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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, 2020
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 classTrading Symbol(s)Name of each exchange on which registered
NoneNoneNone
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, 2020 was 22,500,000 shares.


Table of Contents
TABLE OF CONTENTS
 
  Page
PART I — FINANCIAL INFORMATION
   
   
 
   
 
   
 
   
 
   
 
   
   
   
   
   
   
 

1

Table of Contents
Item 1.  Financial Statements (unaudited)
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
Successor Company
 September 30,
2020
December 31,
2019
Assets  
Current assets:  
Cash and cash equivalents$12,759 $14,763 
Restricted cash133 238 
Trade receivables, net of allowance for doubtful accounts of $2,759 in 2020 and $3,828 in 2019
10,854 12,083 
Inventories, net6,878 5,242 
Prepaid and other current assets20,387 19,953 
Total current assets51,011 52,279 
Property and equipment, net of accumulated depreciation of $13,796 in 2020 and $3,777 in 2019
41,516 42,096 
Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization of $208,387 in 2020 and $61,771 in 2019
1,089,198 1,064,311 
Dealer network and other intangible assets, net of accumulated amortization of $25,748 in 2020 and $7,922 in 2019
118,952 136,778 
Goodwill 81,943 
Deferred income tax asset, net684 684 
Operating lease right-of-use asset18,345 19,277 
Other assets18,651 21,944 
Total assets$1,338,357 $1,419,312 
Liabilities and Stockholders' Equity  
Current liabilities:  
Accounts payable$13,369 $16,869 
Other accrued liabilities45,806 24,954 
Deferred revenue11,065 12,008 
Holdback liability8,583 8,191 
Current portion of long-term debt8,225 8,225 
Total current liabilities87,048 70,247 
Non-current liabilities:  
Long-term debt979,550 978,219 
Long-term holdback liability1,761 2,183 
Operating lease liabilities15,648 16,195 
Other liabilities66,989 6,390 
Total liabilities1,150,996 1,073,234 
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued
  
Common stock, $0.01 par value. Authorized 45,000,000 shares; issued and outstanding 22,500,000 shares at both September 30, 2020 and December 31, 2019
225 225 
Additional paid-in capital379,175 379,175 
Accumulated deficit(189,779)(33,331)
Accumulated other comprehensive (loss) income, net(2,260)9 
Total stockholders' equity187,361 346,078 
Total liabilities and stockholders' equity$1,338,357 $1,419,312 
 See accompanying notes to condensed consolidated financial statements.
2

Table of Contents
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
(unaudited)
Successor CompanyPredecessor Company
 Three Months Ended September 30,Period from September 1, 2019 through September 30,Period from July 1, 2019 through August 31,
 202020192019
Net revenue$130,852 $36,289 $84,589 
Operating expenses:
Cost of services31,383 8,976 19,986 
Selling, general and administrative, including stock-based and long-term incentive compensation
31,572 11,390 20,980 
Radio conversion costs
5,612 825 931 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
57,240 17,302 32,508 
Depreciation3,459 925 1,073 
 129,266 39,418 75,478 
Operating income (loss)1,586 (3,129)9,111 
Other (income) expense:
Gain on restructuring and reorganization, net  (702,824)
Interest expense20,033 7,474 27,112 
 20,033 7,474 (675,712)
(Loss) income before income taxes(18,447)(10,603)684,823 
Income tax expense717 204438 
Net (loss) income(19,164)(10,807)684,385 
Other comprehensive loss:
Unrealized loss on derivative contracts, net(475)  
Total other comprehensive loss, net of tax(475)  
Comprehensive (loss) income$(19,639)$(10,807)$684,385 
Basic and diluted income per share:
Net loss$(0.85)$(0.48)$ 
 
See accompanying notes to condensed consolidated financial statements.

3

Table of Contents
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
(unaudited)
Successor CompanyPredecessor Company
 Nine Months Ended September 30,Period from September 1, 2019 through September 30,Period from January 1, 2019 through August 31,
 202020192019
Net revenue$374,235 $36,289 $342,286 
Operating expenses:
Cost of services87,017 8,976 75,286 
Selling, general and administrative, including stock-based and long-term incentive compensation
108,566 11,390 80,365 
Radio conversion costs
14,103 825 931 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
164,889 17,302 130,791 
Depreciation10,019 925 7,348 
Goodwill impairment81,943   
 466,537 39,418 294,721 
Operating (loss) income(92,302)(3,129)47,565 
Other (income) expense:
Gain on restructuring and reorganization, net  (669,722)
Interest expense60,582 7,474 105,081 
Realized and unrealized loss, net on derivative financial instruments
  6,804 
Refinancing expense  5,214 
 60,582 7,474 (552,623)
(Loss) income before income taxes(152,884)(10,603)600,188 
Income tax expense1,937 2041,775 
Net (loss) income(154,821)(10,807)598,413 
Other comprehensive loss:
Unrealized loss on derivative contracts, net(2,269) (940)
Total other comprehensive loss, net of tax(2,269) (940)
Comprehensive (loss) income$(157,090)$(10,807)$597,473 
Basic and diluted income per share:
Net loss$(6.88)$(0.48)$ 
 
See accompanying notes to condensed consolidated financial statements.
4

Table of Contents
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
Successor CompanyPredecessor Company
Nine Months Ended September 30,Period from September 1, 2019 through September 30,Period from January 1, 2019 through August 31,
202020192019
Cash flows from operating activities:
Net (loss) income$(154,821)$(10,807)$598,413 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets164,889 17,302 130,791 
Depreciation10,019 925 7,348 
Stock-based and long-term incentive compensation722 26 912 
Gain on restructuring and reorganization, net  (705,559)
Unrealized loss on derivative financial instruments, net  4,577 
Refinancing expense  5,214 
Trade bad debt expense6,567 912 7,558 
Goodwill impairment81,943   
Other non-cash activity, net2,867 117 (462)
Changes in assets and liabilities:
Trade receivables(5,338)(1,183)(6,271)
Inventories(1,636)(943)(188)
Prepaid expenses and other assets(4,554)207 2,948 
Subscriber accounts - deferred contract acquisition costs(1,904)(162)(2,193)
Payables and other liabilities(6,357)6,776 36,690 
Net cash provided by operating activities92,397 13,170 79,778 
Cash flows from investing activities: 
Capital expenditures(10,530)(1,123)(7,100)
Cost of subscriber accounts acquired(84,253)(8,012)(83,814)
Net cash used in investing activities(94,783)(9,135)(90,914)
Cash flows from financing activities:
Proceeds from long-term debt65,000 5,000 253,100 
Payments on long-term debt(63,669)(5,000)(379,666)
Payments of earnout liability(1,054)  
Proceeds from equity rights offering  161,497 
Cash contributed by Ascent Capital  24,139 
Payments of restructuring and reorganization costs  (13,249)
Payments of refinancing costs  (7,404)
Value of shares withheld for share-based compensation  (18)
Dividend to Ascent Capital  (5,000)
Net cash provided by financing activities277  33,399 
Net (decrease) increase in cash, cash equivalents and restricted cash(2,109)4,035 22,263 
Cash, cash equivalents and restricted cash at beginning of period15,001 24,640 2,377 
Cash, cash equivalents and restricted cash at end of period$12,892 $28,675 $24,640 
 
See accompanying notes to condensed consolidated financial statements.
5

Table of Contents
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Amounts in thousands, except share amounts
(unaudited)
Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
SharesAmount
Balance at December 31, 2019 (Successor)
22,500,000 $225 $379,175 $(33,331)$9 $346,078 
Adoption of ASU 2016-13
— — — (1,627)— (1,627)
Adjusted balance at January 1, 2020 (Successor)
22,500,000 $225 $379,175 $(34,958)$9 $344,451 
Net loss— — — (114,005)— (114,005)
Other comprehensive loss— — — — (1,813)(1,813)
Balance at March 31, 2020 (Successor)
22,500,000 $225 $379,175 $(148,963)$(1,804)$228,633 
Net loss— — — (21,652)— (21,652)
Other comprehensive income— — — — 19 19 
Balance at June 30, 2020 (Successor)
22,500,000 $225 $379,175 $(170,615)$(1,785)$207,000 
Net loss— — — (19,164)— (19,164)
Other comprehensive loss— — — — (475)(475)
Balance at September 30, 2020 (Successor)22,500,000 $225 $379,175 $(189,779)$(2,260)$187,361 

6

Table of Contents
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Amounts in thousands, except share amounts
(unaudited)

 Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive
Income (Loss)
Total Stockholders' Equity (Deficit)
 SharesAmount
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 

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. We also periodically acquire alarm monitoring accounts from other alarm companies in bulk on a negotiated basis.

As previously disclosed, on June 30, 2019, Monitronics and certain of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (collectively, the "Petitions" and, the cases commenced thereby, the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). The Debtors' Chapter 11 Cases were jointly administered under the caption In re Monitronics International, Inc., et al., Case No. 19-33650. On August 7, 2019, the Bankruptcy Court entered an order, Docket No. 199 (the "Confirmation Order"), confirming and approving the Debtors' Joint Partial Prepackaged Plan of Reorganization (including all exhibits thereto and, as modified by the Confirmation Order, the "Plan") that was previously filed with the Bankruptcy Court on June 30, 2019. On August 30, 2019 (the "Effective Date"), the conditions to the effectiveness of the Plan were satisfied and the Company emerged from Chapter 11 after completing a series of transactions through which the Company and its former parent, Ascent Capital Group, Inc. ("Ascent Capital"), merged (the "Merger") in accordance with the terms of the Agreement and Plan of Merger, dated as of May 24, 2019 (the "Merger Agreement"). Monitronics was the surviving corporation and, immediately following the Merger, was redomiciled in Delaware in accordance with the terms of the Merger Agreement.

Upon emergence from Chapter 11 on the Effective Date, the Company has applied Accounting Standards Codification ("ASC") 852, Reorganizations, in preparing its condensed consolidated financial statements. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, a new entity for financial reporting purposes was created. The Company selected a convenience date of August 31, 2019 for purposes of applying fresh start accounting as the activity between the convenience date and the Effective Date did not result in a material difference in the financial results. References to "Successor" or "Successor Company" relate to the balance sheet and results of operations of Monitronics on and subsequent to September 1, 2019. References to "Predecessor" or "Predecessor Company" refer to the balance sheet and results of operations of Monitronics prior to September 1, 2019. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization. As such, references to the "Company" could refer to either the Predecessor or Successor periods, as defined.

The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s (the "SEC") Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The Company’s unaudited condensed consolidated balance sheet as of September 30, 2020, and the unaudited condensed statements of operations and cash flows of the Successor Company for the three and nine months ended September 30, 2020 and of the Predecessor Company for the three and nine months ended September 30, 2019, include the results of Monitronics and all of its direct and indirect subsidiaries. The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year, particularly when considering the risks and uncertainties associated with the COVID-19 pandemic and the impacts it may have on our financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Monitronics Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period. The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of subscriber accounts, deferred tax assets, goodwill and other indefinite-lived intangible assets. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including consideration of the potential impacts of the COVID-19 pandemic, and adjusts them when facts and circumstances change. Given the severity and the duration the COVID-19 pandemic is unknown, the potential impacts of the
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pandemic on Management's estimates is uncertain. Furthermore, as the effects of any future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.

Supplemental Cash Flow Information


Successor CompanyPredecessor Company
Nine Months Ended September 30,Period from September 1, 2019 through September 30,Period from January 1, 2019 through August 31,
202020192019
State taxes paid, net$2,532 $ $2,637 
Interest paid59,686 7,238 72,710 
Accrued capital expenditures713 1,471 1,405 
Earnout Payments liability84,799   

(2)          Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"), and related amendments, which replaces the incurred loss impairment methodology under prior GAAP with an expected credit loss model. ASU 2016-13 affects trade receivables, loans, contract assets, certain beneficial interests, off-balance sheet credit exposures not accounted for as insurance and other financial assets that are not subject to fair value through net income, as defined by the standard. Under the expected credit loss model, we are required to consider future economic trends to estimate expected credit losses over the lifetime of the asset. We adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach and recorded a $1,627,000 increase in Accumulated deficit and a reduction in Contract assets, net - current portion, which is included in Prepaid and other current assets in the unaudited condensed consolidated balance sheets, as an opening adjustment.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, and becomes effective on January 1, 2021. The adoption of the new guidance is not expected to have a material impact on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) ("ASU 2020-04"). ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. The guidance is optional and may be elected over time as reference rate reform activities occur. During the second quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

(3)          Goodwill

The following table provides the activity and balances of goodwill by reporting unit (amounts in thousands):
Brinks Home
Security
Balance at 12/31/2019$81,943 
Goodwill impairment(81,943)
Balance at 9/30/2020$ 

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The Company accounts for its goodwill pursuant to the provisions of FASB ASC Topic 350, Intangibles - Goodwill and Other ("ASC 350"). In accordance with ASC 350, goodwill is not amortized, but rather tested for impairment annually, or earlier if an event occurs, or circumstances change, that indicate the fair value of a reporting unit may be below its carrying amount.

As of March 31, 2020, the Company determined that a triggering event had occurred as a result of the recent economic disruption and uncertainty due to the COVID-19 pandemic. In response to the triggering event, the Company performed a quantitative impairment test at the Brinks Home Security entity level as we operate as a single reporting unit. The fair value of the Company's reporting unit was estimated based on a discounted cash flow model and market-based approach. Assumptions critical to our fair value estimate under the discounted cash flow model include the discount rate, projected average revenue growth and projected long-term growth rates in the determination of terminal values. The results of the quantitative assessment indicated that the carrying value was in excess of the fair value of the reporting unit, including goodwill. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. Applying this methodology, we recorded a full goodwill impairment charge of $81,943,000 during the nine months ended September 30, 2020. The factors leading to the goodwill impairment were lower projected overall account acquisition in future periods due to the estimated impact of COVID-19 on our account acquisition channels and an increase in the discount rate applied in the discounted cash flow model based on current economic conditions. This resulted in reductions in future cash flows and a lower fair value as calculated under the income approach.

(4)          Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands): 
 September 30,
2020
December 31,
2019
Accrued payroll and related liabilities$8,966 $5,908 
Interest payable258 291 
Income taxes payable2,046 2,603 
Operating lease liabilities3,441 3,725 
Contingent dealer liabilities2,591 3,274 
Earnout Payments liability21,786  
Other6,718 9,153 
Total Other accrued liabilities$45,806 $24,954 

(5)          Debt
 
Debt consisted of the following (amounts in thousands):
 September 30,
2020
December 31,
2019
Takeback Loan Facility, matures March 29, 2024, LIBOR plus 6.5%, subject to a LIBOR floor of 1.25%, with an effective rate of 8.0%
$814,275 $820,444 
Term Loan Facility, matures July 3, 2024, LIBOR plus 5.0%, subject to a LIBOR floor of 1.5%, with an effective rate of 6.7%
150,000 150,000 
Revolving Credit Facility, matures July 3, 2024, LIBOR plus 5.0%, subject to a LIBOR floor of 1.5%, or base rate (with a floor of 4.5%) plus 4.0%, with an effective rate of 9.0%
23,500 16,000 
 $987,775 $986,444 
Less: Current portion of long-term debt(8,225)(8,225)
Long-term debt$979,550 $978,219 

Takeback Loan Facility

On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into an $822,500,000 takeback term loan facility (the "Takeback Loan Facility") with the lenders party thereto, and Alter Domus (formerly known as Cortland Capital Market Services, LLC) as administrative agent. The Takeback Loan Facility requires quarterly interest payments and quarterly principal payments of $2,056,250, and matures on March 29, 2024. Interest on loans made under the Takeback Loan Facility accrues at an interest rate per year equal to the LIBOR rate (with a floor of 1.25%) plus 6.5% or base rate plus 5.5%. The
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Takeback Loan Facility, subject to certain exceptions, is guaranteed by each of the Company's existing and future domestic subsidiaries and is secured by substantially all the assets of the Company and such subsidiary guarantors. See note 13, Consolidating Guarantor Financial Information for further information. The Takeback Loan Facility contains customary representations, warranties, covenants and events of default and related remedies.

Credit Facilities

On the Effective Date, pursuant to the terms of the Plan, the Debtors entered into a $145,000,000 senior secured revolving credit facility (the "Revolving Credit Facility"), including a $10,000,000 swingline loan, and $150,000,000 in senior secured term loans (the "Term Loan Facility" and together with the Revolving Credit Facility, the "Credit Facilities") with the lenders party thereto, and Encina Private Credit SPV, LLC as administrative agent, swingline lender and L/C issuer. As of September 30, 2020, the Company had $600,000 available under a standby letter of credit issued. As of September 30, 2020, $120,900,000 is available for borrowing under the Revolving Credit Facility, subject to certain financial covenants.

The maturity date of loans made under the Credit Facilities is July 3, 2024, subject to a springing maturity of March 29, 2024, or earlier, depending on any repayment, refinancing or changes in the maturity date of the Takeback Loan Facility. Interest on loans made under the Credit Facilities accrues at an interest rate per year equal to the LIBOR rate (with a floor of 1.5%) plus 5.0% or base rate (with a floor of 4.5%) plus 4.0%, dependent upon the type of borrowing requested by the Company. There is a commitment fee of 0.75% on unused portions of the Revolving Credit Facility.

The Credit Facilities, subject to certain exceptions, are guaranteed by each of the Company's existing and future domestic subsidiaries and are secured by substantially all the assets of the Company and such subsidiary guarantors. See note 13, Consolidating Guarantor Financial Information for further information. The Credit Facilities contain customary representations, warranties, covenants and events of default and related remedies.

On June 17, 2020, the Company entered into Amendment No. 1 to the Takeback Loan Facility and Amendment No. 1 to the Credit Facilities (collectively, the "Credit Agreements"). The Amendments amended the applicable Credit Agreement to, among other things, (a) exclude earnouts, holdbacks, and similar payments (including the Earnout Payments) from consideration in the determination of the maximum amount of bulk purchases of alarm monitoring contracts permitted annually, (b) limit the recurring monthly revenue attributable to monitoring contracts with an active earnout, holdback or similar payment for the calculation of certain leverage ratios, (c) limit the annual amount permitted to be paid by the Company to buy out, accelerate, or settle any earnout, holdback or similar payments for future acquisitions structured similarly to the Acquisition prior to the original due date of such payments and (d) permit a board observer appointed by a majority of the lenders party to the Takeback Loan Facility to attend meetings of the board of directors of the Company.

The terms of the Takeback Loan Facility and the Credit Facilities provide for certain financial and nonfinancial covenants.  As of September 30, 2020, the Company was in compliance with all required covenants under these financing arrangements.

In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loan under the Takeback Loan Facility, the Company entered into an interest rate cap agreement. The critical terms of the interest rate cap agreement were designed to mirror the terms of the Takeback Loan Facility and are highly effective at offsetting the cash flows being hedged. See note 6, Derivatives for further disclosures related to the settlement of these derivative instruments.

As of September 30, 2020, principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
Remainder of 2020$2,056 
20218,225 
20228,225 
20238,225 
2024961,044 
2025 
Thereafter 
Total debt principal payments$987,775 


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(6)          Derivatives
 
Interest Rate Cap

In November of 2019, the Company entered into an interest rate cap agreement to reduce the interest rate risk inherent in the Company's variable rate Takeback Loan Facility. The interest rate cap agreement provides the right to receive cash if the reference interest rate rises above a contractual rate. The premium paid for the interest rate cap agreement was $3,020,000, which was the initial fair value of the interest rate cap recorded on the condensed consolidated balance sheets.

The critical terms of the interest rate cap were designed to mirror the terms of the Company's variable rate Takeback Loan Facility and are highly effective at offsetting the cash flows being hedged. The Company designated the interest rate cap as a cash flow hedge of the variability of the LIBOR-based interest payments on $750,000,000 of principal of the Takeback Loan Facility. The interest rate cap agreement will expire on December 31, 2023. The effective portion of the interest rate cap's change in fair value is recorded in Accumulated other comprehensive income (loss). Any ineffective portions of the interest rate cap's change in fair value are recognized in current earnings in Interest expense.

During the Successor Company three and nine months ended September 30, 2020, interest expense of $186,000 and $554,000, respectively, was reclassified from Accumulated other comprehensive income (loss) to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss). The Company expects to similarly reclassify approximately $737,000 from Accumulated other comprehensive income (loss) to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss) in the next twelve months.

The fair value of the interest rate cap was $137,000 at September 30, 2020, and constituted an asset of the Company. The fair value of the interest rate cap is included in non-current Other assets, net on the condensed consolidated balance sheets based on the maturity date of the derivative instrument. See note 7, Fair Value Measurements for related fair value disclosures.

Interest Rate Swaps

Historically, the Company entered into interest rate swap agreements (all interest rate swap agreements are collectively referred to as the "Swaps") to reduce the interest rate risk inherent in the Company's prior debt agreements.

Prior to December of 2018, all of the Swaps were designated and qualified as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive income (loss). However, in December of 2018, given the potential for changes in the Company's future expected interest payments that these Swaps hedged, all of the Swaps no longer qualified as a cash flow hedge and were de-designated as such. Before the de-designation, changes in the fair value of the Swaps were recognized in Accumulated other comprehensive income (loss) and were reclassified to Interest expense when the hedged interest payments on the underlying debt were recognized. After the de-designation, changes in the fair value of the Swaps are recognized in Unrealized loss on derivative financial instruments on the condensed consolidated statements of operations and comprehensive income (loss). For the Predecessor Company three months ended March 31, 2019, the Company recorded an Unrealized loss on derivative financial instruments of $7,773,000. On April 30, 2019, the various counterparties and the Company agreed to settle and terminate all of the outstanding interest rate swap agreements, which required us to pay $8,767,000 in termination amount to certain counterparties and required a certain counterparty to pay $6,540,000 in termination amount to us, resulting in a Realized net loss on derivative financial instruments of $2,227,000. There are no Swaps outstanding as of September 30, 2020.

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The impact of the derivatives on the condensed consolidated financial statements is depicted below (amounts in thousands):
Successor CompanyPredecessor Company
Three Months Ended September 30,Period from September 1, 2019 through September 30,Period from July 1, 2019 through August 31,
202020192019
Effective portion of loss recognized in Accumulated other comprehensive income (loss)
$(661)$ $ 
Interest cost of interest rate cap reclassified into Net loss (a)
$186 $ $ 

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

Successor CompanyPredecessor Company
Nine Months Ended September 30,Period from September 1, 2019 through September 30,Period from January 1, 2019 through August 31,
202020192019
Effective portion of loss recognized in Accumulated other comprehensive income (loss)
$(2,823)$ $ 
Interest cost of interest rate cap reclassified into Net loss (b)
$554 $ $ 
Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net income (loss) (b)
$ $ $(940)

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

(7)          Fair Value Measurements
 
According to the FASB ASC Topic 820, Fair Value Measurement, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:

Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active or inactive markets and valuations derived from models where all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable in any market.

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The following summarizes the fair value level of assets that are measured on a recurring basis at September 30, 2020 and December 31, 2019 (amounts in thousands): 
 Level 1Level 2Level 3Total
September 30, 2020
Interest rate cap agreement - assets (a)$ $137 $ $137 
Total$ $137 $ $137 
December 31, 2019
Interest rate cap agreement - assets (a)$ $2,959 $ $2,959 
Total$ $2,959 $ $2,959 

(a)   Interest rate cap asset value is included in non-current Other assets on the condensed consolidated balance sheets.
 
The Company has determined that the significant inputs used to value the interest rate cap fall within Level 2 of the fair value hierarchy.  As a result, the Company has determined that its interest rate cap valuation is classified in Level 2 of the fair value hierarchy.
 
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
 September 30, 2020December 31, 2019
Long term debt, including current portion:
Carrying value$987,775 $986,444 
Fair value (a)$784,206 $857,717 

(a)  The fair value is based on market quotations from third party financial institutions and is classified as Level 2 in the hierarchy.
 
The Company’s other financial instruments', including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and contingent dealer liabilities, carrying values approximate their fair values because of their nature.

(8)          Stockholders' Equity

Common Stock

The Company had 22,500,000 issued and outstanding shares of Common Stock, par value $0.01 per share ("Common Stock") as of both September 30, 2020 and December 31, 2019.

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Accumulated Other Comprehensive Income (Loss)

The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 (amounts in thousands):
Successor Company
 Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2019$9 
Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0
(1,997)
Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (a)
184 
Balance at March 31, 2020$(1,804)
Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0
(165)
Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (a)
184 
Balance at June 30, 2020$(1,785)
Unrealized loss on interest rate cap recognized through Accumulated other comprehensive income (loss), net of income tax of $0
(661)
Interest cost of interest rate cap reclassified into Net loss, net of income tax of $0 (a)
186 
Balance at September 30, 2020$(2,260)

(a)  Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations.  See note 6, Derivatives for further information.

The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the period January 1, 2019 through August 31, 2019 (amounts in thousands):
Predecessor Company
 Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2018$7,608 
Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
(468)
Balance at March 31, 2019$7,140 
Reclassifications of unrealized loss on derivatives into Net loss, net of income tax of $0 (a)
(472)
Balance at June 30, 2019$6,668 
Fresh start adjustment (b)(6,668)
Balance at August 31, 2019$ 

(a)  Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations.  See note 6, Derivatives for further information.
(b)  The remaining amount recognized in Accumulated other comprehensive income (loss) was evaluated to have no fair value upon the application of fresh start accounting pursuant to the Plan.

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Incentive Award Plan

On August 3, 2020, the Board of Directors (the "Board") adopted the Monitronics International, Inc. 2020 Incentive Award Plan (the "Plan"), pursuant to which the company may grant cash, equity and equity-based incentive awards to eligible service providers. The Plan provides for the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents and other stock or cash-based awards (collectively, "awards"). Non-employee directors of the Company, as well as employees and consultants of the Company or its subsidiaries (collectively, "participants") are eligible to receive awards under the Plan. The Plan authorizes the issuance of 2,500,000 shares of common stock.

Through September 30, 2020, and pursuant to the Plan, the company granted a total of 994,000 Performance-Based Restricted Stock Unit awards ("PRSUs") and a total of 426,000 Time-Based Restricted Stock Unit awards ("TRSUs") covering shares of common stock to certain of the company's directors, executives and senior leadership employees. Each RSU represents a contractual right to receive one share of the company’s common stock upon becoming fully vested and payable subject to the terms and conditions of the respective award agreement. Both the PRSUs and the TRSUs are subject to performance condition such that the awards are not payable unless there is a change in control of the company. Because a change in control is not probable of occurring as of the reporting date, no compensation expense has been recognized for either the PRSUs or the TRSUs for the three and nine months ended September 30, 2020.

(9)          Basic and Diluted Earnings Per Common Share

Basic earnings per common share ("EPS") is computed by dividing net income by the weighted average number of shares of Common Stock outstanding for the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of shares of Common Stock outstanding and the effect of dilutive securities. For the Successor Company three and nine months ended September 30, 2020, there were no anti-dilutive securities outstanding. For the Predecessor Company period from September 1, 2019 through September 30, 2019, there were no anti-dilutive securities outstanding. The weighted average number of basic and diluted shares of Common Stock was 22,500,000 for the Successor Company three and nine months ended September 30, 2020. The weighted average number of basic and dilutive shares of Common Stock was 22,500,000 for the Predecessor Company period from September 1, 2019 through September 30, 2019. There were no public shares of Common Stock outstanding during the Predecessor Company period January 1, 2019 through August 31, 2019 as Monitronics was wholly-owned by Ascent Capital.

(10)        Commitments, Contingencies and Other Liabilities
 
The Company is involved in litigation and similar claims incidental to the conduct of its business. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management's estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In management's opinion, none of the pending actions are likely to have a material adverse impact on the Company's financial position or results of operations. The Company accrues and expenses legal fees related to loss contingency matters as incurred.

Asset Purchase Agreement

On June 17, 2020, the Company acquired certain contracts for the provision of alarm monitoring and related services (the "Accounts") as well as the related accounts receivable, intellectual property and equipment inventory of Protect America, Inc. The Company paid approximately $16,600,000 at closing and will make 50 subsequent monthly payments ("Earnout Payments") consisting of a portion of the revenue attributable to the Accounts, subject to adjustment for Accounts that are no longer active. The transaction was accounted for as an asset acquisition with the cost of the assets acquired recorded as of June 17, 2020 and an estimated liability for the Earnout Payments of approximately $86,000,000. The Earnout Payments liability was estimated based on the terms of the payout and the forecasted attrition of the Protect America subscriber base. The current portion of the Earnout Payments liability is included in current Other accrued liabilities on the condensed consolidated balance sheets and the long-term portion of the Earnout Payments is included in non-current Other liabilities on the condensed consolidated balance sheets. The monthly Earnout Payments are classified as Cash flows from financing activities on the condensed consolidated statements of cash flows.


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(11)        Revenue Recognition

Disaggregation of Revenue

Revenue is disaggregated by source of revenue as follows (in thousands):
Successor CompanyPredecessor Company
Three Months Ended September 30,Period from September 1, 2019 through September 30,Period from July 1, 2019 through August 31,
202020192019
Alarm monitoring revenue$119,164 $33,594 $78,608 
Product, installation and service revenue10,506 2,224 4,993 
Other revenue1,182 471 988 
Total Net revenue$130,852 $36,289 $84,589 

Successor CompanyPredecessor Company
Nine Months Ended September 30,Period from September 1, 2019 through September 30,Period from January 1, 2019 through August 31,
202020192019
Alarm monitoring revenue$340,235 $33,594 $319,172 
Product, installation and service revenue30,513 2,224 19,111 
Other revenue3,487 471 4,003 
Total Net revenue$374,235 $36,289 $342,286 

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
September 30,
2020
December 31,
2019
Trade receivables, net$10,854 $12,083 
Contract assets, net - current portion (a)$13,490 $12,070 
Contract assets, net - long-term portion (b)$14,827 $14,852 
Deferred revenue$11,065 $12,008 

(a)  Amount is included in Prepaid and other current assets in the unaudited condensed consolidated balance sheets.
(b)  Amount is included in Other assets in the unaudited condensed consolidated balance sheets.

(12)        Leases

The Company primarily leases buildings and equipment. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Certain real estate leases contain lease and non-lease components, which are accounted for separately.

Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.

All of the Company's leases are currently determined to be operating leases.

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Components of Lease Expense

The components of lease expense were as follows (in thousands):
Successor CompanyPredecessor Company
Three Months Ended September 30,Period from September 1, 2019 through September 30,Period from July 1, 2019 through August 31,
202020192019
Operating lease cost (a)$178 $34 $70 
Operating lease cost (b)860 320 624 
Total operating lease cost$1,038