Financial Information

RISKS AND UNCERTAINTIES (continued)

Supply chain

The Company relies on major components to be manufactured on an OEM (Original Equipment Manufacturer) basis. Reliance upon OEMs, as well as industry supply conditions generally involve several risks, including the possibility of defective products (which can adversely affect the Company’s reputation for reliability), a shortage of components and delays in delivery schedules (which can adversely affect the Company’s distribution schedules), and increases in component costs (which can adversely affect the Company’s profitability). The Company has some single-sourced manufacturer relationships, either because alternative sources are not readily or economically available or because the relationship is advantageous due to performance, quality support, delivery, capacity, or price considerations. If these sources are unable or unwilling to manufacture our products in a timely and reliable manner, the Company could experience temporary distribution interruptions, delays, or inefficiencies, adversely affecting our results of operations. Even where alternative OEMs are available, qualification of the alternative manufacturers and establishment of reliable suppliers could result in delays affecting operating results adversely.

Possible Adverse Effect of “False Alarm” Ordinances

According to American industry sources, approximately 98% of alarm activations that result in the dispatch of police or fire department personnel are not emergencies, and thus are “false alarms”. Significant concern has arisen in certain municipalities about the high incidence of “false alarms’’. Although AlarrnForce maintains a relatively low number of false alarms by providing live two-way voice communication with the residence and thereby minimizing the number of dispatches, this concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain security monitoring services. A number of municipalities have implemented or are considering adopting various measures aimed at reducing the number of false alarms. Such measures include (i) subjecting monitoring companies to fines for transmitting false alarms (ii) licensing individual security systems and the revocation of such licences following a specified number of false alarms (iii) imposing fines on security subscribers for false alarms, (iv) imposing limitations on the number of times police will respond to alarms at a particular location after a specified number of false alarms, and (v) requiring further verification of an emergency signal before the police will respond. As a result, the Company has determined that the most appropriate and cost effective method to combat these police service policies is to retain a private dispatch security response team to respond to the alarm signals.

Dependence on Key Personnel
The Company is highly dependent on the experience and personal efforts of management to promote and sell the Company’s products and services, and to manage its operations and growth. The future success of the Company is dependent on the management of the Company. The departure of any of the operations or management personnel or their inability to continue being functional could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results.

Risks of Litigation
The nature of the alarm services provided by AlarmForce potentially exposes it to greater risks of liability for employee acts or omissions or system failures. The Company’s subscriber agreements pursuant to which it distributes its products and services contain provisions limiting liability to subscribers in an attempt to reduce this risk. However, in the event of litigation with respect to such matters, there can be no assurance that these limitations will be enforced, and the costs of such litigation could have a material adverse effect on the Company.

Ability to Maintain Profitability and Manage Growth
There can be no assurances that the Company’s business and growth strategy will enable the Company to remain profitable in the future. The Company’s future operating results will depend on a number of factors, including (i) the efficiency and effectiveness of the Company’s marketing and advertising programs, (ii) the Company’s ability to continuously improve its service to achieve new and enhanced customer benefits, better quality service and reduced costs, (iii) the Company’s ability to successfully identify and respond to emerging trends in the security industry, (iv) the level of competition in the security industry and (v) the ability to manage attrition level and subscriber replacement costs.

There can be no assurance that the Company will be able to effectively manage its growth, and any failure to do so could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.

Competition
The Company competes with larger companies, as well as smaller regional and local companies, in all of its operations. Furthermore, new competitors are continuing to enter the security industry and the Company may encounter additional competition from such future industry newcomers. Some of the Company’s current competitors have, and new competitors may have, greater financial resources than the Company. The effect of such competition may be to reduce the volume of potential subscribers available to the Company, which could adversely affect the Company’s results of operations.

Expansion
The success of the Company’s continued expansion will depend upon many factors, including the ability of the Company to maintain acceptable attrition rates and control of operating costs. There can be no assurance that the Company will be able to grow or achieve its continued expansion. Such risks, if they materialize, could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.

Effectiveness and Efficiency of Advertising Expenditures
The Company’s future growth and profitability will be dependent in part on the effectiveness and efficiency of the Company’s advertising expenditures, including the ability of the Company to (i) create greater awareness of the Company’s products and services, (ii) determine the appropriate creative message and media mix for future advertising expenditures, and (iii) effectively manage advertising costs in order to maintain acceptable operating margins. There can be no assurance that the Company will experience benefits fiom advertising expenditures in the future. In addition, no assurance can be given that the Company’s planned advertising expenditures will result in increased sales’ will generate sufficient levels of product and service awareness or that the Company will be able to manage such advertising expenditures on a cost-effective basis.

Possible Adverse effect of Future Government Regulations
The Company’s operations are subject to a variety of laws, regulations and licensing requirements of federal, provincial, municipal authorities and ULC. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have a material adverse effect on the Company. The Company believes that it is in material compliance with applicable laws and regulatory requirements.

18. OUTLOOK

The Company expects continued growth in revenues as it expands its subscriber monitored account base using its mass marketing model and brand recognition, focusing on giving the customer the best value possible through its infrastructure of manufacturing capabilities, customer-focused team culture and financial capital base. The Company is committed to differentiating its position in the industry and controlling all aspects of subscriber service delivery.

Management believes that the Company is well positioned to grow the subscriber account base in the foreseeable future, given that the fundamental drivers for the residential alarm industry are considered sound. These are represented by fine-tuning of the low-cost approach, false alarm minimization and up market features, which are expected to be strong drivers and will continue to differentiate the company’s technology and innovative approach.

Additional information on the Company can be found in the Company’s Annual Information Form (“AIF”) and other information filed with Canadian regulators on SEDAR at www.sedar.com.