AlarmForce Industries Inc.
TSX : AF

AlarmForce Industries Inc.

January 31, 2017 01:28 ET

AlarmForce Reports 2016 Financial Results; Provides Results of Review of Revenue Recognition Policies and Completes Restatement

Update on Independent Review of Internal Controls & Employment Related Tax Audits

TORONTO, ONTARIO--(Marketwired - Jan. 31, 2017) -

Full Year Highlights

  • Revenue of $56.4 million, an increase of $1.1 million or 2% over 2015 (restated); net loss of $0.5 million, diluted loss per share of $0.04

  • EBITDA decreased by 42% or $4.5 million year-over-year to $6.4 million. One-time, non-recurring items of $5.9 million (excludes higher than normal professional services fees and the impact of the refund reserve in the year), were incurred relative to $3.7 million in 2015. EBITDA of $12.3 million excluding one-time items and adjustments compared to $14.6 million in 2015, a decrease of $2.4million or 16%)

  • The non-recurring items included $0.9 million related to the process of evaluating unsolicited offers to purchase the Company in Q1 2016, $4.2 million related to legal, accounting and other professional fees incurred related to the review of subscription cancellations, installation personnel worker classification, employee settlements, provisions and other costs due to the potential misclassification of installation personnel, and $0.8 million in write-downs of obsolete VideoRelay camera equipment. These costs totalled $5.9 million for the year or $0.51 per share

  • Gross new subscriber additions were 17,276 for the year, about 24% lower than 2015 reflecting a shift in focus in geographic origination and underwriting to improve the overall quality and lifetime value of new subscribers

  • Total subscribers decreased by 5.5% for 2016 from 143,083 to 136,702 with net subscriber growth unfavourably impacted by approximately 6,048 subscribers which is comprised of approximately 3,436 subscribers who should have been cancelled in prior periods and approximately 2,612 subscribers who cancelled in Q4 as a result of updated cancellations practices whose cancellations historically would have been incurred in a subsequent period

  • Notwithstanding decline in overall subscribers recurring monthly revenue totaled $4.5 million, down only 1% over 2015, driven by strong average revenue per new user since the launch of new products and cancellation of lower average revenue per subscriber accounts

Q4 Highlights

  • Revenue of $14 million including an increase in revenue from Canadian operations of 1% and a decrease in revenue from US operations of 9% from Q4 2015

  • At October 31, 2016 the Company had provisions on the balance sheet totaling $6.1 million related to subscriber refunds, potential consumer protection penalties and liabilities related to the potential misclassification of installation personnel

  • EBITDA of $1.4 million (excluding one-time items), down $2.1 million from the comparable period in 2015

  • Average revenue per user for existing subscribers was $32.56 for Q4, a 3% increase (2.5% excluding the effect of foreign exchange) over 2015

  • Average revenue per user for new subscribers was $37.40, an increase of 3% (or 2% excluding the effect of foreign exchange) over 2015

Three months ended October 31, Twelve months ended October 31,
2016 2015 (restated) Change 2016 2015 (restated) Change
($ in thousands, except per share and subscriber amounts)
Total revenue $ 14,007 $ 14,185 -1 % $ 56,361 $ 55,214 2 %
Recurring monthly revenue (RMR) $ 4,450 $ 4,514 -1 % $ 4,450 $ 4,514 -1 %
EBITDA* $ (765 ) $ 2,251 -134 % $ 6,374 $ 10,909 -41 %
Net income $ (2,652 ) $ 1,177 -325 % $ (510 ) $ 4,420 -112 %
Shares outstanding, diluted 11,590 11,644 -0.5 % 11,590 11,644 -0.5 %
Diluted net income per share $ (0.23 ) $ 0.10 -330 % $ (0.04 ) $ 0.38 -111 %
Total subscribers 136,702 143,083 -4.5 % 136,702 143,083 -4.5 %

*EBITDA is a non-IFRS financial measure and is defined in the disclosure section accompanying this press release.

AlarmForce Industries Inc. (TSX:AF) (AlarmForce or the Company) announced today its financial results for Q4 And the fiscal year ended October 31, 2016, the results of the 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 and the completion of the previously announced restatement of its financial statements for the year ended October 31, 2015 and the first and second quarters of 2016. The Company also provided an update of its employment related tax audits and independent review of financial controls.

"With the challenges of the review process and restatements firmly behind us we will continue to focus on implementing the Company's new strategic plan and build our momentum as the leading home security and automation company in the Canadian market," said Graham Badun, President and CEO of AlarmForce Industries Inc. "Customer loyalty and retention remain at the very core of our company's operation. New product technologies, diversification and strategic partnerships will all lead to a better customer experience and continued growth. Our strong cash position of $12 million plus our debt free balance sheet provide more than enough liquidity to not only address the cash needs of the review process but also many opportunities for us to invest to return value to our shareholders in 2017 and beyond."

Following the termination of the management cease trade order and subject to the approval of the TSX, the Company intends to initiate a normal course issuer bid and will announce the details accordingly.

Q4 and Fiscal 2016 Financial Results

For the fiscal year ended October 31, 2016, AlarmForce Industries (TSX:AF) reported revenues of $56.4 million compared to $55.2 million in 2015 (restated). Net income fell by 112% or $4.9 million year-over-year, driven by one-time, non-recurring items totalling $5.9 million. As a result, diluted earnings per share were $(0.04) in 2016 down from $0.38 (restated) during 2015.

Recurring monthly revenue (RMR) decreased to $4.45 million from $4.51 million at the end of 2015, or 1%. Cash flow from operations increased from $8.9 million in 2015 to $13.2 million in 2016, or 48% driven by changes in non-cash working capital.

Background of the Review

The Company received a number of unsolicited offers to purchase the Company during Q1 2016. In its evaluation of these offers, the Company granted prospective purchasers access to due diligence materials continuing into Q3. Concurrently, the Company continued to execute on its strategic plan.

Through both the efforts of Management in executing the strategic plan, and the due diligence undertaken by prospective purchasers, issues related to the absence of rescission rights in some of the Company's residential customer contracts and the Company's cancellation practices were identified (the "Identified Issues").

In July 2016 third party legal and accounting advisors were engaged to support the Company's ongoing assessment of the Identified Issues as well as a more general assessment of the Company's legacy contracts and cancellation practices against consumer protection legislation in those provinces and states in which the Company had a material number of residential subscribers.

On August 24, 2016 the Company announced that, after concluding a review of its residential subscription practices, it determined that it ought not to have continued charging monitoring fees in some jurisdictions for the period following certain residential customers' subscription cancellations until their equipment was returned. Accordingly, retroactive to August 1, 2013, residential customers who have been incorrectly charged monitoring fees subsequent to the cancellation date will receive a refund of those charges plus interest. The Company also announced that it would be delaying the filing of its Q3 2016 financial statements and would begin a detailed subscriber-by-subscriber review in order to fully assess any potential required restatements. In addition, the Company announced that it was under review by tax authorities for the State of Florida and separate IRS and Ontario Employer Health Tax Act audits were initiated.

Scope of Review

Consumer Legislation Compliance Regarding Cancellations

Legal analysis was undertaken to assess the Company's cancellation practices relative to the consumer protection legislation and associated statute of limitation periods in each of the jurisdictions in which the Company operates. The conclusions of such legal review were used by the Company in determining the circumstances and periods within which a subscriber could and could not be charged monitoring fees subsequent to receipt of its cancellation request.

The Company has changed its cancellation practices to comply with consumer protection laws. In addition, in connection with the launch of new third party manufactured products in Q4 2016, the Company introduced new compliant residential customer contracts.

Revenue Recognition

Efforts have been focused on quantifying the amount of monitoring revenue required to be derecognized. This involved a detailed review (the "Customer Review"), assessing previously cancelled subscribers as well as active customers who may have requested cancellation of monitoring services but had either reconsidered or had not returned their equipment ("Pending Cancelled"). This has resulted in the Company determining to pay refunds to certain customers who have cancelled subsequent to August 1, 2013.

A detailed, manual, subscriber-by-subscriber review was undertaken for all Pending Cancelled customers. A dataset of all active subscribers at July 31, 2016 formed the starting point, where system data was used to determine where an active subscriber may have submitted either a written or oral cancellation request. Through the review, it was determined that 3,436 subscribers would need to be cancelled with the cancellation captured in the period in which the cancellation request was received. In addition, the Company completed a review of its previously cancelled subscribers in order to assess the actual cancellation date relative to any prior cancellation request.

Nature of the Errors and Impact on Recognized Revenue

The period covered by the review included all subscriber accounts cancelled forming part of the Customer Review, including the Pending Cancelled subscribers who had provided a cancellation request but had not been cancelled. Based on the terms of the Company's legacy residential customer contracts not being compliant with consumer protection legislation and the Company's cancellation practices relative to such legislation, it was determined that the Company had incorrectly charged certain residential customers monitoring fees subsequent to the cancellation date. Accordingly, revenue in respect of such monitoring fees should not have been recognized and therefore, the Company's prior period financial statements contained reporting errors and gives rise to liabilities owed to affected customers in the form of refunds.

Restatement

On December 16, 2016, the Company announced that it had substantially completed its review, including its evaluation of the Company's revenue recognition policies for certain revenue generated from customer contracts after a customer had requested cancellation of services. The Company determined that it would need to restate its financial statements for the fiscal year ended October 31, 2015 as well as the first and second quarters of fiscal 2016. In order for the Company to become current with its filing obligations for its financial statements under applicable Canadian securities laws, the Company has filed the following documents with Canadian securities regulators on SEDAR:

  • Audited Annual Consolidated Financial Statements for fiscal 2016, which includes restated financial information for fiscal 2015, and related MD&A;
  • 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; and
  • Annual Information Form for fiscal 2016.

Copies of the filings are available on SEDAR (www.sedar.com).

Independent Contractor Classification

As well, during Q3 2016, the Company undertook a high level, preliminary legal reviews of its installer classification. External legal counsel was engaged to advise the Company with respect to correspondence and communication with the appropriate national and local tax authorities, and to act on behalf of the Company when needed. The Company also continues to engage in negotiations with these tax authorities to achieve a settlement of any possible tax liabilities over the Company's treatment of installers as contractors. The Company has taken a reserve in Q4 in relation thereto.

Management and Special Committee Review of Financial Controls

As part of the Company's assessment of the Identified Issues as well as a more general assessment of the Company's legacy contracts and cancellation practices, the Company's senior management concluded that the Company's non-compliance with certain consumer protection legislation in its standard form legacy consumer contracts and previous cancellation practices resulted from a prior design deficiency and material weakness in the Company's internal controls over financial reporting ("ICFR") and its disclosure controls and procedures ("DC&P"), which led to the restatement and delayed regulatory filings. At the end of Q3 and in early Q4, the Company changed its cancellation practice in order to comply with consumer protection legislation. In addition, prior to launching new third party products and compliant residential customer contracts, the Company introduced an addendum to accompany its legacy standard form consumer contract in order to inform new subscribers of their cancellation rights. Based on the above and other factors considered by management as described in the MD&A filed with the Company's Audited Annual Consolidated Financial Statements for fiscal 2016, management has concluded that as at October 31, 2016, there were no longer any material weaknesses in the Company's ICFR and DC&P.

On October 20, 2016, the Board appointed a special committee (the "Special Committee") for the purpose of reviewing the circumstances leading to the DC&P, ICFR and delayed regulatory filing issues facing the Company. The Special Committee retained external counsel and an advisor on internal financial controls to assist in this review.

The Special Committee, with the assistance of its advisors, reviewed the facts and circumstances surrounding the Company's residential subscription cancellation practice and its classification of installers as contractors as opposed to employees. In addition to conducting a detailed review of the Company's documentation, the Special Committee's advisors conducted interviews of the chair of the audit committee, members of senior management and certain other employees identified as relevant to the review.

The Special Committee and Board have concluded that the measures and remedial actions taken by the current CEO, CFO and management to address its legacy subscriber cancellation practices and residential customer contracts were timely and appropriate and that the control environment did not contain any material weaknesses in DC&P or ICFR as at October 31, 2016.

The Company is committed to continuing to enhance the calibre of its overall internal financial controls environment including measures to expand documentation, reinforce reporting of evaluations and continuing to increase organizational awareness and understanding regarding the importance of internal controls. Accordingly, management and the Board intend to work with an independent third party advisor in adopting and implementing enhancements to its current internal financial control environment.

The Company will be investigating the actions of former members of management with respect to the Identified Issues, including what legal remedies may be available to the Company in respect thereof.

Review Costs

Included in the Company's general and administrative expenses in fiscal 2016 are legal, accounting and other professional costs incurred by the Company in support of its efforts to identify, quantify and assess the impacts of its revenue recognition practices associated with monitoring fees charged to certain subscribers subsequent to the cancellation date.

During 2016, total costs incurred are estimated to have been $1.2 million including costs associated with the Company's review of its revenue recognition practices, installation personnel worker classification (described under Risk Factor - Classification of Installers) and certain other tax matters. The Company has also taken provisions for potential penalties, fines and assessments. Additional costs will continue to be incurred in respect of these reviews in fiscal 2017.

Other Events

During 2016, the Company repurchased a total of 20,900 common shares for cancellation under the normal course issuer bid for a total cost of $0.2 million and has paid dividends totalling $2.1 million.

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.

Disclosure

EBITDA is defined as earnings before interest expenses, income taxes, depreciation and amortization. EBITDA is a key measure used in the security industry to assist in understanding and comparing operating results and is often referred to by our competitors. Management views EBITDA as a measure to assess the operating performance of the Company. Yet, since it does not have any standardized meaning defined by IFRS, it may not be considered in isolation of IFRS measures such as net income/loss or cash flows, as a measure of liquidity. The Company, however, utilizes these measures in making operating decisions and assessing its performance. Management believes that it allows the Company to assess its ongoing business without the impact of depreciation or amortization expenses. Since EBITDA is not a defined term under IFRS, it is unlikely to be comparable to a similar measure presented by other issuers.

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 expectation that new product technologies, diversification and strategic partnerships will all lead to a better customer experience and continued growth; the Company's expectation that it has more than enough liquidity to not only address the cash needs of the review process but also many opportunities for the Company to invest to return value to its shareholders in 2017 and beyond; the payment of refunds to certain customers who have cancelled their services subsequent to August 1, 2013; the Company's intention to continue to engage in negotiations with tax authorities to achieve a settlement of any possible tax liabilities over the Company's treatment of installers as contractors; the Company's intention to continue to enhance the caliber of its overall internal financial controls environment including measures to expand documentation, reinforce reporting of evaluations and continuing to increase organizational awareness and understanding regarding the importance of internal controls; the intentions of management and the Board to work with an independent third party advisor in adopting and implementing enhancements to the Company's current internal financial control environment; the Company's expectation that additional costs will continue to be incurred in respect of its reviews in fiscal 2017.

The forward‐looking statements in this press release reflect 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; the quantum of refunds to be made to customers; the impact of the changed contractual terms and cancellation policy and practice on subscribers; 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; general economic conditions; the Company's business plans; exchange rates; hiring and labour trends and conditions; timing and payment of dividends; treatment under governmental regulatory regimes and tax laws; and currency, exchange and interest rates.

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: the quantum of incorrectly charged monitoring fees and refunds to be made to customers is significantly different than preliminarily determined; that the consumer law, tax and any other possible consequences related to the Company's past and current treatment of cancellations is significantly different than preliminarily determined; the possibility that 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 and other risks, and the risks discussed in the "Risk Factors" section of the Company's Annual Information Form and the "Risks and Uncertainties" section of the Company's MD&A, copies of which may be obtained at www.sedar.com.

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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