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

May 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 was expected that the enforcement of this change would generate a significant demand for Ageviewers. Political resistance, however, has delayed the enforcement of the Act. With public awareness increasing, it is expected that the retail outlet demand for Ageviewers will commence shortly.

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

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

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

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

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During the three month period ended on March 31, 2014, directors of the Company concluded that it is in the best interest of the Company to create an Advisory Board with senior industry members. At the Annual Board meeting of the Company held on March 27, 2014, this subject was mentioned though no vote was taken. After members of the Advisory Board are selected, the Company will file an 8K disclosing the newly appointed members of the Advisory Board.

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

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

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

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

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

REVENUES



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

Current revenues were derived from sales of kiosk equipment. The breakdown of revenues for the three months ended March 31, 2014 consists of revenues of $97,288 from sale of kiosk equipment, $655 from age verification, $983 from narrowcasting, and $985 from miscellaneous. The breakdown of revenues for the three months ended March 31, 2013 consists of revenues of $63,426 from sale of vending machines, $1,335 from age verification, $4,465 from narrowcasting, and $9,945 from miscellaneous.

COST OF SALES



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

During three month periods ended March 31, 2014 and 2013, the cost of sales included costs derived from maintaining the contracts in relation to its age-validation business which provide the Company with the technical acceptance, market exposure and credibility required upon which to base the service offering. The allocation of such costs are in line with the Company's strategic plan. These expenditures have been efficient in achieving the results to date in the area of technical adaptation to market requirements, market exposure and user acceptance. The Company expects its costs of sales to increase in line with the installations of Ageviewers in supermarkets under the new commercial conditions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

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

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

REVENUES



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

Current revenues were derived from sales of kiosk equipment. The breakdown of revenues for the six months ended March 31, 2014 consists of revenues of $127,411 from the sale of kiosk equipment, $655 from age verification, $983 from narrowcasting, and $1,539 from miscellaneous. The breakdown of revenues for the six months ended March 31, 2013 consists of revenues of $267,456 from the sale of vending machines, $1,335 from age verification, $4,610 from narrowcasting, and $11,106 from miscellaneous.

COST OF SALES



Cost of sales for the six month period ended March 31, 2014 were $167,494 as compared to $248,345 for the same period of 2013; a decrease of 32.6% or $80,851. The breakdown of 2014 costs consisted of telecommunications costs of $24,566, kiosk costs of $103,767, kiosk support costs of $16,523 and inventory write-downs of $22,638. During six month period ended March 31, 2013, the breakdown of costs of sales consists of telecommunications costs of $27,207, vending machine costs of $186,130, kiosk support costs of $6,710, inventory write-downs of $21,919 and other miscellaneous costs of $6,379.

During the six month period ended March 31, 2014, the cost of sales also included costs derived from maintaining the contracts in relation to its age-validation business which provide the Company with the technical acceptance, market exposure and credibility required upon which to base the service offering. The allocation of such costs are in line with the Company's strategic plan. These expenditures have been efficient in achieving the results to date in the area of technical adaptation to market requirements, market exposure and user acceptance. The Company expects its costs of sales to increase in line with the installations of Ageviewers in supermarkets under the new commercial conditions.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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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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