Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
 
FORM 10-Q
 
ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019
OR
o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to
 
Commission File Number 333-110025
 MONITRONICS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
State of Delaware
 
74-2719343
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
1990 Wittington Place
 
 
Farmers Branch, Texas
 
75234
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 243-7443 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
None
 
None
 
None
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ý  No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ý No o
The number of outstanding shares of Monitronics International, Inc.'s common stock as of November 13, 2019 was 22,500,000 shares.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Item 1.  Financial Statements (unaudited)
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
 
Successor Company
 
 
Predecessor Company
 
September 30,
2019
 
 
December 31,
2018
Assets
 

 
 
 

Current assets:
 

 
 
 

Cash and cash equivalents
$
28,589

 
 
2,188

Restricted cash
86

 
 
189

Trade receivables, net of allowance for doubtful accounts of $912 in 2019 and $3,759 in 2018
12,105

 
 
13,121

Prepaid and other current assets
24,966

 
 
28,178

Total current assets
65,746

 
 
43,676

Property and equipment, net of accumulated depreciation of $925 in 2019 and $40,531 in 2018
41,215

 
 
36,539

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization of $15,322 in 2019 and $1,621,242 in 2018
1,089,135

 
 
1,195,463

Dealer network and other intangible assets, net of accumulated amortization of $1,980 in 2019 and $0 in 2018
142,719

 
 

Goodwill
81,943

 
 

Deferred income tax asset, net
783

 
 
783

Operating lease right-of-use asset
19,153

 
 

Other assets
16,694

 
 
29,307

Total assets
$
1,457,388

 
 
1,305,768

Liabilities and Stockholder's Equity (Deficit)
 

 
 
 

Current liabilities:
 

 
 
 

Accounts payable
$
14,416

 
 
12,099

Other accrued liabilities
35,035

 
 
31,085

Deferred revenue
13,309

 
 
13,060

Holdback liability
6,148

 
 
11,513

Current portion of long-term debt
8,225

 
 
1,816,450

Total current liabilities
77,133

 
 
1,884,207

Non-current liabilities:
 

 
 
 

Long-term debt
985,775

 
 

Long-term holdback liability
2,207

 
 
1,770

Derivative financial instruments

 
 
6,039

Operating lease liabilities
15,929

 
 

Other liabilities
7,751

 
 
2,727

Total liabilities
1,088,795

 
 
1,894,743

Commitments and contingencies


 
 


Stockholder's equity (deficit):
 
 
 
 
Predecessor common stock, $.01 par value. 1,000 shares authorized, issued and outstanding at December 31, 2018

 
 

Predecessor additional paid-in capital

 
 
439,711

Predecessor accumulated deficit

 
 
(1,036,294
)
Predecessor accumulated other comprehensive income, net

 
 
7,608

Successor preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued

 
 

Successor common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 22,500,000 shares at September 30, 2019
225

 
 

Successor additional paid-in capital
379,175

 
 

Successor accumulated deficit
(10,807
)
 
 

Total stockholder's equity (deficit)
368,593

 
 
(588,975
)
Total liabilities and stockholder's equity (deficit)
$
1,457,388

 
 
1,305,768

 

See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
(unaudited)
 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from July 1, 2019 through August 31,
 
Three Months Ended September 30,
 
2019
 
 
2019
 
2018
Net revenue
$
36,289

 
 
$
84,589

 
137,156

Operating expenses:
 
 
 
 
 
 
Cost of services
8,976

 
 
19,986

 
35,059

Selling, general and administrative, including stock-based and long-term incentive compensation
11,390

 
 
20,980

 
34,266

Radio conversion costs
825

 
 
931

 

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
17,302

 
 
32,508

 
52,671

Depreciation
925

 
 
1,073

 
2,880

 
39,418

 
 
75,478

 
124,876

Operating (loss) income
(3,129
)
 
 
9,111

 
12,280

Other (income) expense:
 
 
 
 
 
 
Gain on restructuring and reorganization, net

 
 
(702,824
)
 

Interest expense
7,474

 
 
27,112

 
39,077

Refinancing expense

 
 

 
5,697

 
7,474

 
 
(675,712
)
 
44,774

(Loss) income before income taxes
(10,603
)
 
 
684,823

 
(32,494
)
Income tax expense
204

 
 
438

 
1,346

Net (loss) income
(10,807
)
 
 
684,385

 
(33,840
)
Other comprehensive income (loss):
 
 
 
 
 
 
Unrealized gain on derivative contracts, net

 
 

 
3,269

Total other comprehensive income, net of tax

 
 

 
3,269

Comprehensive (loss) income
$
(10,807
)
 
 
$
684,385

 
(30,571
)
 
 
 
 
 
 
 
Basic and diluted income per share:
 
 
 
 
 
 
Net loss
$
(0.48
)
 
 
$

 

 
See accompanying notes to condensed consolidated financial statements.


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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
(unaudited)
 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from January 1, 2019 through August 31,
 
Nine Months Ended September 30,
 
2019
 
 
2019
 
2018
Net revenue
$
36,289

 
 
$
342,286

 
405,922

Operating expenses:
 
 
 
 
 
 
Cost of services
8,976

 
 
75,286

 
100,807

Selling, general and administrative, including stock-based and long-term incentive compensation
11,390

 
 
80,365

 
98,935

Radio conversion costs
825

 
 
931

 

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
17,302

 
 
130,791

 
160,973

Depreciation
925

 
 
7,348

 
8,360

Loss on goodwill impairment

 
 

 
214,400

 
39,418

 
 
294,721

 
583,475

Operating (loss) income
(3,129
)
 
 
47,565

 
(177,553
)
Other (income) expense:
 
 
 
 
 
 
Gain on restructuring and reorganization, net

 
 
(669,722
)
 

Interest expense
7,474

 
 
105,081

 
114,550

Realized and unrealized loss, net on derivative financial instruments

 
 
6,804

 

Refinancing expense

 
 
5,214

 
5,697

 
7,474

 
 
(552,623
)
 
120,247

(Loss) income before income taxes
(10,603
)
 
 
600,188

 
(297,800
)
Income tax expense
204

 
 
1,775

 
4,039

Net (loss) income
(10,807
)
 
 
598,413

 
(301,839
)
Other comprehensive (loss) income:
 
 
 
 
 
 
Unrealized (loss) gain on derivative contracts, net

 
 
(940
)
 
23,196

Total other comprehensive (loss) income, net of tax

 
 
(940
)
 
23,196

Comprehensive (loss) income
$
(10,807
)
 
 
$
597,473

 
(278,643
)
 
 
 
 
 
 
 
Basic and diluted income per share:
 
 
 
 
 
 
Net loss
$
(0.48
)
 
 
$

 

 
See accompanying notes to condensed consolidated financial statements.


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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from January 1, 2019 through August 31,
 
Nine Months Ended September 30,
 
2019
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
 
 
Net (loss) income
$
(10,807
)
 
 
$
598,413

 
(301,839
)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
17,302

 
 
130,791

 
160,973

Depreciation
925

 
 
7,348

 
8,360

Stock-based and long-term incentive compensation
26

 
 
912

 
751

Deferred income tax expense

 
 

 
1,987

Amortization of debt discount and deferred debt costs

 
 

 
5,472

Gain on restructuring and reorganization, net

 
 
(669,722
)
 

Unrealized loss on derivative financial instruments, net

 
 
4,577

 

Refinancing expense

 
 
5,214

 
5,697

Bad debt expense
912

 
 
7,558

 
8,511

Loss on goodwill impairment

 
 

 
214,400

Other non-cash activity, net
117

 
 
(462
)
 
2,040

Changes in assets and liabilities:
 
 
 
 
 
 
Trade receivables
(1,183
)
 
 
(6,271
)
 
(9,028
)
Prepaid expenses and other assets
(736
)
 
 
2,760

 
(9,769
)
Subscriber accounts - deferred contract acquisition costs
(162
)
 
 
(2,193
)
 
(4,529
)
Payables and other liabilities
6,776

 
 
36,690

 
(8,568
)
Net cash provided by operating activities
13,170

 
 
115,615

 
74,458

Cash flows from investing activities:
 
 
 
 

 
 

Capital expenditures
(1,123
)
 
 
(7,100
)
 
(11,513
)
Cost of subscriber accounts acquired
(8,012
)
 
 
(83,814
)
 
(111,531
)
Net cash used in investing activities
(9,135
)
 
 
(90,914
)
 
(123,044
)
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from long-term debt
5,000

 
 
253,100

 
218,950

Payments on long-term debt
(5,000
)
 
 
(379,666
)
 
(136,600
)
Proceeds from equity rights offering

 
 
166,300

 

Cash contributed by Ascent Capital

 
 
24,139

 

Payments of restructuring and reorganization costs

 
 
(53,889
)
 

Payments of refinancing costs

 
 
(7,404
)
 
(5,015
)
Value of shares withheld for share-based compensation

 
 
(18
)
 
(83
)
Dividend to Ascent Capital

 
 
(5,000
)
 
(5,000
)
Net cash (used in) provided by financing activities

 
 
(2,438
)
 
72,252

Net increase in cash, cash equivalents and restricted cash
4,035

 
 
22,263

 
23,666

Cash, cash equivalents and restricted cash at beginning of period
24,640

 
 
2,377

 
3,302

Cash, cash equivalents and restricted cash at end of period
$
28,675

 
 
$
24,640

 
26,968

 

See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder’s Equity (Deficit)
Amounts in thousands, except share amounts
(unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive
Income (Loss)
 
Total Stockholder’s Deficit
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018 (Predecessor)
1,000

 
$

 
439,711

 
(1,036,294
)
 
7,608

 
$
(588,975
)
Net loss

 

 

 
(31,770
)
 

 
(31,770
)
Other comprehensive loss

 

 

 

 
(468
)
 
(468
)
Dividend paid to Ascent Capital

 

 
(5,000
)
 

 

 
(5,000
)
Contribution from Ascent Capital

 

 
2,250

 

 

 
2,250

Stock-based compensation

 

 
189

 

 

 
189

Value of shares withheld for minimum tax liability

 

 
(1
)
 

 

 
(1
)
Balance at March 31, 2019 (Predecessor)
1,000

 
$

 
437,149

 
(1,068,064
)
 
7,140

 
$
(623,775
)
Net loss

 

 

 
(54,202
)
 

 
(54,202
)
Other comprehensive loss

 

 

 

 
(472
)
 
(472
)
Stock-based compensation

 

 
(413
)
 

 

 
(413
)
Value of shares withheld for minimum tax liability

 

 
(2
)
 

 

 
(2
)
Balance at June 30, 2019 (Predecessor)
1,000

 
$

 
436,734

 
(1,122,266
)
 
6,668

 
$
(678,864
)
Net income

 

 

 
684,385

 

 
684,385

Stock-based compensation

 

 
267

 

 

 
267

Value of shares withheld for minimum tax liability

 

 
(15
)
 

 

 
(15
)
Cancellation of Predecessor equity
(1,000
)
 

 
(436,986
)
 
437,881

 
(6,668
)
 
(5,773
)
Issuance of Successor common stock
22,500,000

 
225

 
379,175

 

 

 
379,400

Balance at August 31, 2019 (Predecessor)
22,500,000

 
$
225

 
379,175

 

 

 
$
379,400

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 1, 2019 (Successor)
22,500,000

 
$
225

 
379,175

 

 

 
$
379,400

Net loss

 

 

 
(10,807
)
 

 
(10,807
)
Balance at September 30, 2019 (Successor)
22,500,000

 
$
225

 
379,175

 
(10,807
)
 

 
$
368,593



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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder’s Equity (Deficit)
Amounts in thousands, except share amounts
(unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive
Income (Loss)
 
Total Stockholder’s Equity (Deficit)
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017 (Predecessor)
1,000

 
$

 
444,330

 
(334,219
)
 
(7,375
)
 
$
102,736

Impact of adoption of Topic 606

 

 

 
(22,720
)
 

 
(22,720
)
Impact of adoption of ASU 2017-12

 

 

 
(605
)
 
605

 

Adjusted balance at January 1, 2018 (Predecessor)
1,000

 
$

 
444,330

 
(357,544
)
 
(6,770
)
 
$
80,016

Net loss

 

 

 
(26,207
)
 

 
(26,207
)
Other comprehensive income

 

 

 

 
14,406

 
14,406

Stock-based compensation

 

 
47

 

 

 
47

Value of shares withheld for minimum tax liability

 

 
(42
)
 

 

 
(42
)
Balance at March 31, 2018 (Predecessor)
1,000

 
$

 
444,335

 
(383,751
)
 
7,636

 
$
68,220

Net loss

 

 

 
(241,792
)
 

 
(241,792
)
Other comprehensive income

 

 

 

 
5,521

 
5,521

Stock-based compensation

 

 
383

 

 

 
383

Value of shares withheld for minimum tax liability

 

 
(27
)
 

 

 
(27
)
Balance at June 30, 2018 (Predecessor)
1,000

 
$

 
444,691

 
(625,543
)
 
13,157

 
$
(167,695
)
Net loss

 

 

 
(33,840
)
 

 
(33,840
)
Other comprehensive income

 

 

 

 
3,269

 
3,269

Dividend to Ascent Capital

 

 
(5,000
)
 

 

 
(5,000
)
Stock-based compensation

 

 
373

 

 

 
373

Value of shares withheld for minimum tax liability

 

 
(14
)
 

 

 
(14
)
Balance at September 30, 2018 (Predecessor)
1,000

 
$

 
440,050

 
(659,383
)
 
16,426

 
$
(202,907
)
 
See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
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.

As previously disclosed, on June 30, 2019 (the "Petition Date"), 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 ("ASC 852"), in preparing its consolidated financial statements (see Note 2, Emergence from Bankruptcy and Note 3, Fresh Start Accounting). 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 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.

Subsequent to the Petition Date and before the Effective Date, all expenses, gains and losses directly associated with the restructuring and reorganization proceedings are reported as Gain on restructuring and reorganization, net in the accompanying unaudited condensed consolidated statements of operations. Additionally, Liabilities subject to compromise during the pendency of the Chapter 11 Cases are distinguished from liabilities of the Company that are not expected to be compromised, including post-petition liabilities, in the accompanying unaudited condensed consolidated balance sheets.

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, 2019, and the unaudited condensed statements of operations and cash flows of the Successor for the period from September 1, 2019 through September 30, 2019 and of the Predecessor for the period from January 1, 2019 through August 31, 2019 and for three and nine months ended September 30, 2018, 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. 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, 2018, filed with the SEC on April 1, 2019.

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

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preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of subscriber accounts and valuation of deferred tax 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 and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.

Going Concern

In accordance with the requirements of Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40), and ASC 205-40, the Company has the responsibility to evaluate at each reporting period, including interim periods, whether conditions and events, considered in the aggregate, raise substantial doubt about its ability to meet its future financial obligations. During the pendency of the Chapter 11 Cases, the Company’s ability to continue as a going concern was contingent upon a variety of factors, including the Bankruptcy Court’s approval of the Plan and the Company’s ability to successfully implement the Plan. As a result of the effectiveness of the Plan and the Company’s current financial condition and liquidity sources, the Company believes it has the ability to meet its obligations for at least one year from the date of issuance of this Form 10-Q.

Supplemental Cash Flow Information

 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from January 1, 2019 through August 31,
 
Nine Months Ended September 30,
 
2019
 
 
2019
 
2018
State taxes paid, net
$

 
 
$
2,637

 
2,710

Interest paid
7,238

 
 
72,710

 
95,889

Accrued capital expenditures
1,471

 
 
1,405

 
882


(2)    Emergence from Bankruptcy

On August 7, 2019, the Bankruptcy Court entered the Confirmation Order confirming the Plan. On 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 with the Company and its former parent, Ascent Capital, merged in accordance with the terms of 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.

Cancellation of Certain Prepetition Obligations

On the Effective Date, by operation of the Plan, all outstanding obligations under (i) the 9.125% Senior Notes due April 2020 (the "Predecessor Senior Notes") and the indenture governing the Predecessor Senior Notes and (ii) the Company’s prepetition credit facility (the "Predecessor Credit Facility") were terminated, as described in further detail below.

Additional Matters Contemplated by the Plan

On the Effective Date, the Company also completed a series of transactions through which the Company’s debt was restructured as follows:

(i) terminating the Company’s $245,000,000 secured debtor-in-possession revolving credit facility (the "Predecessor DIP Facility") and replacing it with a $145,000,000 senior secured revolving credit facility (the "Successor Revolving Credit Facility") and $150,000,000 in senior secured term loans (the "Successor Term Loan Facility" and together with the Successor Revolving Credit Facility the "Successor Credit Facilities"),

(ii) exchanging $1,072,500,000 of outstanding term loans under the Company's Predecessor Credit Facility for (A) $150,000,000 in cash received from the equity rights offering described below, (B) $100,000,000 in shares of Common Stock (as defined below), and (C) term loans under an $822,500,000 takeback term loan facility (the "Successor Takeback Loan Facility"), and


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(iii) cancelling the Company’s $585,000,000 outstanding Predecessor Senior Notes and exchanging the Predecessor Senior Notes for, at the option of each holder of the Predecessor Senior Notes (the "Noteholders"), (A) cash in an amount equal to 2.5% of the principal and accrued but unpaid interest due under the Senior Notes held by such Noteholder or (B) to the extent that such Noteholder elects not to receive cash, its pro rata share of 18.0% of the Common Stock (as defined below) issued and outstanding as of the Effective Date.

See note 6, Debt for further information regarding these debt transactions.

The Company also received $200,000,000 in cash from a combination of an equity rights offering to the Noteholders and $23,000,000 of a deemed contribution of cash on hand through a merger with Ascent Capital (as discussed below). This cash was used to repay Predecessor Term Loan debt.

The foregoing description of certain matters effected pursuant to the Plan, and the transactions related to and contemplated thereunder, is not intended to be a complete description of, or a substitute for, a full and complete reading of the Plan.

Ascent Capital Merger

As previously announced, on May 24, 2019, the Company and Ascent Capital entered into the Merger Agreement. On August 21, 2019, in connection with, and prior to the completion of the Merger, the stockholders of Ascent Capital approved the Merger Agreement at a special meeting of the stockholders. On August 30, 2019, the Company completed the Merger with Ascent Capital in accordance with the Merger Agreement. The Company was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware. The Company’s certificate of incorporation adopted in accordance with the Plan authorized the issuance of 45,000,000 shares of Common Stock, par value $0.01 per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"). For more information, see note 9, Stockholder's Equity.

Under the terms of the Merger Agreement, the Company issued and reserved a total of 1,309,757 shares of common stock, par value $0.01 per share ("Common Stock"), to Ascent Capital's stockholders at a ratio of 0.1043086 shares of Common Stock for each share of Ascent Capital common stock (the "Exchange Ratio"). The Exchange Ratio was determined through negotiations between the Company and Ascent Capital.

Immediately after the Merger, there were approximately 22,500,000 shares of Common Stock issued and outstanding.

Immediately after the Merger, the former stockholders of Ascent Capital owned approximately 5.82% of the outstanding Common Stock. No fractional shares of Common Stock were issued in connection with the Merger. The Common Stock commenced trading on the OTCQX Best Market under the ticker symbol "SCTY" on September 4, 2019.

(3)    Fresh Start Accounting

In connection with the Company’s emergence from Chapter 11 on the Effective Date, the Company qualified for fresh start accounting under ASC 852 as (1) the holders of voting shares of the Predecessor Company received less than 50% of the voting shares of the Successor Company and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims. ASC 852 requires that fresh start accounting be applied when the Bankruptcy Court enters a confirmation order confirming a plan of reorganization, or as of a later date when all material conditions precedent to the effectiveness of a plan of reorganization are resolved, which for Monitronics was August 30, 2019. 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.

Upon the application of fresh start accounting, Monitronics allocated the reorganization value to its individual assets based on their estimated fair values in conformity with ASC 805, Business Combinations (“ASC 805”). Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. Liabilities existing as of the Effective Date, other than deferred taxes, were recorded at the value of amounts expected to be paid. Deferred taxes were determined in conformity with applicable accounting standards. Predecessor Company accumulated depreciation, accumulated amortization, and accumulated deficit were eliminated. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements after August 31, 2019 are not comparable to the Company’s consolidated financial statements as of or prior to that date.


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Reorganization Value

As set forth in the Plan, the enterprise value of the Successor Company was estimated to be between $1,350,000,000 and $1,550,000,000, which was confirmed by the Bankruptcy Court. Based on the estimates and assumptions discussed below, Monitronics estimated the enterprise value to be $1,373,400,000.

We estimated the enterprise value of the Successor Company by applying the discounted cash flow method. To estimate enterprise value applying the discounted cash flow method, we established an estimate of future cash flows for the period 2019 to 2026 with a terminal value and discounted the estimated future cash flows to present value. The expected cash flows for the period 2019 to 2026 with a terminal value were based upon certain financial projections and assumptions provided to the Bankruptcy Court. The expected cash flows for the period 2019 to 2026 were derived from revenue projections and assumptions regarding growth and profit margin, as applicable. We calculated a terminal value using an exit multiple based on subscriber monthly RMR in the terminal period.

The Company’s enterprise value represents the fair value of its interest-bearing debt and equity capital, while the reorganization value is derived from the enterprise value by adding back non-interest bearing liabilities. The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date (dollars in thousands):

Enterprise value
$
1,373,400

Plus: Fair value of non-interest bearing current liabilities
61,188

Plus: Fair value of non-interest bearing long-term liabilities
26,060

Reorganization value
$
1,460,648


Unaudited Condensed Consolidated Balance Sheet

The adjustments set forth in the following unaudited condensed consolidated balance sheet as of August 31, 2019 reflect the consummation of the transactions contemplated by the Plan (reflected in the column "Reorganization Adjustments"), transactions recorded to complete the merger with Ascent Capital (reflected in the column "Ascent Capital Merger") as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities as well as significant assumptions or inputs (dollars in thousands).


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As of August 31, 2019
 
 
Predecessor
Company
 
Reorganization
Adjustments
 
Ascent Capital
Merger
 
Fresh Start
Adjustments
 
Successor
Company
Assets
 
 

 
 
 
 
 
 
 
 
Current assets:
 
 

 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
19,862

 
3,604

(1)
1,139

(9)

 
24,605

Restricted cash
 
35

 

 

 

 
35

Trade receivables, net
 
11,834

 

 

 

 
11,834

Prepaid and other current assets
 
23,825

 

 
27

(9)

 
23,852

Total current assets
 
55,556

 
3,604

 
1,166

 

 
60,326

Property and equipment, net
 
37,143

 

 

 
3,808

(10)
40,951

Subscriber accounts and deferred contract acquisition costs, net
 
1,151,322

 

 

 
(55,936
)
(11)
1,095,386

Dealer network and other intangible assets
 

 

 

 
144,700

(12)
144,700

Goodwill
 

 

 

 
81,943

(13)
81,943

Deferred income tax asset, net
 
783

 

 

 

 
783

Operating lease right-of-use asset
 
19,222

 

 
90

(9)

 
19,312

Other assets
 
17,932

 

 

 
(685
)
(14)
17,247

Total assets
 
$
1,281,958

 
3,604

 
1,256

 
173,830

 
1,460,648

Liabilities and Stockholder's Equity (Deficit)
 
 

 
 
 
 
 
 
 
 
Current liabilities:
 
 

 
 

 
 
 
 
 
 
Accounts payable
 
$
13,713

 

 

 

 
13,713

Other accrued liabilities
 
30,571

 
(1,070
)
(2)
241

(9)
4,427

(15)
34,169

Deferred revenue
 
12,646

 

 

 
(5,331
)
(16)
7,315

Holdback liability
 
12,516

 

 

 
(6,525
)
(17)
5,991

Current portion of long-term debt
 

 
8,225

(3)

 

 
8,225

Total current liabilities
 
69,446

 
7,155

 
241

 
(7,429
)
 
69,413

Non-current liabilities:
 
 

 
 
 
 
 
 
 
 
Long-term debt
 
199,000

 
786,775

(4)

 

 
985,775

Long-term holdback liability
 
1,817

 

 

 

 
1,817

Operating lease liabilities
 
16,055

 

 

 

 
16,055

Other liabilities
 
2,175

 

 

 
6,013

(15)
8,188

Total non-current liabilities
 
219,047

 
786,775

 

 
6,013

 
1,011,835

Liabilities subject to compromise
 
1,722,052

 
(1,722,052
)
(5)

 

 

Total liabilities
 
2,010,545

 
(928,122
)
 
241

 
(1,416
)
 
1,081,248

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
Stockholder's equity (deficit):
 
 
 
 
 
 
 
 
 
 
Predecessor additional paid-in capital
 
436,986

 
(436,986
)
(6)

 

 

Predecessor accumulated other comprehensive income, net
 
6,668

 

 

 
(6,668
)
(18)

Successor common stock
 

 
225

(7)

 

 
225

Successor additional paid-in capital
 

 
379,175

(7)

 

 
379,175

(Accumulated deficit) retained earnings
 
(1,172,241
)
 
989,312

(8)
1,015

(9)
181,914

(18)

Total stockholder's equity (deficit)
 
(728,587
)
 
931,726

 
1,015

 
175,246

 
379,400

Total liabilities and stockholder's equity (deficit)
 
$
1,281,958

 
3,604

 
1,256

 
173,830

 
1,460,648



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Reorganization adjustments

1. Reflects cash contributions and debt principal and interest payments from the implementation to the Plan as follows (dollars in thousands):
Equity rights offering proceeds from Noteholders
$
177,000

Equity rights offering proceeds from Ascent Capital
23,000

Payment of Predecessor Credit Facility principal and interest
(165,619
)
Payment of Predecessor DIP Facility principal and interest
(28,570
)
Payment of Predecessor Senior Notes principal and interest
(2,207
)
Net cash contribution
$
3,604


2. Represents payment of Predecessor DIP Facility accrued interest.

3. Represents the Current portion of long-term debt based on the repayment terms of the Successor Takeback Loan Facility.

4. Represents the net increase in Long-term debt as follows (dollars in thousands):
Long-term portion of Successor Takeback Term Loan
$
814,275

Payment of Predecessor DIP Facility principal
(27,500
)
Net increase in Long-term Debt
$
786,775


5. Liabilities subject to compromise immediately prior to the Effective Date consisted of the following (dollars in thousands):
Predecessor Term Loan
$
1,072,500

Predecessor Senior Notes
585,000

Predecessor Term Loan accrued interest
15,619

Predecessor Senior Notes accrued interest
48,933

Total Liabilities subject to compromise
$
1,722,052


Liabilities subject to compromise have been settled as follows in accordance with the Plan (dollars in thousands):
Liabilities subject to compromise
$
1,722,052

Payment of Predecessor Term Loan principal and interest
(165,619
)
Payment of Predecessor Senior Notes principal and interest
(2,207
)
Issue Successor Takeback Term Loan
(822,500
)
Fair value of common stock issued to Predecessor Term Loan and Predecessor Senior Notes holders
(171,989
)
Gain on settlement of Liabilities subject to compromise
$
559,737


6. Pursuant to the Plan, all equity interests of the Predecessor that were issuable or issued and outstanding immediately prior to the Effective Date were cancelled. The elimination of the carrying value of the cancelled equity interests was recorded as an offset to retained earnings (accumulated deficit).

7. Pursuant to the Plan, the Company issued new common stock through an equity rights offering to the Noteholders, the exchange of Ascent Capital common shares for Monitronics common shares pursuant to the Merger, the partial equitization of the Predecessor Term Loan and the cancellation of the outstanding Predecessor Senior Notes, to the extent each Noteholder elected not to receive cash. See note 2, Emergence from Bankruptcy for further information regarding these transactions. As of the Effective Date, there were 22,500,000 common shares issued and outstanding that have a par value of $0.01 per share.


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8. Adjustment made to Retained earnings (accumulated deficit) consisted of the following (dollars in thousands):
Cancellation of Predecessor additional paid-in capital
$
436,986

Loss on equity rights offering discount, net
(7,411
)
Gain on settlement of Liabilities subject to compromise
559,737

Total adjustment to Retained earnings (accumulated deficit)
$
989,312


Ascent Capital Merger

9. Represents the transfer of the Ascent Capital final balances to Monitronics to complete the merger.

Fresh Start Adjustments

10. Reflects the increase in net book value of property and equipment to the estimated fair value as of the Effective Date. The following table summarizes the components of Property and equipment, net as of August 31, 2019, and the fair value as of the Effective Date (dollars in thousands):
 
Estimated Useful Life
 
Successor Company
 
 
Predecessor Company
Leasehold improvements
9 years
 
$
353

 
 
$
771

Computer systems and software
2 to 4 years
 
39,320

 
 
83,238

Furniture and fixtures
5 years
 
1,278

 
 
2,009

 
 
 
40,951

 
 
86,018

Accumulated depreciation
 
 

 
 
(48,875
)
Property and equipment, net
 
 
$
40,951

 
 
$
37,143


To estimate the fair value of property and equipment, the Company utilized an cost approach by applying the reproduction cost method. The Successor property and equipment will be depreciated using the straight-line method over the estimated useful lives of the assets.

11. Represents the fair value adjustment of the subscriber accounts. The fair value of the subscriber accounts was determined based on the excess earnings method, a derivation of the income approach, that considers cash flows to the subscriber accounts after accounting for a fair return to the other supporting assets of the business. The valuation of the subscriber accounts is based on the projected cash flows to be generated by the existing subscribers as of the Effective Date. The Successor subscriber accounts will be amortized using the 14-year 235% double-declining balance method. The amortization methods were selected to provide an approximate matching of the amortization of the subscriber accounts intangible asset to estimated future subscriber revenues based on the projected lives of individual subscriber contracts.

12. The Company recorded an adjustment to dealer network and other intangible assets as follows (dollars in thousands):
Dealer network
$
140,000

Leasehold interest
4,700

Total Dealer network and other intangible assets
$
144,700


The fair values of dealer network and other intangible assets were determined as follows:
a. The fair value of the dealer network was determined based on the excess earnings method, a derivation of the income approach, that considers cash flows related to the dealer network after accounting for a fair return to the other supporting assets of the business. The valuation of the dealer network is based on the cash flow, net of purchase price, to be earned from subscribers purchased in the future from the current dealer network. The Successor dealer network will be amortized on a straight-line basis over the estimated useful life of six years.

b. The leasehold interest was valued using an income approach by applying the discount cash flow method based on the contractual lease rate and market lease rates. The Successor leasehold interest will be amortized on a straight-line basis over the remaining life of the lease.


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13. The amount recognized for goodwill represents the amount of the reorganization value, after the fresh start accounting adjustments, left over after allocating to the fair value of acquired assets and liabilities.

14. Represents the elimination of the carrying value of dealer assets. The fair value adjustment of these assets is included in the valuation of the dealer network.

15. Represents the fair value adjustment of the bonus purchase price and revenue sharing liabilities based on estimated future cash payments.

16. Represents the fair value adjustment of deferred revenue to remove gross margin costs from the balance sheet.

17. Represents the fair value adjustment of the holdback liability based on estimated future cash payments.

18. Reflects the cumulative impact of the fresh start accounting adjustments discussed above on retained earnings (accumulated deficit) as follows (dollars in thousands):
Property and equipment fair value adjustment
$
3,808

Subscriber accounts fair value adjustment
(55,936
)
Dealer network and other intangible assets fair value adjustment
144,700

Goodwill
81,943

Other assets and liabilities fair value adjustments
731

Predecessor accumulated other comprehensive income, net
6,668

Net gain on fresh start adjustments
$
181,914


Gain on restructuring and reorganization, net

Gain on restructuring and reorganization recognized as a result of the Chapter 11 Cases is presented separately in the accompanying unaudited condensed consolidated statement of operations as follows (dollars in thousands):
 
Predecessor Company
 
Period from July 1, 2019 through
August 31, 2019
 
Period from January 1, 2019 through
August 31, 2019
Gain on settlement of Liabilities subject to compromise (a)
$
559,737

 
559,737

Gain on fresh start adjustments (b)
181,914

 
181,914

Loss on equity rights offering discount (c)
(8,325
)
 
(8,325
)
Restructuring and reorganization expense (d)
(30,502
)
 
(63,604
)
Gain on restructuring and reorganization, net
$
702,824

 
669,722

 
(a)        Gain recognized primarily on Predecessor Senior Notes converted from debt to equity and Predecessor Senior Notes settled at a discount in accordance with the Plan.
(b)        Revaluation of certain assets and liabilities upon the adoption of fresh start accounting.
(c)        In accordance with the Plan, Noteholders that participated in the equity rights offering purchased Monitronics common stock at a discount.
(d)        Legal, financial advisory and other professional costs directly associated with the restructuring and reorganization process.

(4)    Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. The Company adopted ASU 2016-02 using a modified retrospective approach at January 1, 2019, as outlined in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method of adoption, there is no impact to the comparative condensed consolidated statements of operations and condensed consolidated balance sheets. The Company determined that there was no cumulative effect adjustment to beginning Accumulated deficit on the condensed consolidated balance sheets. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as

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outlined in Accounting Standards Codification Topic 840, "Leases". In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

Adoption of this standard had no impact on the Company's Loss before income taxes and the condensed consolidated statements of cash flows. Upon adoption as of January 1, 2019, the Company recognized an Operating lease right-of-use asset of $20,240,000 and a total Operating lease liability of $20,761,000. The difference between the two amounts were due to decreases in prepaid rent and deferred rent recorded under prior lease accounting in Prepaid and other current assets and Other accrued liabilities, respectively, on the condensed consolidated balance sheets. See note 13, Leases for further information.

(5)    Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands): 
 
Successor Company
 
Predecessor Company
 
September 30,
2019
 
December 31,
2018
Accrued payroll and related liabilities
$
6,075

 
$
4,459

Interest payable
283

 
14,446

Income taxes payable
2,080

 
2,742

Operating lease liabilities
3,836

 

Contingent dealer liabilities
4,630

 

Accrued reorganization costs
9,715

 

Other
8,416

 
9,438

Total Other accrued liabilities
$
35,035

 
$
31,085


(6)    Debt
 
Debt consisted of the following (amounts in thousands):
 
Successor Company
 
 
Predecessor Company
 
September 30,
2019
 
 
December 31,
2018
Successor Takeback Loan Facility, matures March 29, 2024, LIBOR plus 6.50%, subject to a LIBOR floor of 1.25%, with an effective rate of 9.2%
$
822,500

 
 
$

Successor Term Loan Facility, matures July 3, 2024, LIBOR plus 5.00%, subject to a LIBOR floor of 1.50%, with an effective rate of 7.6%
150,000

 
 

Successor Revolving Credit Facility, matures July 3, 2024, LIBOR plus 5.00%, subject to a LIBOR floor of 1.50%, or base rate (with a floor of 4.5%) plus 4.0%, with an effective rate of 12.7%
21,500

 
 

9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.1%

 
 
585,000

Ascent Intercompany Loan due October 1, 2020 with an effective rate of 12.5%

 
 
12,000

Term loan, matures September 30, 2022, LIBOR plus 5.50%, subject to a LIBOR floor of 1.00%, with an effective rate of 8.6%

 
 
1,075,250

$295 million revolving credit facility, matures September 30, 2021, LIBOR plus 4.00%, subject to a LIBOR floor of 1.00%, with an effective rate of 7.5%

 
 
144,200

 
$
994,000

 
 
$
1,816,450

Less: Current portion of long-term debt
(8,225
)
 
 
(1,816,450
)
Long-term debt
$
985,775

 
 
$


Successor Takeback Loan Facility

On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into the Successor Takeback Loan Facility with the lenders party thereto, and Cortland Capital Market Services, LLC. as administrative agent. In exchange for its Predecessor

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Credit Facility term loans under the Company's Predecessor Credit Facility, each term lender thereunder (other than term lenders equitizing their term loans) received, pursuant to the terms of the Plan, its pro rata share of (i) $150,000,000 in cash from the proceeds of a rights offering (which, together with the equitization of $100,000,000 of the Predecessor Credit Facility term loans, resulted in an aggregate reduction of term loans by $250,000,000 in principal amount) and (ii) term loans under the $822,500,000 Successor Takeback Loan Facility.
 
The maturity date of the Successor Takeback Loan Facility is March 29, 2024 and requires quarterly interest payments and, beginning December 31, 2019, quarterly principal payments of $2,056,250. Interest on loans made under the Successor 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 Successor 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 14, Consolidating Guarantor Financial Information for further information. The Successor Takeback Loan Facility contains customary representations, warranties, covenants and events of default and related remedies.

Successor Credit Facilities

On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into Successor Credit Facilities with the lenders party thereto, KKR Capital Markets LLC as lead arranger and bookrunner, KKR Credit Advisors (US) LLC as Structuring Advisor and Encina Private Credit SPV, LLC as administrative agent, swingline lender and L/C issuer. Under the Successor Credit Facilities, the Company has access to $295,000,000 which includes $150,000,000 in term loans under the Successor Term Loan Facility and up to $145,000,000 under the Successor Revolving Credit Facility (including a $10,000,000 swingline loan). As of September 30, 2019, $123,500,000 is available for borrowing under the Successor Revolving Credit Facility, subject to certain financial covenants.

The maturity date of loans made under the Successor 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 Successor Takeback Term Loan. Interest on loans made under the Successor 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 Successor Revolving Credit Facility.

The Successor 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 14, Consolidating Guarantor Financial Information for further information. The Successor Credit Facilities contain customary representations, warranties, covenants and events of default and related remedies.

The terms of the Successor Takeback Loan Facility and the Successor Credit Facilities provide for certain financial and nonfinancial covenants.  As of September 30, 2019, the Company was in compliance with all required covenants under these financing arrangements.

Predecessor Senior Notes
 
The Predecessor Senior Notes totaled $585,000,000 in principal, were scheduled to mature on April 1, 2020 and bore interest at 9.125% per annum.  Interest payments were due semi-annually on April 1 and October 1 of each year. On the Effective Date, by operation of the Plan, the Company cancelled all outstanding obligations under the Predecessor Senior Notes and exchanged the Predecessor Senior Notes, at the option of each Noteholder, (A) cash in an amount equal to 2.5% of the principal and accrued but unpaid interest due under the Senior Notes held by such Noteholder or (B) to the extent that such Noteholder elects not to receive cash, its pro rata share of 18.0% of the Common Stock to be issued and outstanding as of the Effective Date. See note 2, Emergence from Bankruptcy for further information.

Predecessor Ascent Intercompany Loan
 
On February 29, 2016, the Company retired the existing intercompany loan with an outstanding principal amount of $100,000,000 and executed and delivered a Promissory Note to Ascent Capital in a principal amount of $12,000,000 (the "Ascent Intercompany Loan"), with the $88,000,000 remaining principal being treated as a capital contribution.  The entire principal amount under the Ascent Intercompany Loan would have been due on October 1, 2020.  The Ascent Intercompany Loan bore interest at a rate equal to 12.5% per annum, payable semi-annually in cash in arrears on January 12 and July 12 of each year.  Borrowings under the Ascent Intercompany Loan constituted unsecured obligations of the Company and were not guaranteed by any of the Company’s subsidiaries.


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In January 2019, the Company repaid $9,750,000 of the Ascent Intercompany Loan and $2,250,000 was contributed to our stated capital.
 
Predecessor Credit Facility

The Predecessor Credit Facility term loan had an outstanding prepetition principal balance of $1,072,500,000 and was scheduled to mature on September 30, 2022. The Credit Facility term loan required quarterly interest payments and quarterly principal payments of $2,750,000. The Credit Facility term loan bore interest at LIBOR plus 5.5%, subject to a LIBOR floor of 1.0%. On the Effective Date, by operation of the Plan, the Company cancelled all outstanding obligations under the Predecessor Credit Facility and exchanged the outstanding principal balance for (A) $150,000,000 in cash, (B) $100,000,000 in shares of Common Stock and (C) new term loans under an $822,500,000 takeback term loan facility (the Successor Takeback Loan Facility discussed above). See note 2, Emergence from Bankruptcy and note 9, Stockholder's Equity for further information.

The Predecessor Credit Facility revolver had a prepetition principal amount outstanding of $181,400,000 and an aggregate of $1,000,000 available under two standby letters of credit issued and was scheduled to mature on September 30, 2021. The Credit Facility revolver typically bore interest at LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%. There was a commitment fee of 0.5% on unused portions of the Predecessor Credit Facility revolver. In conjunction with negotiations around certain defaults under the Predecessor Credit Facility in the first quarter of 2019, the Predecessor Credit Facility revolver lenders allowed us to continue to borrow under the revolving credit facility for up to $195,000,000 at an alternate base rate plus 3.0% and the Predecessor Credit Facility term loan lenders allowed the term loan to renew with interest due on an alternate base rate plus 4.5%. Additionally, for the period of April 24, 2019 through May 20, 2019, an additional 2.0% default interest rate was accrued and paid on the Predecessor Credit Facility term loan and revolver. On July 3, 2019, with approval from the Bankruptcy Court, the Predecessor Credit Facility revolver principal and interest was repaid in full with proceeds from the Predecessor DIP Facility. On the Effective Date, the Predecessor DIP Facility was replaced with the Successor Credit Facilities (as discussed above). See note 2, Emergence from Bankruptcy for further information.

In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loan under the Credit Facility term loan, the Company had entered into interest rate swap agreements with terms similar to the Credit Facility term loan (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”). Prior to December of 2018, all of the Swaps were designated as effective hedges of the Company's variable rate debt and qualified for hedge accounting. However, in December of 2018, given the potential for changes in the Company's future expected interest payments that the Swap hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. In April of 2019, all of the outstanding Swaps were settled and terminated with their respective counterparties. See note 7, Derivatives for further disclosures related to the settlement of these derivative instruments.

As of September 30, 2019, principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
Remainder of 2019
$
2,056

2020
8,225

2021
8,225

2022
8,225

2023
8,225

2024
959,044

Thereafter

Total debt principal payments
$
994,000


(7)    Derivatives
 
Historically, the Company utilized Swaps to reduce the interest rate risk inherent in the Company's variable rate Credit Facility term loan. The valuation of these instruments was determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatility. The Company incorporated credit valuation adjustments to appropriately reflect the respective counterparty's nonperformance risk in the fair value measurements. See note 8, Fair Value Measurements for additional information about the credit valuation adjustments.

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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 period from January 1, 2019 through August 31, 2019, the Company recorded an Unrealized loss on derivative financial instruments of $4,577,000. On April 30, 2019, the various counterparties and the Company agreed to settle and terminate all of the outstanding 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 derivatives outstanding as of September 30, 2019.

Amounts recognized in Accumulated other comprehensive income (loss) as of the de-designation date were to be amortized to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss) over the remaining term of the hedged forecasted transactions of the Swaps which were 3 month LIBOR interest payments. 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. The carrying value of this amount was expensed to Gain on restructuring and reorganization, net in the Predecessor period.

The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):
 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from July 1, 2019 through August 31,
 
Three Months Ended September 30,
 
2019
 
 
2019
 
2018
Effective portion of gain recognized in Accumulated other comprehensive income (loss)
$

 
 
$

 
3,165

Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net income (loss) (a)

 
 

 
(104
)
 
(a)        Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from January 1, 2019 through August 31,
 
Nine Months Ended September 30,
 
2019
 
 
2019
 
2018
Effective portion of gain recognized in Accumulated other comprehensive income (loss)
$

 
 
$

 
21,929

Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net income (loss) (a)

 
 
(940
)
 
(1,267
)
 
(a)        Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).


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(8)    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 and liabilities that are measured on a recurring basis at September 30, 2019 and December 31, 2018 (amounts in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2019 (Successor)
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 

 

 

Interest rate swap agreements - liabilities (a)

 

 

 

Total
$

 

 

 

December 31, 2018 (Predecessor)
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 
10,552

 

 
10,552

Interest rate swap agreements - liabilities (a)

 
(6,039
)
 

 
(6,039
)
Total
$

 
4,513

 

 
4,513

 
(a)
Swap asset values are included in non-current Other assets and Swap liability values are included in non-current Derivative financial instruments on the condensed consolidated balance sheets.
 
The Company has determined that the significant inputs used to value the Swaps fall within Level 2 of the fair value hierarchy.  As a result, the Company has determined that its derivative valuations are 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):
 
Successor Company
 
 
Predecessor Company
 
September 30, 2019
 
 
December 31, 2018
Long term debt, including current portion:
 
 
 
 
Carrying value
994,000

 
 
1,816,450

Fair value (a)
925,660

 
 
1,218,606

 
(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 and accounts payable are carried at cost, which approximates their fair value because of their short-term maturity.

(9)    Stockholder's Equity

Pursuant to the Company's certificate of incorporation adopted in accordance with the Plan, the Company is authorized to issue an aggregate of 50,000,000 shares of stock consisting of: (i) 45,000,000 shares of Common Stock and (ii) 5,000,000 shares of Preferred Stock.

Successor Common Stock

Holders of Common Stock are entitled to one vote for each share held. Common Stock will vote as a single class on all matters on which stockholders are entitled to vote, except as otherwise provided in the certificate of incorporation or as required by law. Generally, all matters to be voted on by stockholders, other than the election of directors, must be approved by a majority of the

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Common Stock, then-issued and outstanding. Subject to the rights of the holders of any series of Preferred Stock to elect directors under certain circumstances, directors shall be elected by a plurality of the voting power present in person or represented by proxy and entitled to vote generally in the election of directors. No stockholder shall be entitled to exercise the right of cumulative voting.

In connection with the Company’s emergence from Chapter 11 and in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 1145 of the Bankruptcy Code, the Company issued a total of 22,500,000 shares of Common Stock on August 30, 2019.

As of September 30, 2019, the Company had 22,500,000 issued and outstanding shares of Common Stock.

Successor Preferred Stock

The board of directors of the Company has the authority, without action by its stockholders, to designate and issue preferred stock of the Company in one or more series and to designate the rights, powers, preferences and privileges of each series and any qualifications, limitations or restrictions thereof, which may be greater or less than the rights of the Common Stock. As of September 30, 2019, no shares of preferred stock were issued.

Predecessor Accumulated Other Comprehensive Income (Loss)

The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the period from 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 7, 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. See note 3, Fresh Start Accounting for further information.




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The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2018 (amounts in thousands):
 
Predecessor Company
 
Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2017
$
(7,375
)
Impact of adoption of ASU 2017-12
605

Adjusted balance at January 1, 2018
(6,770
)
Unrealized gain on derivatives recognized through Accumulated other comprehensive income (loss), net of income tax of $0
13,668

Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
738

Net period Other comprehensive income
14,406

Balance at March 31, 2018
$
7,636

Unrealized gain on derivatives recognized through Accumulated other comprehensive income (loss), net of income tax of $0
5,096

Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
425

Net period Other comprehensive income
5,521

Balance at June 30, 2018
$
13,157

Unrealized gain on derivatives recognized through Accumulated other comprehensive income (loss), net of income tax of $0
3,165

Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
104

Net period Other comprehensive income
3,269

Balance at September 30, 2018
$
16,426

 
(a) 
Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations.

(10)    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 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 period from September 1, 2019 through September 30, 2019.

(11)    Commitments, Contingencies and Other Liabilities
 
The Company was named as a defendant in multiple putative class actions consolidated in U.S. District Court (Northern District of West Virginia) on behalf of purported class(es) for persons who claim to have received telemarketing calls in violation of various state and federal laws. The actions were brought by plaintiffs seeking monetary damages on behalf of all plaintiffs who received telemarketing calls made by a Monitronics Authorized Dealer, or any Authorized Dealer's lead generator or sub-dealer. In the second quarter of 2017, the Company and the plaintiffs agreed to settle this litigation for $28,000,000 ("the Settlement Amount"). In the third quarter of 2017, the Company paid $5,000,000 of the Settlement Amount pursuant to the settlement agreement with the plaintiffs. In the third quarter of 2018, the Company paid the remaining $23,000,000 of the Settlement Amount. The Company recovered a portion of the Settlement Amount under its insurance policies held with multiple carriers. In the fourth quarter of 2018, we settled our claims against two such carriers in which those carriers paid us an aggregate of $12,500,000. In April of 2019, Monitronics settled a claim against one such carrier in which that carrier paid the Company $4,800,000.

In addition to the above, the Company is also involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. 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

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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.

(12)    Revenue Recognition

Disaggregation of Revenue

Revenue is disaggregated by source of revenue as follows (in thousands):
 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from July 1, 2019 through August 31,
 
Three Months Ended September 30,
 
2019
 
 
2019
 
2018
Alarm monitoring revenue
$
33,594

 
 
$
78,608

 
125,004

Product and installation revenue
2,224

 
 
4,993

 
11,360

Other revenue
471

 
 
988

 
792

Total Net revenue
$
36,289

 
 
$
84,589

 
137,156


 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from January 1, 2019 through August 31,
 
Nine Months Ended September 30,
 
2019
 
 
2019
 
2018
Alarm monitoring revenue
$
33,594

 
 
$
319,172

 
374,689

Product and installation revenue
2,224

 
 
19,111

 
28,984

Other revenue
471

 
 
4,003

 
2,249

Total Net revenue
$
36,289

 
 
$
342,286

 
405,922


Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
Successor Company
 
Predecessor Company
 
September 30,
2019
 
December 31,
2018
Trade receivables, net
$
12,105

 
13,121

Contract assets, net - current portion (a)
10,952

 
13,452

Contract assets, net - long-term portion (b)
12,600

 
16,154

Deferred revenue
13,309

 
13,060

 
(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.

(13)    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.


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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
 
Period from September 1, 2019 through September 30,
 
 
Period from July 1, 2019 through August 31,
Operating lease cost (a)
$
34

 
 
$
70

Operating lease cost (b)
320

 
 
624

Total operating lease cost
$
354

 
 
$
694

 
(a)        Amount is included in Cost of services in the unaudited condensed consolidated statements of operations.
(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.

 
Successor Company
 
 
Predecessor Company
 
Period from September 1, 2019 through September 30,
 
 
Period from January 1, 2019 through August 31,
Operating lease cost (a)
$
34

 
 
$
321

Operating lease cost (b)
320

 
 
2,595

Total operating lease cost
$
354

 
 
$
2,916

 
(a)        Amount is included in Cost of services in the unaudited condensed consolidated statements of operations.
(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.

Remaining Lease Term and Discount Rate

The following table presents the weighted-average remaining lease term and the weighted-average discount rate: