TLCO Teleconnect Inc (CE)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

Caution Regarding Forward-Looking Statements

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

INTRODUCTION

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

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

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

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

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

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

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

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

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

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

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

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

REVENUES

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

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

COST OF SALES

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

During three month periods ended March 31, 2013 and 2012, the cost of sales included costs derived from maintaining the contracts in relation to its age-validation business which provide the Company with the technical acceptance, market exposure and credibility required upon which to base the service offering. The allocation of such costs are in line with the Company’s strategic plan. These expenditures have been efficient in achieving the results to date in the area of technical adaptation to market requirements, market exposure and user acceptance. The Company expects its costs of sales to increase in line with the installations of Ageviewers in supermarkets under the new commercial conditions.  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

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

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

REVENUES

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

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

COST OF SALES

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

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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