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Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
Monitronics International, Inc. and its subsidiaries (collectively, "Monitronics" or the "Company", doing business as Brinks Home SecurityTM) provide residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, in the United States, Canada and Puerto Rico. Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel"), which offers both Do-It-Yourself and professional installation security solutions and our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers. We also periodically acquire alarm monitoring accounts from other alarm companies in bulk on a negotiated basis.
As previously disclosed, on June 30, 2019, Monitronics and certain of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (collectively, the "Petitions" and, the cases commenced thereby, the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). The Debtors' Chapter 11 Cases were jointly administered under the caption In re Monitronics International, Inc., et al., Case No. 19-33650. On August 7, 2019, the Bankruptcy Court entered an order, Docket No. 199 (the "Confirmation Order"), confirming and approving the Debtors' Joint Partial Prepackaged Plan of Reorganization (including all exhibits thereto and, as modified by the Confirmation Order, the "Plan") that was previously filed with the Bankruptcy Court on June 30, 2019. On August 30, 2019 (the "Effective Date"), the conditions to the effectiveness of the Plan were satisfied and the Company emerged from Chapter 11 after completing a series of transactions through which the Company and its former parent, Ascent Capital Group, Inc. ("Ascent Capital"), merged (the "Merger") in accordance with the terms of the Agreement and Plan of Merger, dated as of May 24, 2019 (the "Merger Agreement"). Monitronics was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware in accordance with the terms of the Merger Agreement.
Upon emergence from Chapter 11 on the Effective Date, the Company has applied Accounting Standards Codification ("ASC") 852, Reorganizations, in preparing its condensed consolidated financial statements. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, a new entity for financial reporting purposes was created. The Company selected a convenience date of August 31, 2019 for purposes of applying fresh start accounting as the activity between the convenience date and the Effective Date did not result in a material difference in the financial results. References to "Successor" or "Successor Company" relate to the balance sheet and results of operations of Monitronics on and subsequent to September 1, 2019. References to "Predecessor" or "Predecessor Company" refer to the balance sheet and results of operations of Monitronics prior to September 1, 2019. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization. As such, references to the "Company" could refer to either the Predecessor or Successor periods, as defined.
The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s (the "SEC") Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The Company’s unaudited condensed consolidated balance sheet as of September 30, 2020, and the unaudited condensed statements of operations and cash flows of the Successor Company for the three and nine months ended September 30, 2020 and of the Predecessor Company for the three and nine months ended September 30, 2019, include the results of Monitronics and all of its direct and indirect subsidiaries. The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year, particularly when considering the risks and uncertainties associated with the COVID-19 pandemic and the impacts it may have on our financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Monitronics Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period. The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of subscriber accounts, deferred tax assets, goodwill and other indefinite-lived intangible assets. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including consideration of the potential impacts of the COVID-19 pandemic, and adjusts them when facts and circumstances change. Given the severity and the duration the COVID-19 pandemic is unknown, the potential impacts of the
pandemic on Management's estimates is uncertain. Furthermore, as the effects of any future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.
Supplemental Cash Flow Information
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|
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Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
State taxes paid, net
|
$
|
2,532
|
|
|
$
|
—
|
|
|
|
$
|
2,637
|
|
|
Interest paid
|
59,686
|
|
|
7,238
|
|
|
|
72,710
|
|
|
Accrued capital expenditures
|
713
|
|
|
1,471
|
|
|
|
1,405
|
|
|
Earnout Payments liability
|
84,799
|
|
|
—
|
|
|
|
—
|
|
(2) Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"), and related amendments, which replaces the incurred loss impairment methodology under prior GAAP with an expected credit loss model. ASU 2016-13 affects trade receivables, loans, contract assets, certain beneficial interests, off-balance sheet credit exposures not accounted for as insurance and other financial assets that are not subject to fair value through net income, as defined by the standard. Under the expected credit loss model, we are required to consider future economic trends to estimate expected credit losses over the lifetime of the asset. We adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach and recorded a $1,627,000 increase in Accumulated deficit and a reduction in Contract assets, net - current portion, which is included in Prepaid and other current assets in the unaudited condensed consolidated balance sheets, as an opening adjustment.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, and becomes effective on January 1, 2021. The adoption of the new guidance is not expected to have a material impact on our condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"). ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. The guidance is optional and may be elected over time as reference rate reform activities occur. During the second quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
(3) Goodwill
The following table provides the activity and balances of goodwill by reporting unit (amounts in thousands):
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Brinks Home
Security
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Balance at 12/31/2019
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$
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81,943
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Goodwill impairment
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(81,943)
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Balance at 9/30/2020
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$
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—
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|
The Company accounts for its goodwill pursuant to the provisions of FASB ASC Topic 350, Intangibles - Goodwill and Other ("ASC 350"). In accordance with ASC 350, goodwill is not amortized, but rather tested for impairment annually, or earlier if an event occurs, or circumstances change, that indicate the fair value of a reporting unit may be below its carrying amount.
As of March 31, 2020, the Company determined that a triggering event had occurred as a result of the recent economic disruption and uncertainty due to the COVID-19 pandemic. In response to the triggering event, the Company performed a quantitative impairment test at the Brinks Home Security entity level as we operate as a single reporting unit. The fair value of the Company's reporting unit was estimated based on a discounted cash flow model and market-based approach. Assumptions critical to our fair value estimate under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessment indicated that the carrying value was in excess of the fair value of the reporting unit, including goodwill. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Applying this methodology, we recorded a full goodwill impairment charge of $81,943,000 during the nine months ended September 30, 2020. The factors leading to the goodwill impairment were lower projected overall account acquisition in future periods due to the estimated impact of COVID-19 on our account acquisition channels and an increase in the discount rate applied in the discounted cash flow model based on current economic conditions. This resulted in reductions in future cash flows and a lower fair value as calculated under the income approach.
(4) Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
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September 30,
2020
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|
December 31,
2019
|
|
Accrued payroll and related liabilities
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$
|
8,966
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|
|
$
|
5,908
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|
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Interest payable
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258
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|
|
291
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|
|
Income taxes payable
|
2,046
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|
|
2,603
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|
|
Operating lease liabilities
|
3,441
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|
|
3,725
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|
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Contingent dealer liabilities
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2,591
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|
|
3,274
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Earnout Payments liability
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21,786
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|
|
—
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Other
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6,718
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|
|
9,153
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Total Other accrued liabilities
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$
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45,806
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|
|
$
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24,954
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(5) Debt
Debt consisted of the following (amounts in thousands):
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September 30,
2020
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December 31,
2019
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Takeback Loan Facility, matures March 29, 2024, LIBOR plus 6.5%, subject to a LIBOR floor of 1.25%, with an effective rate of 8.0%
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$
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814,275
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$
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820,444
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Term Loan Facility, matures July 3, 2024, LIBOR plus 5.0%, subject to a LIBOR floor of 1.5%, with an effective rate of 6.7%
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150,000
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150,000
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Revolving Credit Facility, matures July 3, 2024, LIBOR plus 5.0%, subject to a LIBOR floor of 1.5%, or base rate (with a floor of 4.5%) plus 4.0%, with an effective rate of 9.0%
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23,500
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|
|
16,000
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|
|
|
$
|
987,775
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|
|
$
|
986,444
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Less: Current portion of long-term debt
|
(8,225)
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|
|
(8,225)
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Long-term debt
|
$
|
979,550
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|
|
$
|
978,219
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Takeback Loan Facility
On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into an $822,500,000 takeback term loan facility (the "Takeback Loan Facility") with the lenders party thereto, and Alter Domus (formerly known as Cortland Capital Market Services, LLC) as administrative agent. The Takeback Loan Facility requires quarterly interest payments and quarterly principal payments of $2,056,250, and matures on March 29, 2024. Interest on loans made under the Takeback Loan Facility accrues at an interest rate per year equal to the LIBOR rate (with a floor of 1.25%) plus 6.5% or base rate plus 5.5%. The
Takeback Loan Facility, subject to certain exceptions, is guaranteed by each of the Company's existing and future domestic subsidiaries and is secured by substantially all the assets of the Company and such subsidiary guarantors. See note 13, Consolidating Guarantor Financial Information for further information. The Takeback Loan Facility contains customary representations, warranties, covenants and events of default and related remedies.
Credit Facilities
On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into a $145,000,000 senior secured revolving credit facility (the "Revolving Credit Facility"), including a $10,000,000 swingline loan, and $150,000,000 in senior secured term loans (the "Term Loan Facility" and together with the Revolving Credit Facility, the "Credit Facilities") with the lenders party thereto, and Encina Private Credit SPV, LLC as administrative agent, swingline lender and L/C issuer. As of September 30, 2020, the Company had $600,000 available under a standby letter of credit issued. As of September 30, 2020, $120,900,000 is available for borrowing under the Revolving Credit Facility, subject to certain financial covenants.
The maturity date of loans made under the Credit Facilities is July 3, 2024, subject to a springing maturity of March 29, 2024, or earlier, depending on any repayment, refinancing or changes in the maturity date of the Takeback Loan Facility. Interest on loans made under the Credit Facilities accrues at an interest rate per year equal to the LIBOR rate (with a floor of 1.5%) plus 5.0% or base rate (with a floor of 4.5%) plus 4.0%, dependent upon the type of borrowing requested by the Company. There is a commitment fee of 0.75% on unused portions of the Revolving Credit Facility.
The Credit Facilities, subject to certain exceptions, are guaranteed by each of the Company's existing and future domestic subsidiaries and are secured by substantially all the assets of the Company and such subsidiary guarantors. See note 13, Consolidating Guarantor Financial Information for further information. The Credit Facilities contain customary representations, warranties, covenants and events of default and related remedies.
On June 17, 2020, the Company entered into Amendment No. 1 to the Takeback Loan Facility and Amendment No. 1 to the Credit Facilities (collectively, the "Credit Agreements"). The Amendments amended the applicable Credit Agreement to, among other things, (a) exclude earnouts, holdbacks, and similar payments (including the Earnout Payments) from consideration in the determination of the maximum amount of bulk purchases of alarm monitoring contracts permitted annually, (b) limit the recurring monthly revenue attributable to monitoring contracts with an active earnout, holdback or similar payment for the calculation of certain leverage ratios, (c) limit the annual amount permitted to be paid by the Company to buy out, accelerate, or settle any earnout, holdback or similar payments for future acquisitions structured similarly to the Acquisition prior to the original due date of such payments and (d) permit a board observer appointed by a majority of the lenders party to the Takeback Loan Facility to attend meetings of the board of directors of the Company.
The terms of the Takeback Loan Facility and the Credit Facilities provide for certain financial and nonfinancial covenants. As of September 30, 2020, the Company was in compliance with all required covenants under these financing arrangements.
In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loan under the Takeback Loan Facility, the Company entered into an interest rate cap agreement. The critical terms of the interest rate cap agreement were designed to mirror the terms of the Takeback Loan Facility and are highly effective at offsetting the cash flows being hedged. See note 6, Derivatives for further disclosures related to the settlement of these derivative instruments.
As of September 30, 2020, principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
Remainder of 2020
|
$
|
2,056
|
|
|
2021
|
8,225
|
|
|
2022
|
8,225
|
|
|
2023
|
8,225
|
|
|
2024
|
961,044
|
|
|
2025
|
—
|
|
|
Thereafter
|
—
|
|
|
Total debt principal payments
|
$
|
987,775
|
|
(6) Derivatives
Interest Rate Cap
In November of 2019, the Company entered into an interest rate cap agreement to reduce the interest rate risk inherent in the Company's variable rate Takeback Loan Facility. The interest rate cap agreement provides the right to receive cash if the reference interest rate rises above a contractual rate. The premium paid for the interest rate cap agreement was $3,020,000, which was the initial fair value of the interest rate cap recorded on the condensed consolidated balance sheets.
The critical terms of the interest rate cap were designed to mirror the terms of the Company's variable rate Takeback Loan Facility and are highly effective at offsetting the cash flows being hedged. The Company designated the interest rate cap as a cash flow hedge of the variability of the LIBOR-based interest payments on $750,000,000 of principal of the Takeback Loan Facility. The interest rate cap agreement will expire on December 31, 2023. The effective portion of the interest rate cap's change in fair value is recorded in Accumulated other comprehensive income (loss). Any ineffective portions of the interest rate cap's change in fair value are recognized in current earnings in Interest expense.
During the Successor Company three and nine months ended September 30, 2020, interest expense of $186,000 and $554,000, respectively, was reclassified from Accumulated other comprehensive income (loss) to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss). The Company expects to similarly reclassify approximately $737,000 from Accumulated other comprehensive income (loss) to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss) in the next twelve months.
The fair value of the interest rate cap was $137,000 at September 30, 2020, and constituted an asset of the Company. The fair value of the interest rate cap is included in non-current Other assets, net on the condensed consolidated balance sheets based on the maturity date of the derivative instrument. See note 7, Fair Value Measurements for related fair value disclosures.
Interest Rate Swaps
Historically, the Company entered into interest rate swap agreements (all interest rate swap agreements are collectively referred to as the "Swaps") to reduce the interest rate risk inherent in the Company's prior debt agreements.
Prior to December of 2018, all of the Swaps were designated and qualified as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive income (loss). However, in December of 2018, given the potential for changes in the Company's future expected interest payments that these Swaps hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. Before the de-designation, changes in the fair value of the Swaps were recognized in Accumulated other comprehensive income (loss) and were reclassified to Interest expense when the hedged interest payments on the underlying debt were recognized. After the de-designation, changes in the fair value of the Swaps are recognized in Unrealized loss on derivative financial instruments on the condensed consolidated statements of operations and comprehensive income (loss). For the Predecessor Company three months ended March 31, 2019, the Company recorded an Unrealized loss on derivative financial instruments of $7,773,000. On April 30, 2019, the various counterparties and the Company agreed to settle and terminate all of the outstanding interest rate swap agreements, which required us to pay $8,767,000 in termination amount to certain counterparties and required a certain counterparty to pay $6,540,000 in termination amount to us, resulting in a Realized net loss on derivative financial instruments of $2,227,000. There are no Swaps outstanding as of September 30, 2020.
The impact of the derivatives on the condensed consolidated financial statements is depicted below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from July 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Effective portion of loss recognized in Accumulated other comprehensive income (loss)
|
$
|
(661)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Interest cost of interest rate cap reclassified into Net loss (a)
|
$
|
186
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
(a) Amounts are included in Interest expense in the condensed consolidated statements of operations and comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Effective portion of loss recognized in Accumulated other comprehensive income (loss)
|
$
|
(2,823)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Interest cost of interest rate cap reclassified into Net loss (b)
|
$
|
554
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net income (loss) (b)
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
(940)
|
|
(b) Amounts are included in Interest expense in the condensed consolidated statements of operations and comprehensive income (loss).
(7) Fair Value Measurements
According to the FASB ASC Topic 820, Fair Value Measurement, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:
•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active or inactive markets and valuations derived from models where all significant inputs are observable in active markets.
•Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable in any market.
The following summarizes the fair value level of assets that are measured on a recurring basis at September 30, 2020 and December 31, 2019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Interest rate cap agreement - assets (a)
|
$
|
—
|
|
|
$
|
137
|
|
|
$
|
—
|
|
|
$
|
137
|
|
|
Total
|
$
|
—
|
|
|
$
|
137
|
|
|
$
|
—
|
|
|
$
|
137
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Interest rate cap agreement - assets (a)
|
$
|
—
|
|
|
$
|
2,959
|
|
|
$
|
—
|
|
|
$
|
2,959
|
|
|
Total
|
$
|
—
|
|
|
$
|
2,959
|
|
|
$
|
—
|
|
|
$
|
2,959
|
|
(a) Interest rate cap asset value is included in non-current Other assets on the condensed consolidated balance sheets.
The Company has determined that the significant inputs used to value the interest rate cap fall within Level 2 of the fair value hierarchy. As a result, the Company has determined that its interest rate cap valuation is classified in Level 2 of the fair value hierarchy.
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Long term debt, including current portion:
|
|
|
|
|
Carrying value
|
$
|
987,775
|
|
|
$
|
986,444
|
|
|
Fair value (a)
|
$
|
784,206
|
|
|
$
|
857,717
|
|
(a) The fair value is based on market quotations from third party financial institutions and is classified as Level 2 in the hierarchy.
The Company’s other financial instruments', including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and contingent dealer liabilities, carrying values approximate their fair values because of their nature.
(8) Stockholders' Equity
Common Stock
The Company had 22,500,000 issued and outstanding shares of Common Stock, par value $0.01 per share ("Common Stock") as of both September 30, 2020 and December 31, 2019.
Accumulated Other Comprehensive Income (Loss)
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 (amounts in thousands):
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Balance at December 31, 2019
|
$
|
9
|
|
|
Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0
|
(1,997)
|
|
|
Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (a)
|
184
|
|
|
Balance at March 31, 2020
|
$
|
(1,804)
|
|
|
Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0
|
(165)
|
|
|
Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (a)
|
184
|
|
|
Balance at June 30, 2020
|
$
|
(1,785)
|
|
|
Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0
|
(661)
|
|
|
Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (a)
|
186
|
|
|
Balance at September 30, 2020
|
$
|
(2,260)
|
|
(a) Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations. See note 6, Derivatives for further information.
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the period January 1, 2019 through August 31, 2019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Balance at December 31, 2018
|
$
|
7,608
|
|
|
Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
|
(468)
|
|
|
Balance at March 31, 2019
|
$
|
7,140
|
|
|
Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
|
(472)
|
|
|
Balance at June 30, 2019
|
$
|
6,668
|
|
|
Fresh start adjustment (b)
|
(6,668)
|
|
|
Balance at August 31, 2019
|
$
|
—
|
|
(a) Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations. See note 6, Derivatives for further information.
(b) The remaining amount recognized in Accumulated other comprehensive income (loss) was evaluated to have no fair value upon the application of fresh start accounting pursuant to the Plan.
Incentive Award Plan
On August 3, 2020, the Board of Directors (the "Board") adopted the Monitronics International, Inc. 2020 Incentive Award Plan (the "Plan"), pursuant to which the company may grant cash, equity and equity-based incentive awards to eligible service providers. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents and other stock or cash-based awards (collectively, "awards"). Non-employee directors of the Company, as well as employees and consultants of the Company or its subsidiaries (collectively, "participants") are eligible to receive awards under the Plan. The Plan authorizes the issuance of 2,500,000 shares of common stock.
Through September 30, 2020, and pursuant to the Plan, the company granted a total of 994,000 Performance-Based Restricted Stock Unit awards ("PRSUs") and a total of 426,000 Time-Based Restricted Stock Unit awards ("TRSUs") covering shares of common stock to certain of the company's directors, executives and senior leadership employees. Each RSU represents a contractual right to receive one share of the company’s common stock upon becoming fully vested and payable subject to the terms and conditions of the respective award agreement. Both the PRSUs and the TRSUs are subject to performance condition such that the awards are not payable unless there is a change in control of the company. Because a change in control is not probable of occurring as of the reporting date, no compensation expense has been recognized for either the PRSUs or the TRSUs for the three and nine months ended September 30, 2020.
(9) Basic and Diluted Earnings Per Common Share
Basic earnings per common share ("EPS") is computed by dividing net income by the weighted average number of shares of Common Stock outstanding for the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares of Common Stock outstanding and the effect of dilutive securities. For the Successor Company three and nine months ended September 30, 2020, there were no anti-dilutive securities outstanding. For the Predecessor Company period from September 1, 2019 through September 30, 2019, there were no anti-dilutive securities outstanding. The weighted average number of basic and diluted shares of Common Stock was 22,500,000 for the Successor Company three and nine months ended September 30, 2020. The weighted average number of basic and dilutive shares of Common Stock was 22,500,000 for the Predecessor Company period from September 1, 2019 through September 30, 2019. There were no public shares of Common Stock outstanding during the Predecessor Company period January 1, 2019 through August 31, 2019 as Monitronics was wholly-owned by Ascent Capital.
(10) Commitments, Contingencies and Other Liabilities
The Company is involved in litigation and similar claims incidental to the conduct of its business. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management's estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In management's opinion, none of the pending actions are likely to have a material adverse impact on the Company's financial position or results of operations. The Company accrues and expenses legal fees related to loss contingency matters as incurred.
Asset Purchase Agreement
On June 17, 2020, the Company acquired certain contracts for the provision of alarm monitoring and related services (the "Accounts") as well as the related accounts receivable, intellectual property and equipment inventory of Protect America, Inc. The Company paid approximately $16,600,000 at closing and will make 50 subsequent monthly payments ("Earnout Payments") consisting of a portion of the revenue attributable to the Accounts, subject to adjustment for Accounts that are no longer active. The transaction was accounted for as an asset acquisition with the cost of the assets acquired recorded as of June 17, 2020 and an estimated liability for the Earnout Payments of approximately $86,000,000. The Earnout Payments liability was estimated based on the terms of the payout and the forecasted attrition of the Protect America subscriber base. The current portion of the Earnout Payments liability is included in current Other accrued liabilities on the condensed consolidated balance sheets and the long-term portion of the Earnout Payments is included in non-current Other liabilities on the condensed consolidated balance sheets. The monthly Earnout Payments are classified as Cash flows from financing activities on the condensed consolidated statements of cash flows.
(11) Revenue Recognition
Disaggregation of Revenue
Revenue is disaggregated by source of revenue as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from July 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Alarm monitoring revenue
|
$
|
119,164
|
|
|
$
|
33,594
|
|
|
|
$
|
78,608
|
|
|
Product, installation and service revenue
|
10,506
|
|
|
2,224
|
|
|
|
4,993
|
|
|
Other revenue
|
1,182
|
|
|
471
|
|
|
|
988
|
|
|
Total Net revenue
|
$
|
130,852
|
|
|
$
|
36,289
|
|
|
|
$
|
84,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Alarm monitoring revenue
|
$
|
340,235
|
|
|
$
|
33,594
|
|
|
|
$
|
319,172
|
|
|
Product, installation and service revenue
|
30,513
|
|
|
2,224
|
|
|
|
19,111
|
|
|
Other revenue
|
3,487
|
|
|
471
|
|
|
|
4,003
|
|
|
Total Net revenue
|
$
|
374,235
|
|
|
$
|
36,289
|
|
|
|
$
|
342,286
|
|
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
Trade receivables, net
|
$
|
10,854
|
|
|
$
|
12,083
|
|
|
Contract assets, net - current portion (a)
|
$
|
13,490
|
|
|
$
|
12,070
|
|
|
Contract assets, net - long-term portion (b)
|
$
|
14,827
|
|
|
$
|
14,852
|
|
|
Deferred revenue
|
$
|
11,065
|
|
|
$
|
12,008
|
|
(a) Amount is included in Prepaid and other current assets in the unaudited condensed consolidated balance sheets.
(b) Amount is included in Other assets in the unaudited condensed consolidated balance sheets.
(12) Leases
The Company primarily leases buildings and equipment. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Certain real estate leases contain lease and non-lease components, which are accounted for separately.
Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
All of the Company's leases are currently determined to be operating leases.
Components of Lease Expense
The components of lease expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from July 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Operating lease cost (a)
|
$
|
178
|
|
|
$
|
34
|
|
|
|
$
|
70
|
|
|
Operating lease cost (b)
|
860
|
|
|
320
|
|
|
|
624
|
|
|
Total operating lease cost
|
$
|
1,038
|
|
|
$
|
354
|
|
|
|
$
|
694
|
|
(a) Amount is included in Cost of services in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
(b) Amount is included in Selling, general and administrative, including stock-based and long-term incentive compensation in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Operating lease cost (c)
|
$
|
569
|
|
|
$
|
34
|
|
|
|
$
|
321
|
|
|
Operating lease cost (d)
|
2,997
|
|
|
320
|
|
|
|
2,595
|
|
|
Total operating lease cost
|
$
|
3,566
|
|
|
$
|
354
|
|
|
|
$
|
2,916
|
|
(c) Amount is included in Cost of services in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
(d) Amount is included in Selling, general and administrative, including stock-based and long-term incentive compensation in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
Remaining Lease Term and Discount Rate
The following table presents the weighted-average remaining lease term and the weighted-average discount rate:
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
Weighted-average remaining lease term for operating leases (in years)
|
8.9
|
|
Weighted-average discount rate for operating leases
|
11.7
|
%
|
All of the Company's lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company's estimated incremental borrowing rate is based on information available either upon adoption of ASU 2016-02, Leases (Topic 842) or at the inception of the lease.
Supplemental Cash Flow Information
The following is the supplemental cash flow information associated with the Company's leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
2019
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Lease payments included in cash flows from operating activities (a)
|
$
|
3,460
|
|
|
$
|
345
|
|
|
|
$
|
2,804
|
|
|
Right-of-use assets obtained in exchange for new:
|
|
|
|
|
|
|
|
Operating lease liabilities
|
$
|
738
|
|
|
$
|
69
|
|
|
|
$
|
89
|
|
(a) Cash flow impacts from Operating lease right-of-use assets and Operating lease liabilities are presented net on the cash flow statement in changes in Payables and other liabilities.
Maturities of Lease Liabilities
As of September 30, 2020, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
Remainder of 2020
|
$
|
728
|
|
|
2021
|
3,800
|
|
|
2022
|
3,549
|
|
|
2023
|
3,182
|
|
|
2024
|
3,065
|
|
|
Thereafter
|
17,264
|
|
|
Total lease payments
|
$
|
31,588
|
|
|
Less: Interest
|
(12,499)
|
|
|
Total lease obligations
|
$
|
19,089
|
|
(13) Consolidating Guarantor Financial Information
Monitronics (the "Parent Issuer") entered into the Takeback Loan Facility and the Credit Facilities in August 2019 and both are guaranteed by all of the Company's existing domestic subsidiaries. Consolidating guarantor financial information has not been presented in this Form 10-Q as substantially all of the Company's operations are now conducted by the Parent Issuer entity. The Company believes that disclosing such information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, new service offerings, the availability of capital, financial prospects, anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
•business or economic disruptions or global health concerns, including the outbreak of COVID-19, may materially and adversely affect our business, financial condition, future results and cash flow;
•macroeconomic conditions and their effect on the general economy and on the U.S. housing market, in particular single family homes, which represent our largest demographic;
•uncertainties in the development of our business strategies, including the rebranding to Brinks Home Security and market acceptance of new products and services;
•the competitive environment in which we operate, in particular, increasing competition in the alarm monitoring industry from larger existing competitors and new market entrants, including well-financed technology, telecommunications and cable companies;
•the development of new services or service innovations by competitors;
•our ability to acquire and integrate additional accounts, including the impact of restrictions on selling our services door-to-door, and competition for dealers with other alarm monitoring companies which could cause dealers to leave our program or an increase in expected costs of acquiring an account ("Subscriber Acquisition Costs");
•technological changes which could result in the obsolescence of currently utilized technology with the need for significant upgrade expenditures, including the phase out of 2G, 3G and CDMA networks by cellular carriers;
•the trend away from the use of public switched telephone network lines and the resultant increase in servicing costs associated with alternative methods of communication;
•our high degree of leverage and the restrictive covenants governing its indebtedness;
•the operating performance of our network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facility due to acts of nature or technology deficiencies, and the potential of security breaches related to network or customer information;
•the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations;
•the ability to continue to obtain insurance coverage sufficient to hedge our risk exposures, including as a result of acts of third parties and/or alleged regulatory violations;
•changes in the nature of strategic relationships with original equipment manufacturers, dealers and other of our business partners;
•the reliability and creditworthiness of our independent alarm systems dealers and subscribers;
•changes in our expected rate of subscriber attrition;
•availability of, and our ability to retain, qualified personnel;
•integration of acquired assets and businesses;
•the regulatory environment in which we operate, including the multiplicity of jurisdictions, state and federal consumer protection laws and licensing requirements to which we and/or our dealers are subject and the risk of new regulations, such as the increasing adoption of "false alarm" ordinances; and
•general business conditions and industry trends.
For additional risk factors, please see Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K") and Part II, Item 1A, Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and the 2019 Form 10-K.
Overview
Monitronics International, Inc. and its subsidiaries (collectively, "Monitronics" or the "Company", doing business as Brinks Home SecurityTM) provide residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, in the United States, Canada and Puerto Rico. Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel"), which offers both Do-It-Yourself and professional installation security solutions and our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers. We also periodically acquire alarm monitoring accounts from other alarm companies in bulk on a negotiated basis ("bulk buys").
As previously disclosed, on June 30, 2019, Monitronics and certain of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (collectively, the "Petitions" and, the cases commenced thereby, the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). The Debtors' Chapter 11 Cases were jointly administered under the caption In re Monitronics International, Inc., et al., Case No. 19-33650. On August 7, 2019, the Bankruptcy Court entered an order, Docket No. 199 (the "Confirmation Order"), confirming and approving the Debtors' Joint Partial Prepackaged Plan of Reorganization (including all exhibits thereto and, as modified by the Confirmation Order, the "Plan") that was previously filed with the Bankruptcy Court on June 30, 2019. On August 30, 2019 (the "Effective Date"), the conditions to the effectiveness of the Plan were satisfied and the Company emerged from Chapter 11 after completing a series of transactions through which the Company and its former parent, Ascent Capital Group, Inc. ("Ascent Capital"), merged (the "Merger") in accordance with the terms of the Agreement and Plan of Merger, dated as of May 24, 2019 (the "Merger Agreement"). Monitronics was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware in accordance with the terms of the Merger Agreement.
Upon emergence from Chapter 11 on the Effective Date, the Company has applied Accounting Standards Codification ("ASC") 852, Reorganizations, in preparing its condensed consolidated financial statements. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, a new entity for financial reporting purposes was created. The Company selected a convenience date of August 31, 2019 for purposes of applying fresh start accounting as the activity between the convenience date and the Effective Date did not result in a material difference in the financial results. References to "Successor" or "Successor Company" relate to the balance sheet and results of operations of Monitronics on and subsequent to September 1, 2019. References to "Predecessor" or "Predecessor Company" refer to the balance sheet and results of operations of Monitronics prior to September 1, 2019. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization. As such, references to the "Company" could refer to either the Predecessor or Successor periods, as defined.
Asset Purchase Agreement
On June 17, 2020, the Company acquired certain contracts for the provision of alarm monitoring and related services (the "Accounts") as well as the related accounts receivable, intellectual property and equipment inventory of Protect America, Inc. The Company paid approximately $16,600,000 at closing and will make 50 subsequent monthly payments ("Earnout Payments") consisting of a portion of the revenue attributable to the Accounts, subject to adjustment for Accounts that are no longer active. The transaction was accounted for as an asset acquisition with the cost of the assets acquired recorded as of June 17, 2020 and an estimated liability for the Earnout Payments of approximately $86,000,000. The Earnout Payments liability was estimated based on the terms of the payout and the forecasted attrition of the Protect America subscriber base. The current portion of the Earnout Payments liability is included in current Other accrued liabilities on the condensed consolidated balance sheets and the long-term portion of the Earnout Payments is included in non-current Other liabilities on the condensed consolidated balance sheets. The monthly Earnout Payments are classified as Cash flows from financing activities on the condensed consolidated statements of cash flows.
Impact of COVID-19
In December 2019, an outbreak of a novel strain of coronavirus ("COVID-19") originated in Wuhan, China and has been detected globally on a widespread basis, including in the United States. The COVID-19 pandemic has resulted in the closure of many corporate offices, retail stores, and manufacturing facilities and factories globally, as well as border closings, quarantines, cancellations, disruptions to supply chains and customer activity, and general concern and uncertainty.
In response to the pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S. The CARES Act, among other things, provides for an acceleration of alternative minimum tax credit
refunds, the deferral of certain employer payroll taxes and expands the availability of net operating loss usage. We do not expect the CARES Act to have material impact on the Company's annual effective income tax rate for the year.
With respect to our call and alarm response centers, we have established certain policies and procedures to enable full continuity of our monitoring services moving forward, including distancing staff in the call centers, activating our backup call center facility and enabling our call center operators to operate from home. For employees that can work remotely, we have instituted measures to support them, including purchasing additional equipment to enable work from home capabilities. We are also ensuring we comply with our data security measures to guarantee that all company, employee and customer data remains protected and secure. As of September 30, 2020, substantially all of our workforce is working remotely. In addition, our existing call centers still remain fully operational on premises. Administrative personnel are also working from home and those involved in the Company’s financial reporting and internal controls over financial reporting have been able to continue their normal duties by accessing the Company’s systems and records remotely. Regular communications, review of supporting documentation and tests of operating effectiveness via secured virtual channels have also continued without significant interruption.
In regards to our operations and dealer operations in the field, in jurisdictions where local or state governments have implemented a “shelter in place” or similar orders, we have instructed our dealers to cease doing door-to-door sales until such measures are lifted. This has negatively impacted our Dealer Channel productivity starting in the latter half of March 2020. Dealer Channel volume has shown some recovery in the second and third quarters of 2020, but remains down year over year. Subject to a scheduled service or installation request, and adhering to certain safety protocols, we continue to send field technicians out to service a customer’s home to service or to install a new system. We have taken measures to protect our supply chain of alarm monitoring equipment and, to date, have not experienced significant supply chain constraints to service our customers.
With respect to our receivables from our customers, for the three and nine months ended September 30, 2020, we have issued credits for relief to customers being impacted by hardships from the pandemic. We have temporarily paused standard annual rate increases on applicable customers. Additionally, we have increased our allowances on collection of certain trade and dealer receivables based on the expected impact of the continuation of the pandemic into the fourth quarter of 2020. As a result of COVID-19, we experienced no material impact on our unit and Recurring Monthly Revenue ("RMR") attrition during the three and nine months ended September 30, 2020.
As noted in the financial statements, as of March 31, 2020, the Company determined that a goodwill triggering event had occurred as a result of the recent economic disruption and uncertainty due to the COVID-19 pandemic. Due to the Company's decision to cease door-to-door sales in jurisdictions with a "shelter in place" or similar orders and deteriorating economic conditions, we anticipated a reduction in projected account acquisitions. In response to the triggering event, the Company performed a quantitative goodwill impairment test at the Brinks Home Security entity level as we operate as a single reporting unit. The results of the quantitative assessment indicated that the carrying value was in excess of the fair value of the reporting unit, including goodwill, which resulted in a full goodwill impairment charge of $81,943,000 during the nine months ended September 30, 2020. The factors leading to the goodwill impairment are lower projected overall account acquisition in future periods due to the estimated impact of COVID-19 on our account acquisition channels and an increase in the discount rate applied in the discounted cash flow model based on current economic conditions. This resulted in reductions in future cash flows and a lower fair value as calculated under the income approach.
While we continue to assess the impact of these events, in future periods we may experience reduced revenue, reduced account acquisitions in the Dealer Channel and Direct to Consumer Channel and increased attrition and other costs as a result of the pandemic.
Strategic Initiatives
In recent years, we have implemented several initiatives related to account growth, creation costs, attrition and margin improvements to combat decreases in the generation of new subscriber accounts and negative trends in subscriber attrition.
Account Growth
We believe that generating account growth at a reasonable cost is essential to scaling our business and generating stakeholder value. We currently generate new accounts through both our Dealer Channel and Direct to Consumer Channel. Our ability to grow new accounts in the future will be impacted by our ability to adjust to changes in consumer buying behavior and increased competition from technology, telecommunications and cable companies. We currently have several initiatives in place to drive profitable account growth, which include:
•enhancing our brand recognition with consumers to create a premium customer experience;
•differentiating and profitably growing our Direct to Consumer Channel under the Brinks Home Security brand through a tight integration between phone and field sales;
•recruiting and retaining high quality dealers into our Authorized Dealer Program;
•assisting new and existing dealers with training and marketing initiatives to increase productivity;
•expanding our third party generated sales channel beyond traditional dealers;
•leveraging bulk acquisition opportunities; and
•offering third-party equipment financing to consumers, which is expected to assist in driving account growth at lower creation costs.
Creation Cost Efficiency
We also consider the management of creation costs to be a key driver in improving our financial results. Generating accounts at lower creation costs per account would improve our profitability and cash flows. The initiatives related to managing creation costs include:
•improving performance in our Direct to Consumer Channel including generating higher quality leads at favorable cost; increasing sales close rates and enhancing our customer activation process;
•improved unit economics, including negotiating lower subscriber account purchase price multiples in our Dealer Channel;
•expanding the use and availability of third-party financing, which will drive down net creation costs; and
•leveraging bulk acquisition opportunities with a unique model to acquire accounts at lower multiples.
Attrition
While we have also experienced higher subscriber attrition rates in the past few years, we have continued to develop our efforts to manage subscriber attrition, which we believe will help drive increases in our subscriber base and stakeholder value. We currently have several initiatives in place to reduce subscriber attrition, which include:
•maintaining high customer service levels;
•effectively managing the credit quality of new customers;
•expanding our efforts to both retain customers who have indicated a desire to cancel service and win-back previous customers;
•using predictive modeling to identify subscribers with a higher risk of cancellation and engaging with these subscribers to obtain contract extensions on terms favorable to the Company; and
•implementing effective pricing strategies.
Margin Improvement
We are also implementing initiatives to attempt to reduce expenses and improve our financial results, which include:
•right sizing the cost structure of the business and leveraging our scale;
•increasing use of automation; and
•implementing more sophisticated purchasing techniques.
While there are uncertainties related to the successful implementation of the foregoing initiatives impacting our ability to achieve net profitability and positive cash flows in the near term, we believe they will position us to improve our operating performance, increase cash flows and create stakeholder value over the long-term.
Accounts Acquired
For the Three Months Ended September 30, 2020
During the three months ended September 30, 2020 and 2019, the Company acquired 17,111 and 21,228 subscriber accounts, respectively, through our Dealer Channel and Direct to Consumer Channel. The decrease in accounts acquired for the three months ended September 30, 2020 is principally due to a year-over-year decline in accounts generated in the Dealer Channel and Direct to Consumer Channel. The decline in the Dealer Channel was primarily due to the Company's election to cease purchasing accounts from two dealers in the fourth quarter of 2019 and restrictions on door-to-door selling and other impacts
related to the outbreak of COVID-19 starting in the latter half of March 2020. The decline in the Direct to Consumer Channel production was primarily due to the Company's election to leverage more profitable organic leads. There were no bulk buys during the three months ended September 30, 2020 and 2019.
RMR acquired during the three months ended September 30, 2020 and 2019 was $841,000 and $1,032,000, respectively.
For the Nine Months Ended September 30, 2020
During the nine months ended September 30, 2020 and 2019, the Company acquired 171,306 and 63,974 subscriber accounts, respectively, through our Dealer Channel, Direct to Consumer Channel and bulk buys. The increase in accounts acquired for the nine months ended September 30, 2020 is due to bulk buys of 113,013 accounts in June 2020 and 10,960 accounts in March 2020. There were no bulk buys during the nine months ended September 30, 2019. The increase was partially offset by a year-over-year decline in accounts generated in the Dealer Channel and the Direct to Consumer Channel as noted above.
RMR acquired during the nine months ended September 30, 2020 was $7,187,000, which includes RMR related to bulk buys of $4,866,000. RMR acquired during the nine months ended September 30, 2019 was $3,098,000.
Attrition
Account cancellations, otherwise referred to as subscriber attrition, have a direct impact on the number of subscribers that the Company services and on its financial results, including revenues, operating income and cash flow. A portion of the subscriber base can be expected to cancel their service every year. Subscribers may choose not to renew or to terminate their contract for a variety of reasons, including relocation, cost, switching to a competitor's service, limited use by the subscriber or low perceived value. The largest categories of cancelled accounts relate to subscriber relocation or those cancelled due to non-payment. The Company defines its attrition rate as the number of cancelled accounts in a given period divided by the weighted average number of subscribers for that period. The Company considers an account cancelled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons. If a subscriber relocates but continues its service, it is not a cancellation. If the subscriber relocates, discontinues its service and a new subscriber assumes the original subscriber's service and continues the revenue stream, it is also not a cancellation. The Company adjusts the number of cancelled accounts by excluding those that are contractually guaranteed by its dealers. The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the cancelled account with a new one or refund to the Company the cost paid to acquire the contract. To help ensure the dealer's obligation to the Company, the Company typically maintains a dealer funded holdback reserve ranging from 5-8% of subscriber accounts in the guarantee period. In some cases, the amount of the holdback liability is less than actual attrition experience.
The table below presents subscriber data for the twelve months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30,
|
|
|
|
2020
|
|
2019
|
|
Beginning balance of accounts not subject to Earnout Payments
|
|
865,848
|
|
|
942,157
|
|
|
Accounts acquired
|
|
75,627
|
|
|
84,899
|
|
|
Accounts cancelled
|
|
(128,736)
|
|
|
(156,047)
|
|
|
Cancelled accounts guaranteed by dealer and other adjustments (a)
|
|
(5,276)
|
|
|
(5,161)
|
|
|
Ending balance of accounts not subject to Earnout Payments
|
|
807,463
|
|
|
865,848
|
|
|
Accounts subject to Earnout Payments
|
|
107,929
|
|
|
—
|
|
|
Ending balance of accounts
|
|
915,392
|
|
|
865,848
|
|
|
Attrition rate - Core Unit (c)
|
|
15.4
|
%
|
|
17.3
|
%
|
|
Attrition rate - Core RMR (b) (c)
|
|
17.7
|
%
|
|
17.6
|
%
|
(a) Includes cancelled accounts that are contractually guaranteed to be refunded from holdback.
(b) The RMR of cancelled accounts follows the same definition as subscriber unit attrition as noted above. RMR attrition is defined as the RMR of cancelled accounts in a given period, adjusted for the impact of price increases or decreases in that period, divided by the weighted average of RMR for that period.
(c) Core Unit and RMR attrition rates exclude the impact of the Protect America bulk buy, where the Company is funding the purchase price through an earnout payment structure.
The core unit attrition rate for the twelve months ended September 30, 2020 and 2019 was 15.4% and 17.3%, respectively. The core RMR attrition rate for the twelve months ended September 30, 2020 and 2019 was 17.7% and 17.6%, respectively. The decrease in core unit attrition rate for the twelve months ended September 30, 2020 includes the impact of fewer subscribers, as a percentage of the entire base, reaching the end of their initial contract term, continued efforts around "at risk" extensions and customer retention, and the benefit of improved credit quality in our Direct to Consumer Channel. The increase in the core RMR attrition rate for the twelve months ended September 30, 2020 was due to a combination of lower RMR for accounts generated in the Direct to Consumer Channel, as a minimal equipment subsidy is offered, lower production in the Dealer Channel, which typically has higher RMR, and rate reductions relating to our "at risk" retention program. Further, in light of COVID-19, starting in March 2020, we made the decision to defer taking ordinary course rate adjustments to our customer base, which has continued through September 30, 2020.
We analyze our attrition by classifying accounts into annual pools based on the year of acquisition. We then track the number of cancelled accounts as a percentage of the initial number of accounts acquired for each pool for each year subsequent to its acquisition. Based on the average cancellation rate across the pools, the Company's attrition rate is generally very low within the initial 12 month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to the Company. Over the next few years of the subscriber account life, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked following the end of the initial contract term, which is typically three to five years. Subsequent to the peak following the end of the initial contract term, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool generally normalizes. Accounts generated through the Direct to Consumer Channel have homogeneous characteristics as accounts generated through the Dealer Channel and follow the same attrition curves. However, accounts generated through the Direct to Consumer Channel have attrition of approximately 10% in the initial 12 month period following account acquisition which is higher than accounts generated in the Dealer Channel due to the dealer guarantee period.
Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as revenue and "Adjusted EBITDA." Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts, dealer network and other intangible assets), restructuring charges, stock-based compensation, and other non-cash or non-recurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of our business. In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate the financial performance of companies in the security alarm monitoring industry and is one of the financial measures, subject to certain adjustments, by which our covenants are calculated under the agreements governing our debt obligations. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles in the United States ("GAAP"), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs. It is, however, a measurement that we believe is useful to investors in analyzing our operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. As companies often define non-GAAP financial measures differently, Adjusted EBITDA as calculated by Monitronics should not be compared to any similarly titled measures reported by other companies.
Results of Operations
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Fresh Start Accounting Adjustments. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization of the Company in August 2019 and the application of fresh start accounting. We believe that certain of our consolidated operating results for the three months ended September 30, 2020 is comparable to certain operating results for the period from July 1, 2019 through August 31, 2019 when combined with our consolidated operating results for the period from September 1, 2019 through September 30, 2019. Accordingly, we believe that discussing the non-GAAP combined results of operations and cash flows of the Predecessor Company and the Successor Company for the three month period ended September 30, 2019 is useful when analyzing certain performance measures.
The following table sets forth selected data from the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 30,
|
|
|
Non-GAAP Combined Three Months Ended September 30,
|
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from July 1, 2019 through August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Net revenue
|
$
|
130,852
|
|
|
|
$
|
120,878
|
|
|
|
$
|
36,289
|
|
|
|
$
|
84,589
|
|
|
Cost of services
|
31,383
|
|
|
|
28,962
|
|
|
|
8,976
|
|
|
|
19,986
|
|
|
Selling, general and administrative, including stock-based and long-term incentive compensation
|
31,572
|
|
|
|
32,370
|
|
|
|
11,390
|
|
|
|
20,980
|
|
|
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
|
57,240
|
|
|
|
49,810
|
|
|
|
17,302
|
|
|
|
32,508
|
|
|
Interest expense
|
20,033
|
|
|
|
34,586
|
|
|
|
7,474
|
|
|
|
27,112
|
|
|
(Loss) income before income taxes
|
(18,447)
|
|
|
|
674,220
|
|
|
|
(10,603)
|
|
|
|
684,823
|
|
|
Income tax expense
|
717
|
|
|
|
642
|
|
|
|
204
|
|
|
|
438
|
|
|
Net (loss) income
|
(19,164)
|
|
|
|
673,578
|
|
|
|
(10,807)
|
|
|
|
684,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (a)
|
$
|
68,512
|
|
|
|
$
|
62,502
|
|
|
|
$
|
17,144
|
|
|
|
$
|
45,358
|
|
|
Adjusted EBITDA as a percentage of Net revenue
|
52.4
|
%
|
|
|
51.7
|
%
|
|
|
47.2
|
%
|
|
|
53.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed Subscriber acquisition costs, net
|
|
|
|
|
|
|
|
|
|
|
|
Gross subscriber acquisition costs (b)
|
$
|
3,102
|
|
|
|
$
|
8,041
|
|
|
|
$
|
2,499
|
|
|
|
$
|
5,542
|
|
|
Revenue associated with subscriber acquisition costs
|
(1,527)
|
|
|
|
(1,925)
|
|
|
|
(534)
|
|
|
|
(1,391)
|
|
|
Expensed Subscriber acquisition costs, net
|
$
|
1,575
|
|
|
|
$
|
6,116
|
|
|
|
$
|
1,965
|
|
|
|
$
|
4,151
|
|
(a) See reconciliation of Net income (loss) to Adjusted EBITDA below.
(b) Gross subscriber acquisition costs for the three months ended September 30, 2019 has been restated from $9,710,000 to $8,041,000 due to allocation adjustments made to align with current period presentation of expensed subscriber acquisition costs. See below for further explanation.
Net revenue. Net revenue increased $9,974,000, or 8.3%, for the three months ended September 30, 2020, as compared to the corresponding prior year period. The increase in net revenue is primarily attributable to an increase in alarm monitoring revenue of $6,962,000 due to a higher number of average subscribers relating to the Protect America bulk buy and prior year net revenue including the negative impact of a $5,277,000 fair value adjustment that reduced deferred revenue in 2019 upon the Company's emergence from bankruptcy in accordance with ASC 852. Product, installation and service revenue increased $3,289,000, largely due to an increase in field service jobs associated with contract extensions combined with higher revenue per transaction in the Direct to Consumer Channel. Average RMR per subscriber decreased from $45.29 as of September 30, 2019 to $43.74 as of September 30, 2020 due to a lower average RMR of $40.81 for the Protect America bulk buy and an increase in the percentage of customers generated through our Direct to Consumer Channel which typically have lower RMR as a result of lower subsidization of equipment.
Cost of services. Cost of services increased $2,421,000, or 8.4%, for the three months ended September 30, 2020, as compared to the corresponding prior year period. The increase is primarily attributable to the cost to serve the incremental Protect America customers. The increase is partially offset by a decline in subscriber acquisition costs in our Direct to Consumer Channel. Subscriber acquisition costs, which include expensed equipment and labor costs associated with the creation of new subscribers, decreased to $1,809,000 for the three months ended September 30, 2020, as compared to $2,130,000 for the three months ended September 30, 2019. Cost of services as a percentage of net revenue, excluding the effect of the previously discussed fair value adjustment, increased from 23.0% for the three months ended September 30, 2019 to 24.0% for the three months ended September 30, 2020.
Selling, general and administrative. Selling, general and administrative costs ("SG&A") decreased $798,000, or 2.5%, for the three months ended September 30, 2020, as compared to the corresponding prior year period. The decrease is attributable to reduced subscriber acquisition costs and consulting fees on integration and implementation of company initiatives. Subscriber acquisition costs included in SG&A decreased to $1,293,000 for the three months ended September 30, 2020, as compared to $5,911,000 for the three months ended September 30, 2019 due to the impact of cost saving measures implemented in the first quarter of 2020. These decreases are partially offset by higher salary expense and professional fees related to the post emergence operating structure of the Company. SG&A as a percentage of net revenue, excluding the effect of the fair value adjustment, decreased from 25.7% for the three months ended September 30, 2019 to 24.1% for the three months ended September 30, 2020.
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets. Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets increased $7,430,000, or 14.9%, for the three months ended September 30, 2020, as compared to the corresponding prior year period. The increase is due to amortization of the dealer network intangible asset recognized upon the Company's emergence from bankruptcy. Additionally, as part of the fresh start accounting adjustments, the existing subscriber accounts as of August 31, 2019 were stated at fair value and are amortized on the 14-year, 235% double-declining curve. This curve is shorter than the methodology utilized on newly generated subscriber accounts, due to the various aged vintages of the Company's subscriber base at August 31, 2019. The shorter amortization curve results in higher amortization expense per period. Also contributing to the increase is a higher number of subscriber accounts purchased in the last twelve months ended September 30, 2020 primarily due to the accounts acquired from Protect America, as compared to the corresponding prior year period.
Interest expense. Interest expense decreased $14,553,000, or 42.1%, for the three months ended September 30, 2020, as compared to the corresponding prior year period. The decrease in interest expense is attributable to the Company's decreased outstanding debt balances upon the reorganization, primarily related to the retirement of the Predecessor Company's 9.125% Senior Notes.
Income tax expense. The Company had pre-tax loss of $18,447,000 and income tax expense of $717,000 for the three months ended September 30, 2020. Income tax expense for the three months ended September 30, 2020 is attributable to the Company's state tax expense incurred from Texas margin tax. The Company had pre-tax income of $674,220,000 and income tax expense of $642,000 for the three months ended September 30, 2019. The driver behind the pre-tax income for the three months ended September 30, 2019 is the gain on restructuring and reorganization of $702,824,000 recognized during the three months ended September 30, 2019, primarily due to gains recognized on the conversion of debt to equity and discounted cash settlement of the Predecessor Company's high yield senior notes in accordance with the Company's bankruptcy Plan. There are no income tax impacts from this gain due to net operating loss carryforwards available for the 2019 tax year. Income tax expense for the three months ended September 30, 2019 is attributable to the Company's state tax expense incurred from Texas margin tax.
Net income (loss). The Company had net loss of $19,164,000 for the three months ended September 30, 2020, as compared to a net income of $673,578,000 for the three months ended September 30, 2019. The decrease in net income (loss) for the three months ended September 30, 2020 is primarily attributable to no gain on restructuring and reorganization incurred
in the current year period combined with increased radio conversion costs and amortization expense. These decreases were partially offset by higher revenues and lower interest expense.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Fresh Start Accounting Adjustments. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization of the Company in August 2019 and the application of fresh start accounting. We believe that certain of our consolidated operating results for the nine months ended September 30, 2020 is comparable to certain operating results for the period from January 1, 2019 through August 31, 2019 when combined with our consolidated operating results for the period from September 1, 2019 through September 30, 2019. Accordingly, we believe that discussing the non-GAAP combined results of operations and cash flows of the Predecessor Company and the Successor Company for the nine month period ended September 30, 2019 is useful when analyzing certain performance measures.
The following table sets forth selected data from the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
|
Non-GAAP Combined Nine Months Ended September 30,
|
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Net revenue
|
$
|
374,235
|
|
|
|
$
|
378,575
|
|
|
|
$
|
36,289
|
|
|
|
342,286
|
|
|
Cost of services
|
87,017
|
|
|
|
84,262
|
|
|
|
8,976
|
|
|
|
75,286
|
|
|
Selling, general and administrative, including stock-based and long-term incentive compensation
|
108,566
|
|
|
|
91,755
|
|
|
|
11,390
|
|
|
|
80,365
|
|
|
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
|
164,889
|
|
|
|
148,093
|
|
|
|
17,302
|
|
|
|
130,791
|
|
|
Interest expense
|
60,582
|
|
|
|
112,555
|
|
|
|
7,474
|
|
|
|
105,081
|
|
|
(Loss) income before income taxes
|
(152,884)
|
|
|
|
589,585
|
|
|
|
(10,603)
|
|
|
|
600,188
|
|
|
Income tax expense
|
1,937
|
|
|
|
1,979
|
|
|
|
204
|
|
|
|
1,775
|
|
|
Net (loss) income
|
(154,821)
|
|
|
|
587,606
|
|
|
|
(10,807)
|
|
|
|
598,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (a)
|
$
|
191,354
|
|
|
|
$
|
204,517
|
|
|
|
$
|
17,144
|
|
|
|
$
|
187,373
|
|
|
Adjusted EBITDA as a percentage of Net revenue
|
51.1
|
%
|
|
|
54.0
|
%
|
|
|
47.2
|
%
|
|
|
54.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expensed Subscriber acquisition costs, net
|
|
|
|
|
|
|
|
|
|
|
|
Gross subscriber acquisition costs (b)
|
$
|
14,693
|
|
|
|
$
|
22,818
|
|
|
|
$
|
2,499
|
|
|
|
$
|
20,319
|
|
|
Revenue associated with subscriber acquisition costs
|
(4,831)
|
|
|
|
(6,021)
|
|
|
|
(534)
|
|
|
|
(5,487)
|
|
|
Expensed Subscriber acquisition costs, net
|
$
|
9,862
|
|
|
|
$
|
16,797
|
|
|
|
$
|
1,965
|
|
|
|
$
|
14,832
|
|
(a) See reconciliation of Net income (loss) to Adjusted EBITDA below.
(b) Gross subscriber acquisition costs for the nine months ended September 30, 2019 has been restated from $27,902,000 to $22,818,000 due to allocation adjustments made to align with current period presentation of expensed subscriber acquisition costs. See below for further explanation.
Net revenue. Net revenue decreased $4,340,000, or 1.1%, for the nine months ended September 30, 2020, as compared to the corresponding prior year period. The decrease in net revenue is primarily attributable to a decrease in alarm monitoring revenue of $12,531,000 due to a lower average number of subscribers in the first six months of 2020, partially offset by incremental revenue from the Protect America bulk buy. Prior year net revenue also reflects the negative impact of a $5,277,000 fair value adjustment that reduced deferred revenue upon the Company's emergence from bankruptcy in accordance with ASC 852. Product, installation and service revenue increased $9,178,000, largely due to an increase in field service jobs associated with contract extensions combined with higher revenue per transaction in the Direct to Consumer Channel. Average RMR per subscriber decreased from $45.29 as of September 30, 2019 to $43.74 as of September 30, 2020 due to a lower average RMR of $40.81 for the Protect America bulk buy and an increase in the percentage of customers generated through our Direct to Consumer Channel which typically have lower RMR as a result of lower subsidization of equipment.
Cost of services. Cost of services increased $2,755,000, or 3.3%, for the nine months ended September 30, 2020, as compared to the corresponding prior year period. The increase is primarily attributable to the cost to serve the incremental Protect America customers and an increase in field service jobs associated with contract extensions for our high propensity to churn population. The increase is partially offset by a decline in subscriber acquisition costs in our Direct to Consumer Channel. Subscriber acquisition costs, which include expensed equipment and labor costs associated with the creation of new subscribers, decreased to $5,217,000 for the nine months ended September 30, 2020, as compared to $6,716,000 for the nine months ended September 30, 2019. Cost of services as a percentage of net revenue, excluding the effect of the previously discussed fair value adjustment, increased from 22.0% for the nine months ended September 30, 2019 to 23.3% for the nine months ended September 30, 2020.
Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased $16,811,000, or 18.3%, for the nine months ended September 30, 2020, as compared to the corresponding prior year period. The increase is partially attributable to higher consulting fees incurred on integration and implementation of company initiatives during the first six months of the year, severance expense related to transitioning executive leadership and higher salary expense and professional fees related to the post emergence operating structure of the Company. Additionally, the Company received a $700,000 insurance settlement in the second quarter of 2020, as compared to $4,800,000 received in the second quarter of 2019. These insurance receivable settlements were related to coverage provided by our insurance carriers in the 2017 class action litigation of alleged violation of telemarketing laws. These increases are partially offset by lower subscriber acquisition costs. Subscriber acquisition costs included in SG&A decreased to $9,476,000 for the nine months ended September 30, 2020, as compared to $16,102,000 for the nine months ended September 30, 2019 due to the impact of cost saving measures implemented in the first quarter of 2020. SG&A as a percentage of net revenue, excluding the effect of the fair value adjustment, increased from 23.9% for the nine months ended September 30, 2019 to 29.0% for the nine months ended September 30, 2020.
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets. Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets increased $16,796,000, or 11.3%, for the nine months ended September 30, 2020, as compared to the corresponding prior year period. The increase is due to amortization of the dealer network intangible asset recognized upon the Company's emergence from bankruptcy. Additionally, as part of the fresh start accounting adjustments, the existing subscriber accounts as of August 31, 2019 were stated at fair value and are amortized on the 14-year, 235% double-declining curve. This curve is shorter than the methodology utilized on newly generated subscriber accounts, due to the various aged vintages of the Company's subscriber base at August 31, 2019. The shorter amortization curve results in higher amortization expense per period. Also contributing to the increase is a higher number of subscriber accounts purchased in the last twelve months ended September 30, 2020 primarily due to the accounts acquired from Protect America, as compared to the corresponding prior year period.
Interest expense. Interest expense decreased $51,973,000, or 46.2%, for the nine months ended September 30, 2020, as compared to the corresponding prior year period. The decrease in interest expense is attributable to the Company's decreased outstanding debt balances upon the reorganization, primarily related to the retirement of the Company's 9.125% Senior Notes.
Income tax expense. The Company had pre-tax loss of $152,884,000 and income tax expense of $1,937,000 for the nine months ended September 30, 2020. Income tax expense for the nine months ended September 30, 2020 is attributable to the Company's state tax expense incurred from Texas margin tax. The Company had pre-tax income of $589,585,000 and income tax expense of $1,979,000 for the nine months ended September 30, 2019. The driver behind the pre-tax income for the nine months ended September 30, 2019 is the gain on restructuring and reorganization of $669,722,000 recognized during the nine months ended September 30, 2019, primarily due to gains recognized on the conversion of debt to equity and discounted cash settlement of the Predecessor Company's high yield senior notes in accordance with the Company's bankruptcy Plan. There are no income tax impacts from this gain due to net operating loss carryforwards available for the 2019 tax year. Income
tax expense for the nine months ended September 30, 2019 is attributable to the Company's state tax expense incurred from Texas margin tax.
Net income (loss). The Company had net loss of $154,821,000 for the nine months ended September 30, 2020, as compared to net income of $587,606,000 for the nine months ended September 30, 2019. The decrease in net income (loss) for the nine months ended September 30, 2020 are primarily attributable to no gain on restructuring and reorganization incurred in the current year period and a goodwill impairment charge recorded of $81,943,000 combined with a decline in net revenue and increases in operating expenses as discussed above. Also impacting net loss for the nine months ended September 30, 2020 were increased radio conversion costs.
Adjusted EBITDA
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The following table provide a reconciliation of Net loss to total Adjusted EBITDA for the periods indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Three Months Ended September 30,
|
|
|
Non-GAAP Combined Three Months Ended September 30,
|
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from July 1, 2019 through August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Net (loss) income
|
$
|
(19,164)
|
|
|
|
$
|
673,578
|
|
|
|
$
|
(10,807)
|
|
|
|
$
|
684,385
|
|
|
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
|
57,240
|
|
|
|
49,810
|
|
|
|
17,302
|
|
|
|
32,508
|
|
|
Depreciation
|
3,459
|
|
|
|
1,998
|
|
|
|
925
|
|
|
|
1,073
|
|
|
Radio conversion costs
|
5,612
|
|
|
|
1,756
|
|
|
|
825
|
|
|
|
931
|
|
|
Stock-based compensation
|
—
|
|
|
|
266
|
|
|
|
—
|
|
|
|
266
|
|
|
Long-term incentive compensation
|
2
|
|
|
|
107
|
|
|
|
67
|
|
|
|
40
|
|
|
Severance expense (a)
|
47
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Integration / implementation of company initiatives
|
566
|
|
|
|
2,583
|
|
|
|
1,154
|
|
|
|
1,429
|
|
|
Gain on restructuring and reorganization, net
|
—
|
|
|
|
(702,824)
|
|
|
|
—
|
|
|
|
(702,824)
|
|
|
Interest expense
|
20,033
|
|
|
|
34,586
|
|
|
|
7,474
|
|
|
|
27,112
|
|
|
Income tax expense
|
717
|
|
|
|
642
|
|
|
|
204
|
|
|
|
438
|
|
|
Adjusted EBITDA
|
$
|
68,512
|
|
|
|
$
|
62,502
|
|
|
|
$
|
17,144
|
|
|
|
$
|
45,358
|
|
(a) Severance expense related to transitioning executive leadership in 2020.
Adjusted EBITDA increased $6,010,000, or 9.6%, for the three months ended September 30, 2020, as compared to the corresponding prior year period. The increase for the three months ended September 30, 2020 is attributable to the negative impact of the $5,277,000 fair value adjustment for deferred revenue recognized during the three months ended September 30, 2019 and decreases in expensed subscriber acquisition costs. These increases were partially offset by increases in post-bankruptcy emergence salary and professional fees expenses that were curtailed in the third quarter of 2019 due to the bankruptcy proceedings.
Expensed Subscriber acquisition costs, net. Subscriber acquisition costs, net, decreased to $1,575,000 for the three months ended September 30, 2020, as compared to $6,116,000 for the three months ended September 30, 2019. Expensed subscriber acquisition costs, net, for the three months ended September 30, 2019 was restated from $7,785,000 to $6,116,000 to be comparable with how acquisition costs were allocated for the three months ended September 30, 2020. The change in subscriber acquisition cost allocation was done to better align us with how peer companies in the industry present subscriber acquisition costs. This change had no impact on the unaudited condensed consolidated statements of operations and comprehensive income (loss) because it is an allocation of expenses within each of Cost of services and Selling, general and
administrative. The decrease in subscriber acquisition costs, net is primarily attributable to the impact of cost saving measures implemented in the first quarter of 2020.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
The following table provide a reconciliation of Net loss to total Adjusted EBITDA for the periods indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
Nine Months Ended September 30,
|
|
|
Non-GAAP Combined Nine Months Ended September 30,
|
|
|
Period from September 1, 2019 through September 30,
|
|
|
Period from January 1, 2019 through August 31,
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Net (loss) income
|
$
|
(154,821)
|
|
|
|
$
|
587,606
|
|
|
|
$
|
(10,807)
|
|
|
|
$
|
598,413
|
|
|
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
|
164,889
|
|
|
|
148,093
|
|
|
|
17,302
|
|
|
|
130,791
|
|
|
Depreciation
|
10,019
|
|
|
|
8,273
|
|
|
|
925
|
|
|
|
7,348
|
|
|
Radio conversion costs
|
14,103
|
|
|
|
1,756
|
|
|
|
825
|
|
|
|
931
|
|
|
Stock-based compensation
|
—
|
|
|
|
42
|
|
|
|
—
|
|
|
|
42
|
|
|
Long-term incentive compensation
|
403
|
|
|
|
657
|
|
|
|
67
|
|
|
|
590
|
|
|
LiveWatch acquisition contingent bonus charges
|
—
|
|
|
|
63
|
|
|
|
—
|
|
|
|
63
|
|
|
Legal settlement reserve (related insurance recovery)
|
(700)
|
|
|
|
(4,800)
|
|
|
|
—
|
|
|
|
(4,800)
|
|
|
Severance expense (a)
|
4,289
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Integration / implementation of company initiatives
|
8,710
|
|
|
|
5,997
|
|
|
|
1,154
|
|
|
|
4,843
|
|
|
Goodwill impairment
|
81,943
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain on restructuring and reorganization, net
|
—
|
|
|
|
(669,722)
|
|
|
|
—
|
|
|
|
(669,722)
|
|
|
Interest expense
|
60,582
|
|
|
|
112,555
|
|
|
|
7,474
|
|
|
|
105,081
|
|
|
Realized and unrealized loss, net on derivative financial instruments
|
—
|
|
|
|
6,804
|
|
|
|
—
|
|
|
|
6,804
|
|
|
Refinancing expense
|
—
|
|
|
|
5,214
|
|
|
|
—
|
|
|
|
5,214
|
|
|
Income tax expense
|
1,937
|
|
|
|
1,979
|
|
|
|
204
|
|
|
|
1,775
|
|
|
Adjusted EBITDA
|
$
|
191,354
|
|
|
|
$
|
204,517
|
|
|
|
$
|
17,144
|
|
|
|
$
|
187,373
|
|
(a) Severance expense related to transitioning executive leadership in 2020.
Adjusted EBITDA decreased $13,163,000, or 6.4%, for the nine months ended September 30, 2020, as compared to the corresponding prior year period. The decrease for the nine months ended September 30, 2020 is attributable to lower net revenues due to a lower average number of subscribers in the first six months of 2020, increases in post-bankruptcy emergence salary and professional fees expenses that were curtailed for much of 2019 due to the bankruptcy proceedings and an increase in field service jobs associated with contract extensions for our high propensity to churn population. These decreases were offset by decreases in our expensed subscriber acquisition costs.
Expensed Subscriber acquisition costs, net. Subscriber acquisition costs, net, decreased to $9,862,000 for the nine months ended September 30, 2020, as compared to $16,797,000 for the nine months ended September 30, 2019. Expensed subscriber acquisition costs, net, for the nine months ended September 30, 2019 was restated from $21,881,000 to $16,797,000 to be comparable with how acquisition costs were allocated for the nine months ended September 30, 2020. The change in subscriber acquisition cost allocation was done to better align us with how peer companies in the industry present subscriber acquisition costs. This change had no impact on the unaudited condensed consolidated statements of operations and comprehensive income (loss) because it is an allocation of expenses within each of Cost of services and Selling, general and administrative. The decrease in subscriber acquisition costs, net is primarily attributable to the impact of cost saving measures
implemented in the first quarter of 2020 as well as lower production volume in the Company's Direct to Consumer Channel year over year.
Liquidity and Capital Resources
As of September 30, 2020, we had $12,759,000 of cash and cash equivalents. Our primary sources of funds is our cash flows from operating activities which are generated from alarm monitoring and related service revenues. During the nine months ended September 30, 2020 and 2019, our cash flow from operating activities was $92,397,000 and $92,948,000, respectively. The primary drivers of our cash flow from operating activities are the fluctuations in revenues and operating expenses as discussed in "Results of Operations" above. In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.
During the nine months ended September 30, 2020 and 2019, we used cash of $84,253,000 and $91,826,000, respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations. In addition, during the nine months ended September 30, 2020 and 2019, we used cash of $10,530,000 and $8,223,000, respectively, to fund our capital expenditures.
Our existing long-term debt at September 30, 2020 includes the aggregate principal balance of $987,775,000 under the Takeback Loan Facility, Term Loan Facility and the Revolving Credit Facility. The Takeback Loan Facility has an outstanding principal balance of $814,275,000 as of September 30, 2020 and requires principal payments of $2,056,250 per quarter, with the remaining amount becoming due on March 29, 2024. The Term Loan Facility has an outstanding principal balance of $150,000,000 as of September 30, 2020. The Revolving Credit Facility has an outstanding balance of $23,500,000 as of September 30, 2020. We also had $600,000 available under a standby letter of credit issued as of September 30, 2020. The maturity date of the loans made under the Term Loan Facility and the Revolving Credit Facility is July 3, 2024, subject to a springing maturity of March 29, 2024, or earlier, depending on any repayment, refinancing or changes in the maturity date of the Takeback Loan Facility.
The Asset Purchase Agreement with Protect America provides for 50 monthly Earnout Payments consisting of a portion of the revenue attributable to the Accounts, subject to adjustment for Accounts that are no longer active. The estimated liability for the remaining Earnout Payments as of September 30, 2020 is approximately $84,799,000.
Radio Conversion Costs
Certain cellular carriers of 3G and CDMA cellular networks have announced that they will be retiring these networks between February and December of 2022. As of September 30, 2020, we have approximately 356,000 subscribers with 3G or CDMA equipment which may have to be upgraded as a result of these retirements. Additionally, our cellular provider has informed us that a certain 2G cellular network carrier has extended their sunset of its 2G cellular network until December 31, 2022. As of September 30, 2020, we have approximately 14,000 subscribers with 2G cellular equipment which may have to be upgraded as a result of this retirement. The remaining subscribers with 3G or 2G equipment include approximately 50,000 subscribers acquired from Protect America. While we are in the early phase of offering equipment upgrades to our 3G and 2G population, we currently estimate that the total cost of converting our 3G and 2G subscribers, including those acquired from Protect America, will be between $80,000,000 and $90,000,000. For the three and nine months ended September 30, 2020, the Company incurred radio conversion costs of $5,612,000 and $14,103,000, respectively. Cumulative through September 30, 2020, we have spent approximately $18,299,000 on 3G and 2G conversions. Total costs for the conversion of such customers are subject to numerous variables, including our ability to work with our partners and subscribers on cost sharing initiatives, and the costs that we actually incur could be materially higher than our current estimates.
Liquidity Outlook
In considering our liquidity requirements for the next twelve months, we evaluated our known future commitments and obligations. We will require the availability of funds to finance our strategy to grow through the acquisition of subscriber accounts through our Dealer and Direct to Consumer Channels or potential bulk buy opportunities, as well as completing our payment obligations under the Protect America earnout liability. We considered our expected operating cash flows as well as the borrowing capacity of our Revolving Credit Facility, under which we could borrow an additional $120,900,000 as of September 30, 2020, subject to certain financial covenants. Based on this analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the Revolving Credit Facility will provide sufficient liquidity for the next twelve months, given our anticipated current and future requirements.
Subject to our credit agreements, we may seek debt financing in the event of any new investment opportunities, additional capital expenditures or our operations requiring additional funds, but there can be no assurance that we will be able to obtain
debt financing on terms that would be acceptable to us or at all. Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.