Financial Information

17. RISKS AND UNCERTAINTIES

In light of the current global economic climate, we expect to see continuous weakness in consumer spending and tightening of the credit markets that will lead to an overall deterioration of economic conditions potentially slowing the rate of growth in the subscriber account base. We, however, remain optimistic that the Company will be able to continue the momentum in new customer installations through continued investment in creative advertising campaigns directed at prospective subscribers in Canada and selected centers in the US.

In addition to general economic factors, the Company’s business is subject to a number of risk factors, the list of which has not been exhausted below. However, the principal risks include consumer behaviors, attrition of accounts, technological changes, and competition as further described below. The Company has certain business risks linked to collection of receivables and subscriber attrition risk, which management believes is manageable.

Attrition of accounts

Customer attrition results from a variety of different factors, including relocation of subscribers, financial difficulties experienced by the customer, competition and other socio-economic factors. Any significant increase in the Company’s attrition rates could have a materially adverse effect on the Company’s business, financial condition, liquidity and operating results.

Technological changes

As technology evolves in the security and telecommunication industries, the Company will attempt to keep abreast of the changes, yet there are no assurances that the Company’s products or services, will continue to be competitive as a result of such technological advancements. There are also no guarantees that the utility companies or other companies will not enter the security alarm business with improvements in technology.

Some of our monitoring services depend on wireless technology of security alarm systems and should the need arise we may be required to implement new technology, which could require significant expenditures. The Company makes every attempt to fully embrace and implement the new wireless technology. However, we may not be able to successfully implement these new technologies or adapt to changing market demands within the specified time frames. If we are unable to adapt to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

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 involves 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 AlarmForce 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 licenses 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 security services provided by AlarmForce potentially expose 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 new comers. 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 from 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 Underwriters Laboratories of Canada. 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 including the most recent annual information form; can be found in other information filed with Canadian regulators on SEDAR at www.sedar.com.