EX-99.1 2 exhibit991111016.htm EXHIBIT 99.1 Exhibit

Exhibit 99.1


INTERFACE SECURITY SYSTEMS HOLDINGS, INC.
ANNOUNCES THIRD QUARTER 2016 FINANCIAL RESULTS


St. Louis, MO - November 10, 2016 – Interface Security Systems Holdings, Inc. (along with its subsidiary, the “Company”) today reported financial and operating results for the three and nine months ended September 30, 2016.

Key Highlights:

•
Total Recurring Monthly Revenue (“RMR”) at September 30, 2016 of $11.5 million, a 13.7% increase compared to total RMR of $10.1 million at September 30, 2015.

•
Average revenue per user (“ARPU”) of $145.56 in the third quarter of 2016, up from $124.70, an increase of 16.7%, for the same quarter last year.

•
Total revenue of $42.8 million for the third quarter of 2016, an increase of 15.4%, compared to $37.1 million for the same period in 2015.

•
Net loss decreased to $6.3 million for the third quarter ended September 30, 2016 compared to $11.0 million the same quarter last year.

•
Pre-SAC EBITDA1 of $14.4 million for the three months ended September 30, 2016, an increase of 27.0%, compared to $11.4 million in the same period last year.

“Our third quarter results reflect a continuing positive trend in the company’s financial and operating performance. This trend is attributable to our steady RMR growth and below average industry attrition combined with an established infrastructure to leverage growth with our fixed overhead costs.” said Michael Shaw, CEO of Interface Security Systems Holdings, Inc. “We are seeing business momentum with a majority of our current Sales Pipeline representing bundled IP services and our national account sales initiatives are driving consistent new RMR growth.”









 

1 Pre-SAC EBITDA (formerly referred to as Adjusted EBITDA) is defined in the "Use of Non-GAAP Financial Measures" section and is reconciled to net loss in the addendum of this news release.
1


Third Quarter 2016 Results

 
Three Months Ended September 30,
 
Percent
Change
 
2016
 
2015
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
     Services
$
39,047

 
$
33,135

 
17.8%
     Products
3,783

 
3,971

 
(4.7)%
     Total revenue
42,830

 
37,106

 
15.4%
 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
     Cost of services
28,116

 
27,472

 
2.3%
     Cost of products
2,979

 
3,207

 
(7.1)%
     General and administrative expenses
5,910

 
5,878

 
0.5%
     Depreciation
4,770

 
3,548

 
34.4%
     Amortization
814

 
1,370

 
(40.6)%
     Loss on sale of long-lived assets
225

 
296

 
(24.0)%
     Total costs and expenses
42,814

 
41,771

 
2.5%
     Income (loss) from operations
16

 
(4,665
)
 
(100.3)%
Interest expense
(6,302
)
 
(6,233
)
 
1.1%
Interest income
2

 
—

 
*
Loss before provision for income taxes
(6,284
)
 
(10,898
)
 
(42.3)%
Provision for income taxes
30

 
(136
)
 
(122.1)%
Net loss
$
(6,254
)
 
$
(11,034
)
 
(43.3)%

Revenue

Total revenue increased $5.7 million, or 15.4%, to $42.8 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. ARPU increased by $20.86, or 16.7%, to $145.56 as of September 30, 2016 compared to September 30, 2015.

Services revenue increased $5.9 million, or 17.8%, to $39.0 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. The increase was due primarily to an increase of $5.4 million in services revenue from RMR growth and higher ARPU in the trailing twelve months offset by a $0.5 million decrease from non-RMR services revenue related to lower installations during the three months ended September 30, 2016 compared to the same period in 2015.

Products revenue decreased $0.2 million, or 4.7%, to $3.8 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015 due to a decrease of $0.2 million in product installations related to the installation revenue Contracted Backlog.

Cost and Expenses

Total cost and expenses decreased $1.0 million, or 2.5%, to $42.8 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015, primarily related to the changes discussed below.

Cost of services increased $0.6 million for the three months ended September 30, 2016 to $28.1 million for the three months ended September 30, 2015. The change in cost of services is due to a $0.6 million increase in monitoring and managed service expense and a $0.3 million increase in other operating expenses offset by a $0.4 million decrease in provisioning and customer transfer costs.



2

Cost of products decreased $0.2 million, or 7.1%, to $3.0 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. The decrease in cost of products is related to a $0.1 million decrease in installation materials, net of capitalized installation materials, associated with lower installation revenue and new RMR added during the three months ended September 30, 2016 and a $0.1 million decrease in maintenance materials costs.

General and administrative expenses remained flat at $5.9 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. There was a $0.3 million increase in health insurance fees and insurance claims and a $0.1 million increase in non-recurring fees offset by a $0.1 million decrease in administrative wages and a $0.1 million decrease in legal and professional fees.

Depreciation expense increased $1.2 million, or 34.4%, to $4.8 million for the three months ended September 30, 2016 as compared with the three months ended September 30, 2015. The increase was primarily due to the net addition of subscriber system assets of $6.2 million.

Amortization expense decreased $0.6 million, or 40.6%, to $0.8 million for the three months ended September 30, 2016 and for the three months ended September 30, 2015. The decrease was primarily due to the end of amortizable life of acquired monitoring and maintenance contracts as of September 30, 2016.

Pre-SAC EBITDA

Pre-SAC EBITDA increased 27.0% for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The increase was primarily a result of an increase in organic RMR installations contributing to a higher RMR service margin contribution as compared to 2015.

Net Loss

Net loss decreased $4.8 million to $6.3 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily as a result of the factors described above.

Liquidity

Our primary sources of liquidity are cash on hand, the Revolving Credit Facility and capital investments from existing shareholders. As of September 30, 2016, we had cash on hand of $0.5 million and $5.4 million of available borrowing capacity under our Revolving Credit Facility. We had negative working capital of $1.2 million as of September 30, 2016 and positive working capital of $6.3 million as of December 31, 2015. Net cash used by operations was $3.8 million for the nine months ended September 30, 2016 compared to $25.0 million for the nine months ended September 30, 2015.

Earnings Presentation

The Company will provide additional information in its Third Quarter 2016 Earnings Presentation which can be viewed at the Company’s website at http://www.interfacesystems.com under "Investor Relations" under "Financial Information."

About Interface

Interface Security Systems Holdings, Inc. is a cloud-based managed security services company headquartered in St. Louis, Missouri. Interface manages a broad range of secure, IP-based security solutions for retail, hospitality and small business customers as well as remote interactive video surveillance. The Company operates two UL Approved, 5-Diamond CSAA Certified Secure Operations Centers and a nationwide service delivery infrastructure. Interface is a portfolio company of SunTx Capital Partners. For more information on Interface, visit www.interfacesystems.com.



3

Use of Non-GAAP Financial Measures

We use certain financial measures, including EBITDA and Pre-SAC EBITDA, as supplemental measures of our operating performance that are not required by, or presented in accordance with, GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. These measures are used in the internal management of our business, along with the most directly comparable GAAP financial measures, in evaluating our operating performance. In addition, our presentation of Pre-SAC EBITDA is consistent with the equivalent measurements that are contained in our Revolving Credit Facility and the indenture governing the Senior Secured Notes.

EBITDA represents net loss attributable to Interface Security Systems Holdings, Inc. before interest expense, interest income, income taxes, depreciation and amortization. Pre-SAC EBITDA represents EBITDA as further adjusted for gain or loss of sale of long-lived assets, accrued but not currently payable management fees, sales and installation costs, net of sales and installation revenue, related to organic RMR growth, plus 50% of non-capitalized corporate and service center administrative costs related to organic RMR growth, less capitalized subscriber system assets.

Our measurement of EBITDA and Pre-SAC EBITDA may not be comparable to similarly titled measures of other companies and are not measures of performance calculated in accordance with GAAP. We have included information concerning EBITDA and Pre-SAC EBITDA because we believe that such information is used by certain investors as supplemental measures of a company’s historical ability to service debt. We believe these measures are used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA and Pre-SAC EBITDA when reporting their results. Our presentation of EBITDA and Pre-SAC EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

EBITDA and Pre-SAC EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of, our operating results or cash flows as reported under GAAP. Some of these limitations are:

•
they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
•
they do not reflect changes in, or cash requirements for, our working capital needs;
•
they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
•
although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and EBITDA and Pre-SAC EBITDA do not reflect any cash requirements for such replacements;
•
they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; and
•
other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Pre-SAC EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Pre-SAC EBITDA only for supplemental purposes. Please see our consolidated financial statements contained elsewhere in this report.


4

Cautionary Statement Regarding Forward Looking Statements

This communication includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under "Risk Factors" from time to time in our filings with the SEC. Many of the forward-looking statements contained in this presentation may be identified by the use of forward-looking words such as “estimates,” “expects,” “anticipates,” “projects,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “could,” “would,” “should,” and "potential", among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this presentation are set forth in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

•
our ability to maintain compliance with various covenants under the Revolving Credit Facility (as defined below);
•
our ability to comply with restrictions in the indentures governing the 15.00% Cash Pay / 2.00% PIK Senior Notes due 2019 issued by Grand Master Holdings, Inc. ("Grand Master"), our indirect parent company, the 12.50% / 14.50% Senior Contingent Cash Pay Notes issued by Interface Master Holdings, Inc. (“Master Holdings”), our direct parent company, and our 9 1/4% Senior Secured Notes due 2018 (the “Notes”);
•
our ability to generate sufficient cash to make payments on our debt;
•
our ability to incur additional indebtedness or refinance existing indebtedness;
•
our ability to compete effectively in a highly‑competitive industry;
•
catastrophic events that may disrupt our business;
•
our ability to retain customers;
•
concentration of customer recurring monthly revenue and concentration of our business in certain markets;
•
our ability to manage relationships with third‑party providers, including telecommunication providers and broadband service providers;
•
our reliance on third-party component providers and the risk associated with any failure, supply chain disruption or interruption in products or services provided by these third parties;
•
our reliance on third-party software and service providers;
•
our inability to protect our intellectual property rights;
•
our ability to obtain or maintain necessary governmental licenses and comply with applicable laws and regulations;
•
changes in governmental regulation of communication monitoring;
•
our reliance on network and information systems and other technologies and our ability to manage disruptions caused by cyber-attacks, failure or destruction of our networks, systems, technologies or properties;
•
macroeconomic factors;
•
economic, credit, financial or other risks affecting our customers and their ability to pay us;
•
the uncertainty of our future operating results;
•
our ability to attract, train and retain an effective sales force; and
•
the loss of our senior management.

There may be other factors that may cause our actual results to differ materially from the results referred to in the forward-looking statements. All forward-looking statements apply only as of the date of this quarterly report and are expressly qualified in their entirety by the cautionary statements included in this quarterly report. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law.




5

Contact Investor Relations:
Heather Helm
314-595-0177
Heather.Helm@interfacesystems.com





6

INTERFACE SECURITY SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS



 
Three Months Ended 
 September 30,
 
2016
 
2015
 
 
 
 
Revenue
 
 
 
     Services
$
39,047

 
$
33,135

     Products
3,783

 
3,971

     Total revenue
42,830

 
37,106

 
 
 
 
Cost and Expenses
 
 
 
     Cost of services
28,116

 
27,472

     Cost of products
2,979

 
3,207

     General and administrative expenses
5,910

 
5,878

     Depreciation
4,770

 
3,548

     Amortization
814

 
1,370

     Loss on sale of long-lived assets
225

 
296

     Total costs and expenses
42,814

 
41,771

     Income (loss) from operations
16

 
(4,665
)
Interest expense
(6,302
)
 
(6,233
)
Interest income
2

 
—

Loss before provision for income taxes
(6,284
)
 
(10,898
)
Provision for income taxes
30

 
(136
)
Net loss
$
(6,254
)
 
$
(11,034
)



7

INTERFACE SECURITY SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARES

 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
476

 
$
12,096

Accounts receivable, less allowance for doubtful accounts of $1,451 and $1,441
 
12,649

 
16,002

Inventories
 
12,164

 
14,333

Prepaid expenses and other assets
 
3,763

 
4,513

Total current assets
 
29,052

 
46,944

Property and equipment, net
 
55,890

 
49,636

Intangible assets, net
 
15,300

 
18,512

Goodwill
 
40,463

 
40,463

Deferred charges
 
649

 
1,025

Other assets
 
4,635

 
6,380

Total assets
 
$
145,989

 
$
162,960

 
 
 
 
 
Liabilities and Stockholders' Deficit
 
 
 
 
Current liabilities
 
 
 
 
Current portion of capital leases and other obligations
 
$
816

 
$
2,808

Accounts payable
 
13,221

 
14,528

Accrued expenses
 
11,266

 
18,288

Customer deposits
 
1,592

 
1,671

Deferred revenue
 
3,309

 
3,344

Total current liabilities
 
30,204

 
40,639

Long-term deferred revenue
 
3,807

 
3,110

Deferred income tax
 
7,915

 
7,497

Other obligations
 
1,186

 
979

Long-term debt
 
272,285

 
262,505

Total liabilities
 
315,397

 
314,730

Mezzanine equity
 
 
 
 
Redeemable Class A Preferred Stock, $1.00 par value, 70,000 shares authorized, 39,398 shares outstanding at September 30, 2016 and December 31, 2015
 
110,284

 
110,284

Redeemable Class C Preferred Stock, $1.00 par value, 60,000 shares authorized, 16,094 shares outstanding at September 30, 2016 and December 31, 2015
 
41,154

 
41,154

Convertible and redeemable Class E Preferred Stock, $1.00 par value, 50,000 shares authorized, 10,467 shares outstanding at September 30, 2016 and December 31, 2015
 
11,961

 
11,961

Total mezzanine equity
 
163,399

 
163,399

Stockholders' deficit
 
 
 
 
Class A Common Stock, $0.01 par value, 3,000,000 shares authorized, 2,632,840 shares outstanding at September 30, 2016 and December 31, 2015
 
26

 
26

Class B Common Stock, $0.01 par value, 1,500,000 shares authorized, 976,880 shares outstanding at September 30, 2016 and December 31, 2015
 
10

 
10

Additional paid-in-capital
 
128,234

 
121,364

Accumulated deficit
 
(461,077
)
 
(436,569
)
Total stockholders' deficit
 
(332,807
)
 
(315,169
)
Total liabilities and stockholders' deficit
 
$
145,989

 
$
162,960



8

INTERFACE SECURITY SYSTEMS HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS

 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
Cash flows from operating activities
 
 
 
Net loss
$
(24,508
)
 
$
(40,762
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
Depreciation
13,881

 
9,960

Amortization
3,212

 
4,406

Amortization of deferred charges
1,656

 
1,651

Deferred income tax
418

 
403

Loss on sale of long-lived assets
970

 
844

Change in operating assets and liabilities
 
 
 
Accounts receivable
3,353

 
2,307

Inventories
2,169

 
4,499

Prepaid expenses and other assets
2,495

 
(984
)
Accounts payable
(1,295
)
 
(3,223
)
Accrued expenses
(6,702
)
 
(3,320
)
Customer deposits
(79
)
 
(744
)
Deferred revenue
662

 
(44
)
Net cash used in operating activities
(3,768
)
 
(25,007
)
Cash flows from investing activities
 
 
 
Capital expenditures, subscriber system assets
(20,325
)
 
(22,167
)
Capital expenditures, other
(619
)
 
(912
)
Proceeds from sale of property and equipment
—

 
30

Net cash used in investing activities
(20,944
)
 
(23,049
)
Cash flows from financing activities
 
 
 
Capital contribution
6,870

 
49,800

Proceeds from Revolving Credit Facility
8,500

 
4,000

Payments on capital leases and other obligations
(2,278
)
 
(1,585
)
Deferred charges
—

 
(68
)
Net cash provided by financing activities
13,092

 
52,147

Net (decrease) increase in cash
(11,620
)
 
4,091

Cash and cash equivalents
 
 
 
Beginning of period
12,096

 
25,833

End of period
$
476

 
$
29,924

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid for interest
$
22,457

 
$
22,267

Cash (refunded) paid for taxes
$
(176
)
 
$
380

 
 
 
 
Noncash items
 
 
 
Capital expenditures in accounts payable and accounts payable
$
392

 
$
492

Acquisition of inventory through financing arrangements
$
—

 
$
938



9

INTERFACE SECURITY SYSTEMS HOLDINGS, INC.
UNAUDITED RECONCILIATION OF NET LOSS TO EBITDA AND PRE-SAC EBITDA
IN THOUSANDS

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net loss
$
(6,254
)
 
$
(11,034
)
 
$
(24,508
)
 
$
(40,762
)
Provision for income taxes
(30
)
 
136

 
369

 
525

Interest expense
6,302

 
6,233

 
18,771

 
18,604

Interest income
(2
)
 
—

 
(4
)
 
(1
)
Depreciation
4,770

 
3,548

 
13,881

 
9,960

Amortization
814

 
1,370

 
3,212

 
4,406

EBITDA
5,600

 
253

 
11,721

 
(7,268
)
Loss on sale of long-lived assets
225

 
296

 
970

 
844

Accrued management fees (a)
125

 
125

 
375

 
667

Sales and installation expense (b)
15,274

 
17,148

 
52,841

 
68,944

50% of overhead expenses (c)
2,893

 
2,877

 
8,991

 
8,858

Capitalized expenditures, subscriber system assets (d)
(4,156
)
 
(3,880
)
 
(20,486
)
 
(22,450
)
Sales and installation revenue (e)
(5,544
)
 
(5,465
)
 
(12,869
)
 
(15,144
)
Pre-SAC EBITDA
$
14,417

 
$
11,354

 
$
41,543

 
$
34,451


(a)
Reflects fees under the Management Services Agreement with SunTx Capital Management Corp., the general partner of SunTx Capital Partners that are accrued but not currently payable.
(b)
Reflects sales and installation costs related to organic RMR growth.
(c)
Reflects 50% of the corporate and service center administrative costs related to organic RMR growth and is not capitalized. Corporate and service center administrative costs include expenses and the related overhead to support the RMR and installation growth. Industry participants customarily allocate 50% of their overhead cost to RMR and sales growth.
(d)
Reflects sales and installation costs related to organic RMR growth, including those costs that are capitalized as subscriber systems assets. Since the full amount of sales and installation expense is added as an adjustment in (b) above, the capitalized portion of the sales and installation cost is deducted from the Pre-SAC EBITDA calculation. 
(e)
Reflects revenue received for the installation of subscriber systems related to organic RMR growth to match certain costs incurred in connection with the installations as described in (b) above.



10