AlarmForce Industries Inc.
TSX : AF

AlarmForce Industries Inc.

December 16, 2016 07:00 ET

AlarmForce Announces Decision to Restate Certain Historical Financial Statements and Provides Update on Status of Q3 Filings

Independent Review of Internal Controls & Employment Related Tax Audits

TORONTO, ONTARIO--(Marketwired - Dec. 16, 2016) - AlarmForce Industries Inc. (TSX:AF) (AlarmForce or the Company) announced today that it has substantially completed its previously announced review and evaluation of the Company's revenue recognition policies for certain revenue generated from customer contracts after a customer had requested cancellation of services. As a result, the Company intends to restate its financial statements for the year ended October 31, 2015 and the first and second quarters of 2016 which will also incorporate the cumulative impact of prior period adjustments associated with each of fiscal 2013 and 2014 years. The aggregate amount of revenue that was incorrectly earned is not expected to exceed $3.5M (or about 1.75% of aggregate revenue) for those periods. This amount remains subject to audit. In order for the Company to become current with its filing obligations for its financial statements under applicable Canadian securities laws, the Company intends to file by January 30, 2017:

  • Audited Annual Consolidated Financial Statements for fiscal 2016, which includes restated financial information for fiscal 2015, and related MD&A, which will incorporate the cumulative impact of prior period adjustments; and
  • Unaudited Interim Consolidated Financial Statements for the third quarter of fiscal 2016, which includes restated financial information for the third quarter of 2015, and related MD&A, which will incorporate the cumulative impact of prior period adjustments

The Company today also provides an update on employment related tax audits including steps it will be undertaking to mitigate the risk of additional employment related reassessments and on its review of internal controls.

Restatement Arising from Incorrectly Charged Monitoring Fees Subsequent to Requests for Cancellation

As previously announced on August 24, 2016, after concluding a review of its residential subscription cancellation practice, the Company determined that it ought not to have continued charging monitoring fees in some jurisdictions for the period following certain residential customers' subscription cancellations until the equipment was returned. The Company also announced that, retroactive to August 1, 2013, residential customers who had been incorrectly charged monitoring fees subsequent to the cancellation date will be entitled to a refund of those charges plus interest.

In order to determine which of the Company's residential customers had been impacted, the Company undertook a detailed examination of revenue recognition and cancellation policies and practices for the periods starting fiscal Q4 2013 for revenue generated from customer contracts after a customer had requested cancellation of services. That examination process required a review of individual customer contracts and detailed account information where it appeared that a request to cancel services was made. That review of past and current customer contracts has now been completed.

Based on management's review, the Company announces that up to $3.5M of monitoring fee revenue in aggregate were incorrectly charged. This estimate is preliminary and may change as a result of additional work in the preparation of the Audited Annual Consolidated Financial Statements for fiscal 2016. In addition, there will be other items in the financial statements that will be impacted and restated by this review. At this stage, the final amounts of refunds to be paid will depend on, among other things, the following factors:

  • The Company's ability to reach individuals who cancelled during that time frame, especially those who are at the onset of the review period;
  • Whether or not individual subscribers who have previously cancelled and been contacted by the Company follow up with the Company to complete the required documentation

The Company expects to be able to provide details of the number of affected residential contracts and the amount of restated revenue and expenses when it reports and files its Audited Annual Consolidated Financial Statements for fiscal 2016 and associated MD&A and its Unaudited Interim Consolidated Financial Statements and associated MD&A for the third quarter of fiscal 2016. As a result of such incorrectly charged monitoring fees and related matters, the Company's historical financial statements and related MD&A for the years ended October 31, 2013, 2014 and 2015 and the first and second quarters of 2016 should not be relied upon.

In addition to the affected residential contracts, the Company will also provide some preliminary guidance on the impact of the changed contractual terms, and cancellation policy and practice, which may result in a higher level of customer attrition as well as additional costs being incurred in order to retain certain subscribers. It is currently estimated that the Company will be required to cancel up to 3,400 subscribers as at Q3 2016 for subscribers who should have been cancelled in prior periods. In addition, the change in cancellation practice and policy is estimated to have resulted in the cancellation of an incremental 2,600 customers in Q4 2016 which would historically have been incurred in a subsequent period.

The Company has been responding to requests for refunds and will be contacting the remaining impacted customers through an outreach campaign where the focus will be locating impacted subscribers and validation of refund entitlement and payment instructions. The Company will be providing updated information in this regard on its website in January 2017.

Update on Employment Related Tax Audits

As previously announced, Florida tax authorities and Ontario employer health tax authorities have each taken the position that the Company's contract installers in those jurisdictions should have been classified as employees and have proposed to reassess the Company for taxes and penalties totalling approximately $0.5 million, which the Company is disputing.

To mitigate the risk of further audits and possible reassessments, the Company has initiated discussions with certain tax authorities concerning the future classification of installers as employees or amending the current contractual relationship and recognition of the past classification of its installers as contractors. These discussions are ongoing. In general, tax authorities may audit as far back as three taxation years in the U.S. and four taxation years in Canada. If the Company were reassessed by all applicable provincial, state and federal tax authorities in Canada and the U.S. on the basis that installers should have been classified as employees, the total magnitude of all such reassessments (inclusive of interest and penalties) would be material. Once an estimate on the exposure is determined, the Company will take a charge in fiscal 2016 to provide for this potential liability. It is anticipated that this estimate will be made with the filing of the Audited Annual Consolidated Financial Statements for fiscal 2016.

To the extent that the Company concludes that the best course of action would be converting the installers to employees going forward, this is likely to result in higher operating costs being incurred in maintaining this workforce. Specifically, the introduction of employment benefits and additional remittance requirements will result in the Company incurring an increase in costs of 15% or greater for installation personnel. Based on last year's complement of installers, on an annual basis it is estimated that this could represent an increase of $1.1M or greater. To the extent that the Company converts fewer installers then this amount may decrease. The Company believes that having a more captive installation network in our core markets will contribute to an enhanced customer experience and will improve overall business performance.

The Company and the Board actively review capital allocation and dividend practices and the Company does not anticipate any change in dividend policy at this time. In addition, the Company believes that its current liquidity and cash flow is sufficient to fund the cost of this ongoing review and its expansion plans.

Update on Independent Review of Internal Controls

As announced in the Company's October 26, 2016 news release, an independent special committee has been undertaking an independent review of the Company's internal control environment. Independent legal and accounting advisors have been retained in connection with this review. The Company expects to provide an update on this review on January 30, 2017 with the filing of its Q3 and Fiscal 2016 financial statements.

"The importance of this review and the comprehensive analysis completed to date speaks to the core values of our company and the determined direction in which our new management team is headed," said Graham Badun, CEO of AlarmForce. "We are in the customer service business and correcting this issue is paramount to our success. Today's update announcement on this process in no way impedes our progressive growth strategy that includes the recent re-launch of our brand and updated product technologies. The company believes its competitive position and debt free balance sheet gives us confidence we can navigate these issues and fund our growth strategy. "

Status Update

This status update is provided pursuant to the alternative information guidelines in National Policy 12-203 - Management Cease Trade Orders (NP 12-203), which require the Company to provide bi-weekly updates on its affairs until such time as the Company is current with its filing obligations under Canadian securities laws. In accordance with those requirements, the Company advises that except as disclosed herein: (i) there has not been any material changes to the information contained in our August 24, 2016, September 14, 2016, September 28, 2016, October 12, 2016, October 26, 2016, November 9, 2016, November 23, 2016 and December 7, 2016 news releases; (ii) there has not been any failure by the Company to fulfill its publicly disclosed intentions with respect to satisfying the provisions of the alternative information guidelines of NP 12-203; (iii) there are no subsequent specified defaults (actual or anticipated) within the meaning of NP 12-203; and (iv) there is no other material information concerning the Company and its affairs that has not been generally disclosed as of the date of this press release.

About AlarmForce

AlarmForce provides security alarm monitoring, personal emergency response monitoring, video surveillance and related services to residential and commercial subscribers throughout Canada and the United States. More information about AlarmForce's products and services can be found at alarmforce.com.

Forward-Looking Statements

Certain statements contained in this document constitute forward-looking statements or information (collectively "forward-looking statements") within the meaning of applicable securities legislation. Forward-looking statements are often identified by words such as "may", "will", "should", "could", "anticipate", "believe", "expect", "intend", "plan", "potential", "continue" and similar expressions. Forward-looking statements contained or referred to in this press release includes, but may not be limited to: the Company's intention to restate its financial statements for the year ended October 31 2015 and the first and second quarters of 2016 which will also incorporate the cumulative impact of prior period adjustments associated with each of fiscal 2013 and 2014 years; the Company's expectation that the aggregate amount of revenue that was incorrectly earned is not expected to exceed $3.5M (or about 1.75% of aggregate revenue) for those periods; the Company intention to file by January 30, 2017: (i) Audited Annual Consolidated Financial Statements for fiscal 2016, which includes restated financial information for fiscal 2015, and related MD&A which will incorporate the cumulative impact of prior period adjustments; and (ii) Unaudited Interim Consolidated Financial Statements for the third quarter of fiscal 2016, which includes restated financial information for the third quarter of 2015, and related MD&A which will incorporate the cumulative impact of prior period adjustments; the Company's expectation that it will be able to provide details of the number of affected residential contracts and the amount of restated revenue and expenses when it reports and files its Audited Annual Consolidated Financial Statements for fiscal 2016 and associated MD&A and its Unaudited Interim Consolidated Financial Statements for the third quarter of fiscal 2016 and associated MD&A;
the Company's intention to provide some preliminary guidance on the impact of the changed contractual terms and cancellation policy and practice, which is anticipated to result in a higher level of customer attrition as well as additional costs being incurred in order to retain certain subscribers; the Company's estimate that it will be required to cancel up to 3,400 subscribers as at Q3 2016 for subscribers who should have been cancelled in prior periods; the Company's estimate that the change in cancellation practice and policy resulted in the cancellation of an incremental 2,600 customers in Q4 2016 which would historically have been incurred in a subsequent period; the Company's intention to contact remaining impacted customers through an outreach campaign where the focus will be locating impacted subscribers and validation of refund entitlement and payment instructions and the Company's intention to updated information in this regard on its website in January 2017; the Company's expectation that if the Company were reassessed by all applicable provincial, state and federal tax authorities in Canada and the U.S. on the basis that installers should have been classified as employees, the total magnitude of all such reassessments (inclusive of interest and penalties) would be material; the Company's expectation that once an estimate on the employment and tax exposure is determined, it will take a charge in fiscal 2016 to provide for this potential liability; the Company's anticipation that an estimate of its employment and tax exposure will be made with the filing of its Audited Annual Consolidated Financial Statements for fiscal 2016; the Company's expectation that to the extent that the Company concludes that the best course of action would be converting the installers to employees going forward, that would likely result in higher operating costs being incurred in maintaining this workforce; the Company's expectation that the introduction of employment benefits and additional remittance requirements will result in the Company incurring an increase in costs of 15% or greater for installation personnel; the Company's and the Board's anticipation is that there will be no change in dividend policy at this time; the Company's expectation that its current liquidity and cash flow is sufficient to fund the cost of the ongoing review and its expansion plans; and the Company's expectation that it will provide an update on the independent special committee's review on January 30, 2017 with the filing of its Q3 and Fiscal 2016 financial statements.

The forward-looking statements in this press release reflects the current expectations, assumptions and/or beliefs of AlarmForce about future events based on information currently available to AlarmForce. In connection with the forward-looking statements contained in this press release, AlarmForce has made assumptions about, among other things: no significant events occur outside of AlarmForce's normal course of business; that the Company ought not to have continued charging monitoring fees in some jurisdictions for the period following certain residential customers' subscription cancellations; the quantum of refunds to be made to customers; that the cancelled subscription revenue should not have been recognized; the impact of the changed contractual terms and cancellation policy and practice on subscribers; the impact of the proposed Employer Health Tax assessment by the Ontario Ministry of Finance, ongoing IRS audit and Florida payroll audit and other possible employment and tax exposure in connection with the classification of the Company's independent contractors, including the appropriate accounting treatment of taxes and other amounts that may be found to be owed by the Company.

Although AlarmForce believes that the expectations reflected in the forward-looking statements contained in this press release, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned not to place undue reliance on forward-looking statements included in this press release, as there can be no assurance that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward-looking statements involve risks, uncertainties and other factors that could cause actual events, results, liabilities and financial results in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things: that the quantum of incorrectly charged monitoring feeds and refunds to be made to customers is significantly different than preliminarily determined; that the consumer law, tax and any other possible consequences relating to the Company's past and current treatment of cancellations is significantly different than preliminarily determined; the possibility that the preparation of the Audited Annual Consolidated Financial Statements for fiscal 2016 and its Unaudited Interim Consolidated Financial Statements for the third quarter of fiscal 2016 and related MD&A takes longer than anticipated; the possibility that the impact of the proposed Employer Health Tax assessment by the Ontario Ministry of Finance, ongoing IRS audit and Florida payroll audit and other possible employment and tax exposure in connection with the classification of the Company's independent contractors, including the appropriate accounting treatment of taxes and other amounts that may be found to be owed by the Company is significantly different than preliminarily determined. Readers are cautioned that this list of risk factors should not be construed as exhaustive.

The forward-looking statements contained in this press release speak only as of the date of this press release. Except as may be required by applicable securities laws, AlarmForce disclaims any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise.

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