Quarterly report pursuant to Section 13 or 15(d)

Revenue Recognition

v3.10.0.1
Revenue Recognition
6 Months Ended
Jun. 30, 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Alarm monitoring revenue
$
124,844

 
136,453

 
$
249,685

 
273,343

Product and installation revenue
9,477

 
3,136

 
17,624

 
6,430

Other revenue
692

 
909

 
1,457

 
1,925

Total Net revenue
$
135,013

 
140,498

 
$
268,766

 
281,698



Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
June 30, 2018
 
At adoption
Trade receivables, net
$
12,456

 
12,645

Contract assets, net - current portion (a)
13,528

 
14,197

Contract assets, net - long-term portion (b)
12,908

 
10,377

Deferred revenue
12,965

 
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.

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 six months ended June 30, 2018 (in thousands):

i. Condensed consolidated balance sheets
 
Impact of changes in accounting policies
 
As reported
June 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
2,103

 

 
2,103

Restricted cash
104

 

 
104

Trade receivables, net of allowance for doubtful accounts
12,456

 

 
12,456

Prepaid and other current assets
22,959

 
(13,528
)
 
9,431

Total current assets
37,622

 
(13,528
)
 
24,094

Property and equipment, net of accumulated depreciation
36,582

 

 
36,582

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization
1,222,485

 
47,452

 
1,269,937

Dealer network and other intangible assets, net of accumulated amortization
1,213

 

 
1,213

Goodwill
349,149

 

 
349,149

Other assets, net
31,699

 
(12,908
)
 
18,791

Total assets
$
1,678,750

 
21,016

 
1,699,766

Liabilities and Stockholder’s (Deficit) Equity
 

 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
12,730

 

 
12,730

Accrued payroll and related liabilities
4,934

 

 
4,934

Other accrued liabilities
51,911

 

 
51,911

Deferred revenue
12,965

 
1,302

 
14,267

Holdback liability
9,740

 

 
9,740

Current portion of long-term debt
11,000

 

 
11,000

Total current liabilities
103,280

 
1,302

 
104,582

Non-current liabilities:
 

 
 
 
 
Long-term debt
1,720,235

 

 
1,720,235

Long-term holdback liability
2,031

 

 
2,031

Derivative financial instruments
3,313

 

 
3,313

Deferred income tax liability, net
14,628

 

 
14,628

Other liabilities
2,958

 

 
2,958

Total liabilities
1,846,445

 
1,302

 
1,847,747

Commitments and contingencies


 

 

Stockholder’s (deficit) equity:
 
 
 
 
 
Common stock

 

 

Additional paid-in capital
444,691

 

 
444,691

Accumulated deficit
(625,543
)
 
19,714

 
(605,829
)
Accumulated other comprehensive income, net
13,157

 

 
13,157

Total stockholder’s (deficit) equity
(167,695
)
 
19,714

 
(147,981
)
Total liabilities and stockholder’s (deficit) equity
$
1,678,750

 
21,016

 
1,699,766


ii. Condensed consolidated statements of operations and comprehensive income (loss)
 
Impact of changes in accounting policies
 
As reported
three months ended
June 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Net revenue
$
135,013

 
(2,445
)
 
132,568

Operating expenses:
 
 
 
 
 
Cost of services
33,047

 
(1,596
)
 
31,451

Selling, general and administrative, including stock-based and long-term incentive compensation
32,655

 
(30
)
 
32,625

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
53,891

 
1,880

 
55,771

Depreciation
2,865

 

 
2,865

Loss on goodwill impairment
214,400

 

 
214,400

 
336,858

 
254

 
337,112

Operating loss
(201,845
)
 
(2,699
)
 
(204,544
)
Other expense:
 
 
 
 
 
Interest expense
38,600

 

 
38,600

 
38,600

 

 
38,600

Loss before income taxes
(240,445
)
 
(2,699
)
 
(243,144
)
Income tax expense
1,347

 

 
1,347

Net loss
(241,792
)
 
(2,699
)
 
(244,491
)
Other comprehensive income (loss):
 
 
 
 
 
Unrealized gain on derivative contracts, net
5,521

 

 
5,521

Total other comprehensive income, net of tax
5,521

 

 
5,521

Comprehensive loss
$
(236,271
)
 
(2,699
)
 
(238,970
)


 
Impact of changes in accounting policies
 
As reported
six months ended
June 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Net revenue
$
268,766

 
(2,770
)
 
265,996

Operating expenses:
 
 
 
 
 
Cost of services
65,748

 
(3,518
)
 
62,230

Selling, general and administrative, including stock-based and long-term incentive compensation
64,669

 
(9
)
 
64,660

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
108,302

 
3,763

 
112,065

Depreciation
5,480

 

 
5,480

Loss on goodwill impairment
214,400

 

 
214,400

 
458,599

 
236

 
458,835

Operating loss
(189,833
)
 
(3,006
)
 
(192,839
)
Other expense:
 
 
 
 
 
Interest expense
75,473

 

 
75,473

 
75,473

 

 
75,473

Loss before income taxes
(265,306
)
 
(3,006
)
 
(268,312
)
Income tax expense
2,693

 

 
2,693

Net loss
(267,999
)
 
(3,006
)
 
(271,005
)
Other comprehensive income (loss):
 

 
 
 
 
Unrealized gain on derivative contracts, net
19,927

 

 
19,927

Total other comprehensive income, net of tax
19,927

 

 
19,927

Comprehensive loss
$
(248,072
)
 
(3,006
)
 
(251,078
)

iii. Condensed consolidated statements of cash flows
 
Impact of changes in accounting policies
 
As reported
six months ended
June 30, 2018
 
Adjustments
 
Balances without adoption of Topic 606
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(267,999
)
 
(3,006
)
 
(271,005
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
108,302

 
3,763

 
112,065

Depreciation
5,480

 

 
5,480

Stock-based and long-term incentive compensation
406

 

 
406

Deferred income tax expense
1,324

 

 
1,324

Amortization of debt discount and deferred debt costs
3,613

 

 
3,613

Bad debt expense
5,623

 

 
5,623

Goodwill impairment
214,400

 

 
214,400

Other non-cash activity, net
1,463

 

 
1,463

Changes in assets and liabilities:
 
 
 
 
 
Trade receivables
(5,434
)
 

 
(5,434
)
Prepaid expenses and other assets
(2,276
)
 
3,164

 
888

Subscriber accounts - deferred contract acquisition costs
(2,586
)
 
89

 
(2,497
)
Payables and other liabilities
5,181

 
(783
)
 
4,398

Net cash provided by operating activities
67,497

 
3,227

 
70,724

Cash flows from investing activities:
 

 
 
 
 
Capital expenditures
(8,928
)
 

 
(8,928
)
Cost of subscriber accounts acquired
(69,695
)
 
(3,227
)
 
(72,922
)
Net cash used in investing activities
(78,623
)
 
(3,227
)
 
(81,850
)
Cash flows from financing activities:
 

 
 
 
 
Proceeds from long-term debt
105,300

 

 
105,300

Payments on long-term debt
(95,200
)
 

 
(95,200
)
Value of shares withheld for share-based compensation
(69
)
 

 
(69
)
Net cash provided by financing activities
10,031

 

 
10,031

Net decrease in cash, cash equivalents and restricted cash
(1,095
)
 

 
(1,095
)
Cash, cash equivalents and restricted cash at beginning of period
3,302

 

 
3,302

Cash, cash equivalents and restricted cash at end of period
$
2,207

 

 
2,207