Quarterly report pursuant to Section 13 or 15(d)

Revenue Recognition

v3.8.0.1
Revenue Recognition
3 Months Ended
Mar. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue Recognition
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 its direct-to-consumer sales channel. The Company also offers equipment sales and installation services and, to its 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 
 March 31,
 
2018
 
2017
Alarm monitoring revenue
$
124,840

 
136,891

Product and installation revenue
8,147

 
3,294

Other revenue
766

 
1,015

Total Net revenue
$
133,753

 
141,200



Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
March 31, 2018
 
At adoption
Trade receivables, net
$
12,300

 
12,645

Contract assets, net - current portion (a)
13,543

 
14,197

Contract assets, net - long-term portion (b)
11,101

 
10,377

Deferred revenue
13,477

 
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 will be 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.

The following tables summarize the impacts of adopting Topic 606 on the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2018 (in thousands):

i. Condensed consolidated balance sheets
 
Impact of changes in accounting policies
 
As reported
March 31, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
27,901

 

 
27,901

Restricted cash
93

 

 
93

Trade receivables, net of allowance for doubtful accounts
12,300

 

 
12,300

Prepaid and other current assets
23,193

 
(13,543
)
 
9,650

Total current assets
63,487

 
(13,543
)
 
49,944

Property and equipment, net of accumulated depreciation
34,043

 

 
34,043

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization
1,224,937

 
48,249

 
1,273,186

Dealer network and other intangible assets, net of accumulated amortization
3,941

 

 
3,941

Goodwill
563,549

 

 
563,549

Other assets, net
27,627

 
(11,101
)
 
16,526

Total assets
$
1,917,584

 
23,605

 
1,941,189

Liabilities and Stockholder’s Equity
 

 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
12,858

 

 
12,858

Accrued payroll and related liabilities
5,556

 

 
5,556

Other accrued liabilities
61,728

 

 
61,728

Deferred revenue
13,477

 
1,192

 
14,669

Holdback liability
7,601

 

 
7,601

Current portion of long-term debt
11,000

 

 
11,000

Total current liabilities
112,220

 
1,192

 
113,412

Non-current liabilities:
 

 
 
 
 
Long-term debt
1,711,336

 

 
1,711,336

Long-term holdback liability
2,191

 

 
2,191

Derivative financial instruments
6,553

 

 
6,553

Deferred income tax liability, net
13,966

 

 
13,966

Other liabilities
3,098

 

 
3,098

Total liabilities
1,849,364

 
1,192

 
1,850,556

Commitments and contingencies


 

 

Stockholder’s equity:
 
 
 
 
 
Common stock

 

 

Additional paid-in capital
444,335

 

 
444,335

Accumulated deficit
(383,751
)
 
22,413

 
(361,338
)
Accumulated other comprehensive income, net
7,636

 

 
7,636

Total stockholder’s equity
68,220

 
22,413

 
90,633

Total liabilities and stockholder’s equity
$
1,917,584

 
23,605

 
1,941,189


ii. Condensed consolidated statements of operations and comprehensive income (loss)
 
Impact of changes in accounting policies
 
As reported three months ended
March 31, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Net revenue
$
133,753

 
(325
)
 
133,428

Operating expenses:
 

 
 
 
 
Cost of services
32,701

 
(1,922
)
 
30,779

Selling, general and administrative, including stock-based and long-term incentive compensation
32,014

 
21

 
32,035

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
54,411

 
1,883

 
56,294

Depreciation
2,615

 

 
2,615

 
121,741

 
(18
)
 
121,723

Operating income
12,012

 
(307
)
 
11,705

Other expense:
 

 
 
 
 
Interest expense
36,873

 

 
36,873

 
36,873

 

 
36,873

Loss before income taxes
(24,861
)
 
(307
)
 
(25,168
)
Income tax expense
1,346

 

 
1,346

Net loss
(26,207
)
 
(307
)
 
(26,514
)
Other comprehensive income (loss):
 

 
 
 
 
Unrealized gain on derivative contracts, net
14,406

 

 
14,406

Total other comprehensive income, net of tax
14,406

 

 
14,406

Comprehensive loss
$
(11,801
)
 
(307
)
 
(12,108
)

iii. Condensed consolidated statements of cash flows
 
Impact of changes in accounting policies
 
As reported three months ended
March 31, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(26,207
)
 
(307
)
 
(26,514
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
54,411

 
1,883

 
56,294

Depreciation
2,615

 

 
2,615

Stock-based and long-term incentive compensation
(12
)
 

 
(12
)
Deferred income tax expense
662

 

 
662

Amortization of debt discount and deferred debt costs
1,789

 

 
1,789

Bad debt expense
3,017

 

 
3,017

Other non-cash activity, net
(852
)
 

 
(852
)
Changes in assets and liabilities:
 
 
 
 
 
Trade receivables
(2,672
)
 

 
(2,672
)
Prepaid expenses and other assets
650

 

 
650

Contract asset, net
(70
)
 
70

 

Subscriber accounts - deferred contract acquisition costs
(898
)
 
63

 
(835
)
Payables and other liabilities
17,921

 
388

 
18,309

Net cash provided by operating activities
50,354

 
2,097

 
52,451

Cash flows from investing activities:
 

 
 
 
 
Capital expenditures
(3,310
)
 

 
(3,310
)
Cost of subscriber accounts acquired
(24,560
)
 
(2,097
)
 
(26,657
)
Increase in restricted cash
(93
)
 

 
(93
)
Net cash used in investing activities
(27,963
)
 
(2,097
)
 
(30,060
)
Cash flows from financing activities:
 

 
 
 
 
Proceeds from long-term debt
50,000

 

 
50,000

Payments on long-term debt
(47,750
)
 

 
(47,750
)
Value of shares withheld for share-based compensation
(42
)
 

 
(42
)
Net cash provided by financing activities
2,208

 

 
2,208

Net increase in cash and cash equivalents
24,599

 

 
24,599

Cash and cash equivalents at beginning of period
3,302

 

 
3,302

Cash and cash equivalents at end of period
$
27,901

 

 
27,901