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TELECONNECT INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

February 14, 2014

Caution Regarding Forward-Looking Statements

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

INTRODUCTION



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

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

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

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

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

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

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Subsequent to December 31, 2013, directors of the Company have concluded that it is in the best interest of the Company to create an Advisory Board with senior industry members. At the next Board meeting of the Company, this proposal should be approved and the Advisory Board formally established. Members of the Advisory Board will be disclosed in an 8K filing.

BALANCE SHEET COMPARISON AT DECEMBER 31, 2013 AND SEPTEMBER 30, 2013

Assets: Total assets at December 31, 2013 decreased $201,658 or 3.7% to $5,186,575 compared to $5,388,233 at September 30, 2013. This decrease is due primarily to the depreciation and amortization of fixed assets and intangible assets during the quarter ended December 31, 2013.

Liabilities:Current liabilities at December 31, 2013 increased $399,778 or 16.1% to $2,887,519 compared to $2,487,741 at September 30, 2013. This increase is due primarily to an increase in loans from related parties of $213,554, as well as an increase in accounts payable trade of $87,608, an increase in accrued liabilities - related parties of $92,128 related to both the accrued interest of a related party note and additional unpaid management fees. The increase in accounts payable trade is a consequence of the decrease in working capital.

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

We had net loss of $874,745 for the three months ended December 31, 2013 as compared to net loss of $1,090,569 during the comparable period in 2012, a decrease of 19.8% or $215,824. A comparison of revenues and expenses for the two periods is as follows:

REVENUES



Revenues for the three months ended December 31, 2013 were $30,677 as compared to revenues for the same period in 2012 of $205,336; a decrease of $174,659 or 85.1%.

2012 revenues were derived primarily from $199,175 of sales of a vending solution for airports and railway stations. No such sales occurred in the same period of 2013. Revenues for the three months ended December 31, 2013 consisted of primarily of revenue from support of installed units and additional work on existing kiosks.

COST OF SALES



Cost of sales for the three month period ended December 31, 2013 were $56,401 as compared to $163,024 for the same period of 2012; a decrease of 65.4% or $106,623. The decrease in cost of sales was primarly due to the decrease in vending solution hardware sales in 2013 as compared to 2012.

The cost of sales included costs derived from maintaining the contracts in relation to its age-validation business which provide the Company with the technical acceptance, market exposure and credibility required upon which to base the service offering. The allocation of such costs are in line with the Company's strategic plan. These expenditures have been efficient in achieving the results to date in the area of technical adaptation to market requirements, market exposure and user acceptance. The Company expects its costs of sales to increase in line with the installations of Ageviewers in supermarkets under the new commercial conditions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses have decreased by $252,507 or 35.3% to $462,878 during the three months ended December 31, 2013 as compared to $715,385 for the comparable period in 2012. This decrease in selling, general and administrative expenses is primarily due to a reduction in the cost of outside professional services and management fees.

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2013, the Company had a working capital deficit of $2,476,002 as compared to its working capital deficit as of September 30, 2013 of $2,087,316. This increase is due primarily to an increase in accounts payable trade of $87,608 and an increase in accrued liabilities of $92,128 associated to related parties as well as an increase in loans from related parties of $213,554 offset by a decrease in accounts payable related parties.

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

The Company's capital resources have been provided primarily by capital contributions from stockholders, stockholders' loans, the conversion of outstanding debt into common stock of the Company, and the sale of Common Stock.

The Company intends to look for additional equity funding to pay debts and for working capital. However, there is no assurance that such capital will be raised, and the Company may seek bank financing and other sources of financing to complete the payment of debt and for working capital.


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Source: Edgar Glimpses


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