28, 2012 By:  /s/ Gustavo Gomez
    Gustavo Gomez
    Director

 

35
 

 

INDEX OF EXHIBITS ATTACHED

 

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

 

36

 

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