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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, 2018
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 Texas
 
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 

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

As of November 6, 2018, Monitronics International, Inc. is a wholly owned subsidiary of Ascent Capital Group, Inc.



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)
 
September 30,
2018
 
December 31,
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
26,835

 
3,302

Restricted cash
133

 

Trade receivables, net of allowance for doubtful accounts of $3,630 in 2018 and $4,162 in 2017
13,162

 
12,645

Prepaid and other current assets
26,794

 
10,668

Total current assets
66,924

 
26,615

Property and equipment, net of accumulated depreciation of $45,904 in 2018 and $37,643 in 2017
36,553

 
32,789

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization of $1,570,729 in 2018 and $1,439,164 in 2017
1,215,831

 
1,302,028

Dealer network and other intangible assets, net of accumulated amortization of $48,500 in 2018 and $42,806 in 2017

 
6,994

Goodwill
349,149

 
563,549

Other assets
36,812

 
9,340

Total assets
$
1,705,269

 
1,941,315

Liabilities and Stockholder's (Deficit) Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
11,636

 
11,073

Accrued payroll and related liabilities
6,135

 
3,458

Other accrued liabilities
40,289

 
50,026

Deferred revenue
12,069

 
13,871

Holdback liability
10,766

 
9,309

Current portion of long-term debt
11,000

 
11,000

Total current liabilities
91,895

 
98,737

Non-current liabilities:
 

 
 

Long-term debt
1,795,119

 
1,707,297

Long-term holdback liability
2,031

 
2,658

Derivative financial instruments
1,139

 
13,491

Deferred income tax liability, net
15,291

 
13,304

Other liabilities
2,701

 
3,092

Total liabilities
1,908,176

 
1,838,579

Commitments and contingencies


 


Stockholder's (deficit) equity:
 
 
 
Common stock, $.01 par value. 1,000 shares authorized, issued and outstanding both at September 30, 2018 and December 31, 2017

 

Additional paid-in capital
440,050

 
444,330

Accumulated deficit
(659,383
)
 
(334,219
)
Accumulated other comprehensive income (loss), net
16,426

 
(7,375
)
Total stockholder's (deficit) equity
(202,907
)
 
102,736

Total liabilities and stockholder's (deficit) equity
$
1,705,269

 
1,941,315

 

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)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Net revenue
$
137,156

 
138,211

 
$
405,922

 
419,909

Operating expenses:
 
 
 
 
 
 
 
Cost of services
35,059

 
30,213

 
100,807

 
89,799

Selling, general and administrative, including stock-based and long-term incentive compensation
34,266

 
33,474

 
98,935

 
126,759

Radio conversion costs

 
74

 

 
383

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
52,671

 
59,384

 
160,973

 
178,896

Depreciation
2,880

 
2,170

 
8,360

 
6,415

Loss on goodwill impairment

 

 
214,400

 

 
124,876

 
125,315

 
583,475

 
402,252

Operating income (loss)
12,280

 
12,896

 
(177,553
)
 
17,657

Other expense:
 
 
 
 
 
 
 
Interest expense
39,077

 
36,665

 
114,550

 
108,980

Refinancing expense
5,697

 

 
5,697

 

 
44,774

 
36,665

 
120,247

 
108,980

Loss before income taxes
(32,494
)
 
(23,769
)
 
(297,800
)
 
(91,323
)
Income tax expense
1,346

 
1,767

 
4,039

 
5,330

Net loss
(33,840
)
 
(25,536
)
 
(301,839
)
 
(96,653
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative contracts, net
3,269

 
227

 
23,196

 
(4,501
)
Total other comprehensive income (loss), net of tax
3,269

 
227

 
23,196

 
(4,501
)
Comprehensive loss
$
(30,571
)
 
(25,309
)
 
$
(278,643
)
 
(101,154
)
 
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)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(301,839
)
 
(96,653
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
160,973

 
178,896

Depreciation
8,360

 
6,415

Stock-based and long-term incentive compensation
751

 
2,759

Deferred income tax expense
1,987

 
3,158

Legal settlement reserve

 
23,000

Refinancing expense
5,697

 

Amortization of debt discount and deferred debt costs
5,472

 
5,065

Bad debt expense
8,511

 
7,888

Loss on goodwill impairment
214,400

 

Other non-cash activity, net
2,040

 
4,659

Changes in assets and liabilities:
 
 
 
Trade receivables
(9,028
)
 
(7,225
)
Prepaid expenses and other assets
(9,769
)
 
(1,453
)
Subscriber accounts - deferred contract acquisition costs
(4,529
)
 
(2,299
)
Payables and other liabilities
(8,568
)
 
3,017

Net cash provided by operating activities
74,458

 
127,227

Cash flows from investing activities:
 

 
 

Capital expenditures
(11,513
)
 
(9,999
)
Cost of subscriber accounts acquired
(111,531
)
 
(119,081
)
Net cash used in investing activities
(123,044
)
 
(129,080
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
218,950

 
159,850

Payments on long-term debt
(136,600
)
 
(132,500
)
Payments of financing costs
(5,015
)
 

Value of shares withheld for share-based compensation
(83
)
 
(424
)
Dividend to Ascent Capital
(5,000
)
 

Net cash provided by financing activities
72,252

 
26,926

Net increase in cash, cash equivalents and restricted cash
23,666

 
25,073

Cash, cash equivalents and restricted cash at beginning of period
3,302

 
3,177

Cash, cash equivalents and restricted cash at end of period
$
26,968

 
28,250

Supplemental cash flow information:
 
 
 
State taxes paid, net
$
2,710

 
3,107

Interest paid
95,889

 
90,637

Accrued capital expenditures
882

 
386

 

See accompanying notes to condensed consolidated financial statements.

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MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholder’s 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) Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
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
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
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
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
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, "Brinks Home SecurityTM" or the "Company") are wholly owned subsidiaries of Ascent Capital Group, Inc. ("Ascent Capital").  Brinks Home Security provides 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.  Brinks Home Security customers are obtained through our direct-to-consumer sales channel or our Authorized Dealer network, which provides product and installation services, as well as support to customers. Our direct-to-consumer channel offers both Do-It-Yourself ("DIY") and professional installation security solutions.

The rollout of the Brinks Home Security brand in the second quarter of 2018 included the integration of our business model under a single brand. As part of the integration, we reorganized our business from two reportable segments, "MONI" and "LiveWatch," to one reportable segment, Brinks Home Security. Following the integration, the Company's chief operating decision maker reviews internal financial information on a consolidated basis. The change in reportable segments had no impact on our previously reported historical condensed consolidated financial statements.

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 financial statements as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, include Brinks Home Security 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 condensed consolidated financial statements should be read in conjunction with the Brinks Home Security Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 7, 2018.

The Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("Topic 606") using the modified retrospective approach on January 1, 2018, at which time it became effective for the Company. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings.

The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") which amends the hedge accounting rules to align risk management activities and financial reporting by simplifying the application of hedge accounting guidance. The guidance expands the ability to hedge nonfinancial and financial risk components and eliminates the requirement to separately measure and report hedge ineffectiveness. Additionally, certain hedge effectiveness assessment requirements may be accomplished qualitatively instead of quantitatively. The Company early adopted ASU 2017-12 effective January 1, 2018, and as such, an opening equity adjustment of $605,000 was recognized that reduced Accumulated deficit, offset by a gain in Accumulated other comprehensive income (loss). This adjustment primarily relates to the derecognition of the cumulative ineffectiveness recorded on the Company's interest rate swap derivative instruments, as well as adjustments to cumulative dedesignation adjustments. The Company does not expect this adoption to have a material impact on its financial position, results of operations or cash flows on an ongoing basis.

The Company early adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). Prior to the adoption of ASU 2017-04, the fair value of the reporting unit was compared with the carrying value of the reporting unit (identified as "Step 1"). If the fair value of the reporting unit was lower than its carrying amount, then the implied fair value of goodwill was calculated. If the implied fair value of goodwill was lower than the carrying value of goodwill, an impairment was recognized (identified as "Step 2"). ASU 2017-04 eliminated Step 2 from the impairment test; therefore, a goodwill impairment is recognized as the difference of the fair value and the carrying value of the reporting unit.

The comparative information has not been restated and continues to be reported under the accounting standards in effect during those periods. See note 4, Revenue Recognition, and note 5, Goodwill, in the notes to the condensed consolidated financial statements for further discussion.
 

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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, valuation of deferred tax assets and valuation of goodwill. 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.

(2)    Going Concern

The Company has substantial indebtedness, including $585,000,000 principal of senior notes at September 30, 2018, maturing on April 1, 2020 (the "Senior Notes"), and an existing credit facility with a term loan in principal of $1,078,000,000 as of September 30, 2018, maturing September 30, 2022, and a revolving credit facility with an outstanding balance of $159,100,000 as of September 30, 2018, maturing September 30, 2021 (the term loan and the revolver, together, the "Credit Facility"). The maturity date for each of the term loan and the revolving credit facility under the Credit Facility is subject to a springing maturity 181 days prior to the scheduled maturity date of the Senior Notes, or October 3, 2019, if we are unable to refinance the Senior Notes by that date. In addition, if we are unable to refinance the Senior Notes, or demonstrate the ability to meet our financial covenants for a period of twelve months after the issuance date, prior to the filing with the SEC of our Annual Report on Form 10-K for the year ended December 31, 2018, we may be subject to a going concern qualification in connection with our external audit report, which would be an event of default under the Credit Facility. At any time after the occurrence of an event of default under the Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and terminate any commitment to make further loans under the Credit Facility. These matters raise substantial doubt regarding the Company's ability to continue as a going concern within one year from the date these financial statements are issued.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As a result, the Company’s consolidated financial statements as of September 30, 2018 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

On September 24, 2018, Ascent Capital and Brinks Home Security entered into a Transaction Support Agreement (which was amended and restated pursuant to the Amended and Restated Transaction Support Agreement, entered into on October 30, 2018 (the "Amended and Restated Support Agreement")) with certain holders collectively owning or controlling not less than $380 million aggregate principal amount of the Senior Notes, representing approximately 65% of the Senior Notes (collectively, the "Consenting Noteholders"). The Amended and Restated Support Agreement incrementally included a group of lenders for the Credit Facility term loan holding over 50% of the aggregate outstanding principal amount of the Credit Facility term loan (collectively, the "Credit Facility Lenders"). The Consenting Noteholders and Credit Facility Lenders have committed to support and fully participate in proposed agreed upon transactions that would result in the refinancing of the Senior Notes, if consummated. See Note 13, Subsequent Events, for further information. While management continues to negotiate refinancing terms with its debt holders, as of the issuance date of these financial statements, Brinks Home Security has not refinanced the Senior Notes and there can be no assurances that the negotiations management is pursuing will result in the consummation of transactions that would refinance the Senior Notes.

(3)    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. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, ASU 2016-02 requires a finance lease to be recognized as both an interest expense and an amortization of the associated asset. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. ASU 2018-10, Codification Improvements to Topic 842, Leases, clarifies certain aspects of ASU 2016-12 and the two updates will be adopted concurrently. ASU 2016-02 requires leases to be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach upon adoption. However, ASU 2018-11, Leases (Topic 842): Targeted Improvements provides an alternative transition method by which leases are recognized at the date of adoption and a cumulative-effect adjustment to the opening balance of retained earnings is recognized in the period of adoption. We plan to adopt using this alternative and are currently evaluating the impact that these standards will have on our financial position, results of operations and cash flows.


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(4)    Revenue Recognition

Topic 606 amends and supersedes FASB Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition ("Topic 605"). The core principle of Topic 606 is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Accounting Policy for Periods Commencing January 1, 2018

The Company offers its subscribers professional alarm monitoring services, as well as interactive and home automation services, through equipment at the subscriber's site that communicates with the Company’s central monitoring station and interfaces with other equipment at the site and third party technology companies for interactive and home automation services. These services are typically provided under alarm monitoring agreements (“AMAs”) between the Company and the subscriber. The equipment at the site is either obtained independently from the Company’s network of third party Authorized Dealers or directly from the Company, via our direct-to-consumer sales channel. The Company also offers equipment sales and installation services and, to our existing subscribers, maintenance services on existing alarm equipment. The Company also collects fees for contract monitoring, which are services provided to other security alarm companies for monitoring their accounts on a wholesale basis and other fees from subscribers for late fee or insufficient fund charges.

Revenue under subscriber AMAs is allocated to alarm monitoring revenue and, if applicable, product and installation revenue based on the stand alone selling prices (“SSP”) of each performance obligation as a percentage of the total SSP of all performance obligations. Allocated alarm monitoring revenue is recognized as the monthly service is provided. Allocated product and installation revenue is recognized when the product sale is complete or shipped and the installation service is provided, typically at inception of the AMA. Product and installation revenue is not applicable to AMA's acquired from Authorized Dealers in their initial term. Any cash not received from the subscriber at the time of product sale and installation is recognized as a contract asset at inception of the AMA and is subsequently amortized over the subscriber contract term as a reduction of the amounts billed for professional alarm monitoring, interactive and home automation services. If a subscriber cancels the AMA within the negotiated term, any existing contract asset is determined to be impaired and is immediately expensed in full to Selling, general and administrative expense on the condensed consolidated statement of operations.

Maintenance services are billed and recognized as revenue when the services are completed in the home and agreed to by the subscriber under the subscriber AMA. Contract monitoring fees are recognized as alarm monitoring revenue as the monitoring service is provided. Other fees are recognized as other revenue when billed to the subscriber which coincides with the timing of when the services are provided.

Disaggregation of Revenue

Revenue is disaggregated by source of revenue as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Alarm monitoring revenue
$
125,004

 
134,317

 
$
374,689

 
407,660

Product and installation revenue
11,360

 
2,899

 
28,984

 
9,328

Other revenue
792

 
995

 
2,249

 
2,921

Total Net revenue
$
137,156

 
138,211

 
$
405,922

 
419,909


Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):

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September 30, 2018
 
At adoption
Trade receivables, net
$
13,162

 
12,645

Contract assets, net - current portion (a)
13,836

 
14,197

Contract assets, net - long-term portion (b)
16,621

 
10,377

Deferred revenue
12,069

 
12,892

 
(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.

Changes in Accounting Policies

The Company adopted Topic 606, effective January 1, 2018, using the modified retrospective transition method. Under the modified retrospective transition method, the Company evaluated active AMAs on the adoption date as if each AMA had been accounted for under Topic 606 from its inception. Some revenue related to AMAs originated through our direct-to-consumer channel or through extensions that would have been recognized in future periods under Topic 605 were recast under Topic 606 as if revenue had been accelerated and recognized in prior periods, as it was allocated to product and installation performance obligations. A contract asset was recorded as of the adoption date for any cash that has yet to be collected on the accelerated revenue. As this transition method requires that the Company not adjust historical reported revenue amounts, the accelerated revenue that would have been recognized under this method prior to the adoption date was recorded as an adjustment to opening retained earnings and, thus, will not be recognized as revenue in future periods as previously required under Topic 605. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605.

Under Topic 605, revenue provided under the AMA was recognized as the services were provided, based on the recurring monthly revenue amount billed for each month under contract. Product, installation and service revenue generally was recognized as billed and incurred. Under Topic 606, the Company concluded that certain product and installation services sold or provided to our customers at AMA inception are capable of being distinct and are distinct within the context of the contract. As such, when the Company initiates an AMA with a customer directly and provides equipment and installation services, each component is considered a performance obligation that must have revenue allocated accordingly. The allocation is based on the SSP of each performance obligation as a percentage of the total SSP of all performance obligations multiplied by the total consideration, or cash, expected to be received over the contract term. These AMAs may relate to new customers originated by the Company through its direct-to-consumer channel or existing customers who agree to new contract terms through customer service offerings. For AMAs with multiple performance obligations, management notes that a certain amount of the revenue billed on a recurring monthly basis is recognized earlier under Topic 606 than it was recognized under Topic 605, as a portion of that revenue is allocated to the equipment sale and installation, which is satisfied upon delivery of the product and performance of the installation services at AMA inception.

Revenue on AMAs originated through the Authorized Dealer program are not impacted by Topic 606 in their initial term, as the customer contracts for the equipment sale and installation separately with the Authorized Dealer prior to the Company purchasing the AMA from the Authorized Dealer. Revenue on these customers is recognized as the service is provided based on the recurring monthly revenue amount billed for each month of the AMA. Maintenance service revenue for repair of existing alarm equipment at the subscribers' premises will continue to be billed and recognized based on their SSP at the time the Company performs the services.

Topic 606 also requires the deferral of incremental costs of obtaining a contract with a customer. Certain direct and incremental costs were capitalized under Topic 605, including on new AMAs obtained in connection with a subscriber move (“Moves Costs”). Under Topic 606, Moves Costs are expensed as incurred to accompany the allocated revenue recognized upon product and installation performance obligations recognized at the AMA inception. There are no other significant changes in contract costs that are capitalized or the period over which they are expensed.

Impacts on Financial Statements

The significant effects of adopting Topic 606 are changes to Prepaid and other current assets, Subscriber accounts, net, Other assets, net, Net revenue, Cost of services, Selling, general and administrative and Amortization of subscriber accounts for the period beginning January 1, 2018 for AMAs initiated by the Company with the customer directly with multiple performance obligations, as a portion of that revenue is allocated to the equipment sale and installation, which is satisfied upon delivery of the product and performance of the installation services at AMA inception.

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The following tables summarize the impacts of adopting Topic 606 on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 (in thousands):

i. Condensed consolidated balance sheets
 
Impact of changes in accounting policies
 
As reported
September 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
26,835

 

 
26,835

Restricted cash
133

 

 
133

Trade receivables, net of allowance for doubtful accounts
13,162

 

 
13,162

Prepaid and other current assets
26,794

 
(13,836
)
 
12,958

Total current assets
66,924

 
(13,836
)
 
53,088

Property and equipment, net of accumulated depreciation
36,553

 

 
36,553

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization
1,215,831

 
47,095

 
1,262,926

Dealer network and other intangible assets, net of accumulated amortization

 

 

Goodwill
349,149

 

 
349,149

Other assets, net
36,812

 
(16,621
)
 
20,191

Total assets
$
1,705,269

 
16,638

 
1,721,907

Liabilities and Stockholder’s (Deficit) Equity
 

 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
11,636

 

 
11,636

Accrued payroll and related liabilities
6,135

 

 
6,135

Other accrued liabilities
40,289

 

 
40,289

Deferred revenue
12,069

 
1,133

 
13,202

Holdback liability
10,766

 

 
10,766

Current portion of long-term debt
11,000

 

 
11,000

Total current liabilities
91,895

 
1,133

 
93,028

Non-current liabilities:
 

 
 
 
 
Long-term debt
1,795,119

 

 
1,795,119

Long-term holdback liability
2,031

 

 
2,031

Derivative financial instruments
1,139

 

 
1,139

Deferred income tax liability, net
15,291

 

 
15,291

Other liabilities
2,701

 

 
2,701

Total liabilities
1,908,176

 
1,133

 
1,909,309

Commitments and contingencies


 

 

Stockholder’s (deficit) equity:
 
 
 
 
 
Common stock

 

 

Additional paid-in capital
440,050

 

 
440,050

Accumulated deficit
(659,383
)
 
15,505

 
(643,878
)
Accumulated other comprehensive income, net
16,426

 

 
16,426

Total stockholder’s (deficit) equity
(202,907
)
 
15,505

 
(187,402
)
Total liabilities and stockholder’s (deficit) equity
$
1,705,269

 
16,638

 
1,721,907



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Table of Contents

ii. Condensed consolidated statements of operations and comprehensive income (loss)
 
Impact of changes in accounting policies
 
As reported
three months ended
September 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Net revenue
$
137,156

 
(4,216
)
 
132,940

Operating expenses:
 
 
 
 
 
Cost of services
35,059

 
(1,774
)
 
33,285

Selling, general and administrative, including stock-based and long-term incentive compensation
34,266

 
(103
)
 
34,163

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
52,671

 
1,870

 
54,541

Depreciation
2,880

 

 
2,880

Loss on goodwill impairment

 

 

 
124,876

 
(7
)
 
124,869

Operating loss
12,280

 
(4,209
)
 
8,071

Other expense:
 
 
 
 
 
Interest expense
39,077

 

 
39,077

Refinancing expense
5,697

 

 
5,697

 
44,774

 

 
44,774

Loss before income taxes
(32,494
)
 
(4,209
)
 
(36,703
)
Income tax expense
1,346

 

 
1,346

Net loss
(33,840
)
 
(4,209
)
 
(38,049
)
Other comprehensive income (loss):
 
 
 
 
 
Unrealized gain on derivative contracts, net
3,269

 

 
3,269

Total other comprehensive income, net of tax
3,269

 

 
3,269

Comprehensive loss
$
(30,571
)
 
(4,209
)
 
(34,780
)


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Impact of changes in accounting policies
 
As reported
nine months ended
September 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Net revenue
$
405,922

 
(6,986
)
 
398,936

Operating expenses:
 
 
 
 
 
Cost of services
100,807

 
(5,292
)
 
95,515

Selling, general and administrative, including stock-based and long-term incentive compensation
98,935

 
(112
)
 
98,823

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
160,973

 
5,633

 
166,606

Depreciation
8,360

 

 
8,360

Loss on goodwill impairment
214,400

 

 
214,400

 
583,475

 
229

 
583,704

Operating loss
(177,553
)
 
(7,215
)
 
(184,768
)
Other expense:
 
 
 
 
 
Interest expense
114,550

 

 
114,550

Refinancing expense
5,697

 

 
5,697

 
120,247

 

 
120,247

Loss before income taxes
(297,800
)
 
(7,215
)
 
(305,015
)
Income tax expense
4,039

 

 
4,039

Net loss
(301,839
)
 
(7,215
)
 
(309,054
)
Other comprehensive income (loss):
 

 
 
 
 
Unrealized gain on derivative contracts, net
23,196

 

 
23,196

Total other comprehensive income, net of tax
23,196

 

 
23,196

Comprehensive loss
$
(278,643
)
 
(7,215
)
 
(285,858
)


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iii. Condensed consolidated statements of cash flows
 
Impact of changes in accounting policies
 
As reported
nine months ended
September 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(301,839
)
 
(7,215
)
 
(309,054
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
160,973

 
5,633

 
166,606

Depreciation
8,360

 

 
8,360

Stock-based and long-term incentive compensation
751

 

 
751

Deferred income tax expense
1,987

 

 
1,987

Refinancing expense
5,697

 

 
5,697

Amortization of debt discount and deferred debt costs
5,472

 

 
5,472

Bad debt expense
8,511

 

 
8,511

Goodwill impairment
214,400

 

 
214,400

Other non-cash activity, net
2,040

 

 
2,040

Changes in assets and liabilities:
 
 
 
 
 
Trade receivables
(9,028
)
 

 
(9,028
)
Prepaid expenses and other assets
(9,769
)
 
7,016

 
(2,753
)
Subscriber accounts - deferred contract acquisition costs
(4,529
)
 
89

 
(4,440
)
Payables and other liabilities
(8,568
)
 
(825
)
 
(9,393
)
Net cash provided by operating activities
74,458

 
4,698

 
79,156

Cash flows from investing activities:
 

 
 
 
 
Capital expenditures
(11,513
)
 

 
(11,513
)
Cost of subscriber accounts acquired
(111,531
)
 
(4,698
)
 
(116,229
)
Net cash used in investing activities
(123,044
)
 
(4,698
)
 
(127,742
)
Cash flows from financing activities:
 

 
 
 
 
Proceeds from long-term debt
218,950

 

 
218,950

Payments on long-term debt
(136,600
)
 

 
(136,600
)
Payments of financing costs
(5,015
)
 

 
(5,015
)
Value of shares withheld for share-based compensation
(83
)
 

 
(83
)
Dividend to Ascent Capital
(5,000
)
 

 
(5,000
)
Net cash provided by financing activities
72,252

 

 
72,252

Net increase in cash, cash equivalents and restricted cash
23,666

 

 
23,666

Cash, cash equivalents and restricted cash at beginning of period
3,302

 

 
3,302

Cash, cash equivalents and restricted cash at end of period
$
26,968

 

 
26,968




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Table of Contents

(5)    Goodwill

The following table provides the activity and balances of goodwill by reporting unit (amounts in thousands):
 
 
MONI
 
LiveWatch
 
Brinks Home
Security
 
Total
Balance at 12/31/2017
 
$
527,502

 
$
36,047

 
$

 
$
563,549

Goodwill impairment
 
(214,400
)
 

 

 
(214,400
)
Reporting unit reallocation
 
(313,102
)
 
(36,047
)
 
349,149

 

Balance at 9/30/2018
 
$

 
$

 
$
349,149

 
$
349,149


The Company accounts for its goodwill pursuant to the provisions of FASB ASC Topic 350, Intangibles - Goodwill and Other ("FASB ASC Topic 350"). In accordance with FASB ASC Topic 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 May 31, 2018, the Company determined that a triggering event had occurred due to a sustained decrease in Ascent Capital's share price. In response to the triggering event, the Company performed a quantitative impairment test for both the MONI and LiveWatch reporting units. Fair value was determined using a combination of the income-based approach (using a discount rate of 8.50%) and market-based approach for the MONI reporting unit and an income-based approach (using a discount rate of 8.50%) for the LiveWatch reporting unit. Based on the analysis, the fair value of the LiveWatch reporting unit substantially exceeded its carrying value, while the carrying amount for the MONI reporting unit exceeded its estimated fair value, which indicated an impairment at the MONI reporting unit.

The Company early adopted ASU 2017-04, which eliminated Step 2 from the goodwill impairment test, and as such, 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 an impairment charge of $214,400,000 for the MONI reporting unit during the three months ended June 30, 2018. Factors leading to the impairment are primarily the experience of overall lower account acquisition in recent periods. Using this information, we adjusted the growth outlook for this reporting unit, which resulted in reductions in future cash flows and a lower fair value calculation under the income-based approach. Additionally, decreases in observable market share prices for comparable companies in the quarter reduced the fair value calculated under the market-based approach.

In early June 2018, the reportable segments known as MONI and LiveWatch were combined and presented as Brinks Home Security. Refer to Note 1, Basis of Presentation, for further discussion on the change in reportable segments. As a result of the change in reportable segments, goodwill assigned to these former reporting units of $313,102,000 and $36,047,000, for MONI and LiveWatch, respectively, have been reallocated and combined as of June 30, 2018 under the Brinks Home Security reporting unit.

(6)    Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands): 
 
September 30,
2018
 
December 31,
2017
Interest payable
$
27,904

 
$
14,835

Income taxes payable
2,289

 
2,839

Legal settlement reserve (a)

 
23,000

Other
10,096

 
9,352

Total Other accrued liabilities
$
40,289

 
$
50,026

 
(a)        See note 11, Commitments, Contingencies and Other Liabilities, for further information.


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(7)    Long-Term Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
September 30,
2018
 
December 31,
2017
9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.5%
$
581,588

 
$
580,026

Ascent Intercompany Loan due October 1, 2020 with an effective rate of 12.5%
12,000

 
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 8.2%
1,054,933

 
1,059,598

$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 3.5%
157,598

 
66,673

 
1,806,119

 
1,718,297

Less current portion of long-term debt
(11,000
)
 
(11,000
)
Long-term debt
$
1,795,119

 
$
1,707,297


Senior Notes
 
The senior notes total $585,000,000 in principal, mature on April 1, 2020 and bear interest at 9.125% per annum.  Interest payments are due semi-annually on April 1 and October 1 of each year. Ascent Capital has not guaranteed any of the Company's obligations under the Senior Notes. As of September 30, 2018, the Senior Notes had deferred financing costs, net of accumulated amortization of $3,412,000.

The Senior Notes are guaranteed by all of the Company's existing domestic subsidiaries. See note 12, Consolidating Guarantor Financial Information for further information.

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 is due on October 1, 2020.  The Company may prepay any portion of the balance of the Ascent Intercompany Loan at any time from time to time without fee, premium or penalty (subject to certain financial covenants associated with the Company’s other indebtedness).  Any unpaid balance of the Ascent Intercompany Loan bears 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 constitute unsecured obligations of the Company and are not guaranteed by any of the Company’s subsidiaries.
 
Credit Facility

On September 30, 2016, the Company entered into an amendment ("Amendment No. 6") with the lenders of its existing senior secured credit agreement dated March 23, 2012, and as amended and restated on April 9, 2015, February 17, 2015, August 16, 2013, March 25, 2013, and November 7, 2012 (the "Existing Credit Agreement"). Amendment No. 6 provided for, among other things, the issuance of a $1,100,000,000 senior secured term loan at a 1.5% discount and a new $295,000,000 super priority revolver (the Existing Credit Agreement together with Amendment No. 6, the "Credit Facility").

On September 27, 2018, the Company borrowed an incremental $26,691,000 on its Credit Facility revolver to fund its October 1, 2018 interest payment due under the Senior Notes.

As of September 30, 2018, the Credit Facility term loan has a principal amount of $1,078,000,000, maturing on September 30, 2022. The term loan requires quarterly interest payments and quarterly principal payments of $2,750,000. The term loan bears interest at LIBOR plus 5.5%, subject to a LIBOR floor of 1.0%. The Credit Facility revolver has a principal amount outstanding of $159,100,000 as of September 30, 2018 and matures on September 30, 2021. The Credit Facility revolver bears interest at LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%. There is a commitment fee of 0.5% on unused portions of the Credit Facility revolver. As of September 30, 2018, $135,900,000 is available for borrowing under the Credit Facility revolver subject to certain financial covenants.


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Table of Contents

The maturity date for each of the term loan and the revolving credit facility under the Credit Facility is subject to a springing maturity 181 days prior to the scheduled maturity date of the Senior Notes, or October 3, 2019 (the "Springing Maturity"), if we are unable to refinance the Senior Notes by that date. In addition, if we are unable to refinance the Senior Notes, or demonstrate the ability to meet our financial covenants for a period of twelve months after the issuance date, prior to the filing with the SEC of our Annual Report on Form 10-K for the year ended December 31, 2018, we may be subject to a going concern qualification in connection with our external audit report, which would be an event of default under the Credit Facility. At any time after the occurrence of an event of default under the Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and terminate any commitment to make further loans under the Credit Facility. Also, failure to comply with restrictions contained in the Senior Notes could lead to an event of default under the Credit Facility.

The Credit Facility is secured by a pledge of all of the outstanding stock of the Company and all of its existing subsidiaries and is guaranteed by all of the Company’s existing domestic subsidiaries.  Ascent Capital has not guaranteed any of the Company’s obligations under the Credit Facility.

As of September 30, 2018, the Company has deferred financing costs and unamortized discounts, net of accumulated amortization, of $24,569,000 related to the Credit Facility.

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 has 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”). The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting.  As a result of these interest rate swaps, the Company's effective weighted average interest rate (excluding the impacts of non-cash amortization of deferred debt costs and discounts) on the borrowings under the Credit Facility term loan was 7.99% as of September 30, 2018. See note 8, Derivatives, for further disclosures related to these derivative instruments. 

The terms of the Senior Notes and the Credit Facility provide for certain financial and nonfinancial covenants.  As of September 30, 2018, the Company was in compliance with all required covenants under these financing arrangements.

As of September 30, 2018, principal payments scheduled to be made on the Company’s debt obligations, assuming no Springing Maturity of the Credit Facility, are as follows (amounts in thousands):
Remainder of 2018
$
2,750

2019
11,000

2020
608,000

2021
170,100

2022
1,042,250

2023

Thereafter

Total principal payments
1,834,100

Less:
 
Unamortized deferred debt costs and discounts
27,981

Total debt on condensed consolidated balance sheet
$
1,806,119


(8)    Derivatives
 
The Company utilizes Swaps to reduce the interest rate risk inherent in the Company's variable rate Credit Facility term loan. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatility. The Company incorporates credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements. See note 9, Fair Value Measurements, for additional information about the credit valuation adjustments.

All of the Swaps are designated and qualify as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive income (loss).  Changes in the fair value of the Swaps recognized in

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Table of Contents

Accumulated other comprehensive income (loss) are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized.  Amounts in Accumulated other comprehensive income (loss) expected to be recognized as a reduction of Interest expense in the coming 12 months total approximately $1,810,000.

As of September 30, 2018, the Swaps’ outstanding notional balances, effective dates, maturity dates and interest rates paid and received are noted below:
Notional
 
Effective Date
 
Maturity Date
 
Fixed Rate Paid
 
Variable Rate Received
$
189,998,331

 
March 23, 2018
 
April 9, 2022
 
3.110%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
248,125,000

 
March 23, 2018
 
April 9, 2022
 
3.110%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a)
49,625,000

 
March 23, 2018
 
April 9, 2022
 
2.504%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
374,172,500

 
March 23, 2018
 
September 30, 2022
 
1.833%
 
3 mo. USD-LIBOR-BBA, subject to a 1.00% floor
 
(a) 
On September 30, 2016, the Company negotiated amendments to the terms of these interest rate swap agreements (the "Existing Swap Agreements," as amended, the "Amended Swaps").  The Amended Swaps are held with the same counterparties as the Existing Swap Agreements.  Upon entering into the Amended Swaps, the Company simultaneously dedesignated the Existing Swap Agreements and redesignated the Amended Swaps as cash flow hedges for the underlying change in the swap terms.  The amounts previously recognized in Accumulated other comprehensive income (loss) relating to the dedesignation are recognized in Interest expense over the remaining life of the Amended Swaps.

The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Effective portion of gain (loss) recognized in Accumulated other comprehensive income (loss)
$
3,165

 
(914
)
 
$
21,929

 
(8,890
)
Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net loss (a)
$
(104
)
 
(1,141
)
 
$
(1,267
)
 
(4,389
)
Ineffective portion of amount of loss recognized into Net loss (a)
$

 
(65
)
 
$

 
(157
)
 
(a)        Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss). Upon the adoption of ASU 2017-12 on January 1, 2018, ineffectiveness is no longer measured or recognized.

(9)    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, 2018 and December 31, 2017 (amounts in thousands): 

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Table of Contents

 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2018
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 
17,564

 

 
17,564

Interest rate swap agreements - liabilities (b)

 
(1,139
)
 

 
(1,139
)
Total
$

 
16,425

 

 
16,425

December 31, 2017
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 
7,058

 

 
7,058

Interest rate swap agreements - liabilities (b)

 
(13,817
)
 

 
(13,817
)
Total
$

 
(6,759
)
 

 
(6,759
)
 
(a)
Included in non-current Other assets on the condensed consolidated balance sheets.
(b)
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):
 
September 30, 2018
 
December 31, 2017
Long term debt, including current portion:
 
 
 
Carrying value
$
1,806,119

 
1,718,297

Fair value (a)
1,652,125

 
1,645,616

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


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Table of Contents

(10)    Accumulated Other Comprehensive Income (Loss)
 
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the period presented (amounts in thousands):
 
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 statement of operations.  See note 8, Derivatives, for further information.
 
(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) of 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 Brinks Home Security 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 is actively seeking to recover the Settlement Amount under its insurance policies held with multiple carriers.  On November 1, 2018, we settled our claim against one such carrier in which the carrier agreed to pay us $9,750,000 in the fourth quarter of 2018.  This amount will be recognized in the consolidated statement of operations at such time.  We continue to seek to recover additional funds under our insurance policies from the remaining carriers.

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 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.

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Table of Contents

Other Legal Proceedings

On August 27, 2018, holders purporting to own approximately 68% of Ascent Capital's 4.00% Convertible Senior Notes due 2020 (the "Convertible Notes") filed a complaint in the Court of Chancery in the State of Delaware against Ascent Capital and each of its directors and executive officers.

On September 5, 2018, holders purporting to own approximately 69% of the Convertible Notes filed an amended complaint in the Court of Chancery of the State of Delaware against Ascent Capital and each of its directors and executive officers, and a motion for a preliminary injunction seeking to prevent Ascent Capital from consummating the exchange offer related to the Senior Notes of Brinks Home Security announced by Ascent Capital and Brinks Home Security on August 30, 2018.

On October 1, 2018, holders purporting to own approximately 78% of the Convertible Notes filed a second amended complaint in the Court of Chancery of the State of Delaware against Ascent Capital and each of its directors and executive officers, and an amended motion for a preliminary injunction seeking to prevent Ascent Capital from consummating the transactions announced by Ascent Capital and Brinks Home Security on September 25, 2018.

On October 22, 2018, the Court of Chancery of the State of Delaware entered a Third Scheduling Order Governing Plaintiffs’ Motion for Preliminary Injunction (“the Scheduling Order”). The Scheduling Order provides, among other things, that the preliminary injunction hearing will be held on December 5, 2018.

On November 2, 2018, holders purporting to own approximately 53% of the Convertible Notes (the “Plaintiffs”) filed a third amended complaint (the “Third Amended Complaint”) in the Court of Chancery of the State of Delaware against Ascent Capital and each of its directors and executive officers. The Third Amended Complaint alleges that Ascent Capital’s participation in the transactions announced by Ascent Capital and Brinks Home Security on October 30, 2018 (the “October 30th Transactions”) would be detrimental to Ascent Capital and, if consummated, would result in Ascent Capital becoming insolvent. The Third Amended Complaint further alleges that the October 30th Transactions would (i) result in a breach of Ascent Capital’s directors’ fiduciary duties to Ascent Capital and (ii) constitute a constructive or intentional fraudulent transfer by using assets of Ascent Capital necessary for the repayment of the Notes for other purposes. The Third Amended Complaint seeks (i) injunctive relief to prevent Ascent Capital from engaging in the October 30th Transactions, which would allegedly dissipate Ascent Capital’s assets, and (ii) a declaratory judgment that approval of the October 30th Transactions constitutes a breach of fiduciary duty by Ascent Capital’s directors and that consummation of the October 30th Transactions would constitute a fraudulent transfer by Ascent Capital. Also on November 2, 2018, the Plaintiffs filed an amended motion for a preliminary injunction seeking to prevent Ascent Capital from consummating the October 30th Transactions.

The Third Amended Complaint could be amended, or similar claims could be brought, challenging the October 30th Transactions, and we cannot assure you that such claims will be unsuccessful, will not require us to pay damages (including costs and expenses of the action) or will not have a material effect on any such October 30th Transactions. Ascent Capital believes that the claims in the Third Amended Complaint are meritless, and Ascent Capital intends to vigorously defend against this action.

(12)    Consolidating Guarantor Financial Information

The Senior Notes were issued by Brinks Home Security (the “Parent Issuer”) and are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s existing domestic subsidiaries (“Subsidiary Guarantors”). Ascent Capital has not guaranteed any of the Company’s obligations under the Senior Notes. The unaudited condensed consolidating financial information for the Parent Issuer, the Subsidiary Guarantors and the non-guarantors are as follows:


20

Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of September 30, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
26,614

 
221

 

 

 
26,835

Restricted cash
133

 

 

 

 
133

Trade receivables, net
12,346

 
816

 

 

 
13,162

Prepaid and other current assets
112,574

 
3,728

 

 
(89,508
)
 
26,794

Total current assets
151,667

 
4,765

 

 
(89,508
)
 
66,924

 
 
 
 
 
 
 
 
 
 
Property and equipment, net
34,656

 
1,897

 

 

 
36,553

Subscriber accounts and deferred contract acquisition costs, net
1,180,162

 
35,669

 

 

 
1,215,831

Dealer network and other intangible assets, net

 

 

 

 

Goodwill
313,102

 
36,047

 

 

 
349,149

Other assets, net
36,778

 
34

 

 

 
36,812

Total assets
$
1,716,365

 
78,412

 

 
(89,508
)
 
1,705,269

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's (Deficit) Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
9,874

 
1,762

 

 

 
11,636

Accrued payroll and related liabilities
5,180

 
955

 

 

 
6,135

Other accrued liabilities
38,408

 
91,389

 

 
(89,508
)
 
40,289

Deferred revenue
10,330

 
1,739

 

 

 
12,069

Holdback liability
10,580

 
186

 

 

 
10,766

Current portion of long-term debt
11,000

 

 

 

 
11,000

Total current liabilities
85,372

 
96,031

 

 
(89,508
)
 
91,895

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,795,119

 

 

 

 
1,795,119

Long-term holdback liability
2,031

 

 

 

 
2,031

Derivative financial instruments
1,139

 

 

 

 
1,139

Deferred income tax liability, net
13,254

 
2,037

 

 

 
15,291

Other liabilities
22,357

 

 

 
(19,656
)
 
2,701

Total liabilities
1,919,272

 
98,068

 

 
(109,164
)
 
1,908,176

 
 
 
 
 
 
 
 
 
 
Total stockholder's (deficit) equity
(202,907
)
 
(19,656
)
 

 
19,656

 
(202,907
)
Total liabilities and stockholder's (deficit) equity
$
1,716,365

 
78,412

 

 
(89,508
)
 
1,705,269


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Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of December 31, 2017
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,705

 
597

 

 

 
3,302

Trade receivables, net
12,082

 
563

 

 

 
12,645

Prepaid and other current assets
74,613

 
2,396

 

 
(66,341
)
 
10,668

Total current assets
89,400

 
3,556

 

 
(66,341
)
 
26,615

 
 
 
 
 
 
 
 
 
 
Investment in subsidiaries
4,554

 

 

 
(4,554
)
 

Property and equipment, net
30,727

 
2,062

 

 

 
32,789

Subscriber accounts and deferred contract acquisition costs, net
1,265,519

 
36,509

 

 

 
1,302,028

Dealer network and other intangible assets, net
6,063

 
931

 

 

 
6,994

Goodwill
527,191

 
36,358

 

 

 
563,549

Other assets, net
9,311

 
29

 

 

 
9,340

Total assets
$
1,932,765

 
79,445

 

 
(70,895
)
 
1,941,315

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
9,705

 
1,368

 

 

 
11,073

Accrued payroll and related liabilities
2,648

 
810

 

 

 
3,458

Other accrued liabilities
47,800

 
68,567

 

 
(66,341
)
 
50,026

Deferred revenue
12,332

 
1,539

 

 

 
13,871

Holdback liability
9,035

 
274

 

 

 
9,309

Current portion of long-term debt
11,000

 

 

 

 
11,000

Total current liabilities
92,520

 
72,558

 

 
(66,341
)
 
98,737

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
1,707,297

 

 

 

 
1,707,297

Long-term holdback liability
2,658

 

 

 

 
2,658

Derivative financial instruments
13,491

 

 

 

 
13,491

Deferred income tax liability, net
11,684

 
1,620

 

 

 
13,304

Other liabilities
2,379

 
713

 

 

 
3,092

Total liabilities
1,830,029

 
74,891

 

 
(66,341
)
 
1,838,579

 
 
 
 
 
 
 
 
 
 
Total stockholder's equity
102,736

 
4,554

 

 
(4,554
)
 
102,736

Total liabilities and stockholder's equity
$
1,932,765

 
79,445

 

 
(70,895
)
 
1,941,315


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Table of Contents

MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
(unaudited)

 
Three Months Ended September 30, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
128,320

 
8,836

 

 

 
137,156

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

 
 
Cost of services
28,801

 
6,258

 

 

 
35,059

Selling, general, and administrative, including stock-based compensation
23,095

 
11,171

 

 

 
34,266

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
51,172

 
1,499

 

 

 
52,671

Depreciation
2,640

 
240

 

 

 
2,880

Loss on goodwill impairment

 

 

 

 

 
105,708

 
19,168

 

 

 
124,876

Operating income (loss)
22,612

 
(10,332
)
 

 

 
12,280

Other expense:
 

 
 

 
 

 
 

 
 

Equity in loss of subsidiaries
10,515

 

 

 
(10,515
)
 

Interest expense
39,077

 

 

 

 
39,077

Refinancing expense
5,697

 

 

 

 
5,697

 
55,289

 

 

 
(10,515
)
 
44,774

Loss before income taxes
(32,677
)
 
(10,332
)
 

 
10,515

 
(32,494
)
Income tax expense
1,163

 
183

 

 

 
1,346

Net loss
(33,840
)
 
(10,515
)
 

 
10,515

 
(33,840
)
Other comprehensive income (loss):