Financial Information

5. REVIEW OF OPERATIONS

Revenues

Revenue increased $4,190,976 or 14% to $34,133,361 in 2009 when compared to $29,942,385 in 2008. The increase was primarily due to the increase in recurring monthly monitoring generated from alarm subscriber agreements. Monthly recurring monitoring services compose 89% of total revenues.

Cost of sales

Cost of sales amounted to $8,032,053 in 2009 compared to $6,596,303 in 2008, an increase of $1,435,750 or 22%. The primary reason for the increase is the additional staffing requirements and general wage augmentation to support the increased subscriber accounts. These costs include the cost of providing monitoring services, technical support and field service maintenance cost.

Despite the volatility in the US foreign exchange rate and adverse pressures surrounding the global economy, management expects the gross profit margins to see an upward trend as the Company continues to experience consistent and stable growth in the subscriber base and obtain scale efficiencies with target staffing requirements.

Selling General and Administrative Expenses (“SG & A”)

Selling expenses remained relatively stable at $10,961,454 in 2009 compared to $10,563,991 in 2008, a marginal increase of $397,463 or 4%. Advertising costs reflecting 82% of the selling expenses are in the form of television, radio, print and other media. The relatively stable selling expenditures are primarily due to prudent management of marketing expenditures in negotiating advertising contracts in selected centers. Selling expenses not related to marketing increased by $158,590 in 2009, which is a direct result of general increase in wage augmentations. The Company intends to continue establishing brand recognition in the US and reinforce branding in Canada. The Company also expects to continue building brand recognition in the AlarmCare product using the same successful marketing model used for the alarm systems. These advertising expenditures in the form of radio, television, print and other media uniquely introduce the benefits of the Company’s products and services.

Administrative expenses totaled $6,143,875 in 2009 compared to $5,374,444 in 2008, an increase of $769,431 or 14%. This increase in administrative expenses result from general wage augmentations and costs incurred due to product development of a new security product (as discussed in “Company Overview”). The Company incurred costs amounting to $293,817 for the development of a new security product that will enable monitoring of the home via remote video access. In addition, with downward pressure on subscriber household incomes in Canada and the United States, in fiscal 2009, the Company saw an increase in uncollectible monitoring arising from customer attrition.

Other expenses

Deferred charges were fully amortized in 2009, bringing the amortization expense for deferred charges down to $2,730 in 2009 from $8,457 in 2008. Amortization of Property Plant and Equipment remained relatively flat at $2,425,581 for fiscal 2009 compared to $2,367,729 in fiscal 2008, a marginal increase of $57,852 or 2%.

Rental equipment refers to alarm equipment installed at a subscriber’s location that remains the property of the Company. This equipment is capitalized under rental equipment and is expected to have a longer useful life than the term of the customer agreement. When subscribers are terminated, the related equipment and accumulated amortization is removed from the accounts, thereby reducing the amortization expense for that period.

Interest expense was $70,103 in 2009 compared to $90,131 in 2008, a decrease of $20,028 or 22%. The Company did not obtain any new loans in 2009 and made principal repayments on existing loans, thereby reducing the interest expense for this year. The Company strictly controls the use of debt financing for new subscriber growth and uses an organic growth model to build the account base as opposed to growth by acquisition. This has proven effective in reducing the Company’s debt to equity ratio.

Foreign exchange loss

The Company is exposed to currency risk due to the operations of its US limited partnership, AlarmForce LP, and also a certain portion of the Company’s purchases are in US currency, resulting in US dollar denominated accounts payable. These activities result in exposure to fluctuations in foreign currency rates as the Company adjusts its foreign exchange translation rate periodically. As at October 31, 2009, the Company experienced a foreign exchange gain of $61,511 from the fluctuating US dollar. The Company has not deemed it necessary to utilize any financial instruments or cash management policies to mitigate risk.

Income taxes

Future income tax assets results from timing differences, which stem from the accounting deferral and amortization of sales revenue that are immediately recognized in taxable income at the time the sale is completed. These differences are expected to reverse in the future. The Company conducts research and development activities, which may be eligible for Investment Tax Credits. The Company will account for these Investment Tax Credits when there is reasonable assurance that they will be received.

The tax effects of the significant components of temporary differences giving rise to the future tax assets and liabilities are as follows for the years 2007-2009:

Operating results by business segments

The Company operates primarily in one industry segment, which is security monitoring, and related services. The subscribers are located primarily in one geographic segment of North America. Therefore, no segmented information has been presented.