Company Quick10K Filing
Quick10K
Monitronics International
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-09-13 Officers
8-K 2019-09-09 Officers
8-K 2019-09-09 Regulation FD, Exhibits
8-K 2019-08-30 Bankruptcy, Officers, Amend Bylaw, Exhibits
8-K 2019-08-30 Enter Agreement, Leave Agreement, M&A, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Control, Other Events, Exhibits
8-K 2019-08-26 Enter Agreement, Other Events, Exhibits
8-K 2019-08-08 Other Events, Exhibits
8-K 2019-08-07 Earnings, Other Events, Exhibits
8-K 2019-08-07 Bankruptcy, Other Events, Exhibits
8-K 2019-06-30 Bankruptcy, Off-BS Arrangement, Exhibits
8-K 2019-06-29 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-06-25 Regulation FD, Exhibits
8-K 2019-06-14 Enter Agreement, Exhibits
8-K 2019-06-04 Enter Agreement, Exhibits
8-K 2019-05-24 Enter Agreement, Control, Exhibits
8-K 2019-05-24 Regulation FD, Exhibits
8-K 2019-05-15 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-05-14 Earnings, Exhibits
8-K 2019-05-07 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-04-30 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-04-01 Earnings, Exhibits
8-K 2019-01-16 Regulation FD, Exhibits
8-K 2018-12-23 Leave Agreement, Shareholder Rights, Other Events, Exhibits
8-K 2018-12-11 Other Events, Exhibits
8-K 2018-11-20 Enter Agreement, Shareholder Rights, Other Events, Exhibits
8-K 2018-11-13 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-10-30 Regulation FD, Exhibits
8-K 2018-10-16 Enter Agreement, Exhibits
8-K 2018-09-24 Enter Agreement, Regulation FD, Exhibits
8-K 2018-09-14 Other Events, Exhibits
8-K 2018-09-05 Other Events
8-K 2018-08-30 Regulation FD, Exhibits
8-K 2018-08-27 Regulation FD
8-K 2018-08-27 Other Events
8-K 2018-08-17 Regulation FD
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-07-16 Regulation FD, Exhibits
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-04-30 Regulation FD, Exhibits
8-K 2018-03-01 Earnings, Exhibits
8-K 2018-02-26 Regulation FD, Exhibits
8-K 2018-02-16 Regulation FD, Exhibits
USO United States Oil Fund 1,403
NUVR Nuvera Communications 99
TBTC Table Trac 15
ACFN Acorn Energy 8
GIGL Giggles N' Hugs 3
BTHE Boston Therapeutics 1
ADGO Advantego 0
ALPP Alpine 4 Technologies 0
GALEM Galem Group 0
BENH Bio-En 0
MTII 2019-06-30
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 moniex311q22019.htm
EX-31.2 moniex312q22019.htm
EX-32 moniex32q22019.htm

Monitronics International Earnings 2019-06-30

MTII 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 moni2019q210-q.htm 10-Q Document

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 June 30, 2019
OR
o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to
 
Commission File Number 333-110025
 MONITRONICS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
State of 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 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
None
 
None
 
None
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ý  No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
As of August 7, 2019, Monitronics International, Inc. is a wholly owned subsidiary of Ascent Capital Group, Inc.



TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Item 1.  Financial Statements (unaudited)
MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-In-Possession)
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
 
June 30,
2019
 
December 31,
2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
11,495

 
2,188

Restricted cash
93

 
189

Trade receivables, net of allowance for doubtful accounts of $2,843 in 2019 and $3,759 in 2018
12,545

 
13,121

Prepaid and other current assets
28,226

 
28,178

Total current assets
52,359

 
43,676

Property and equipment, net of accumulated depreciation of $46,806 in 2019 and $40,531 in 2018
36,940

 
36,539

Subscriber accounts and deferred contract acquisition costs, net of accumulated amortization of $1,719,220 in 2019 and $1,621,242 in 2018
1,161,472

 
1,195,463

Deferred income tax asset, net
783

 
783

Operating lease right-of-use asset
19,521

 

Other assets
18,649

 
29,307

Total assets
$
1,289,724

 
1,305,768

Liabilities and Stockholder's Deficit
 

 
 

Current liabilities:
 

 
 

Accounts payable
$

 
12,099

Other accrued liabilities
3,795

 
31,085

Deferred revenue

 
13,060

Holdback liability

 
11,513

Current portion of long-term debt
181,400

 
1,816,450

Total current liabilities not subject to compromise
185,195

 
1,884,207

Non-current liabilities:
 

 
 

Long-term holdback liability

 
1,770

Derivative financial instruments

 
6,039

Operating lease liabilities
16,317

 

Other liabilities

 
2,727

Total liabilities not subject to compromise
201,512

 
1,894,743

Liabilities subject to compromise
1,767,076

 

Total liabilities
1,968,588

 
1,894,743

Commitments and contingencies


 


Stockholder's deficit:
 
 
 
Common stock, $.01 par value. 1,000 shares authorized, issued and outstanding both at June 30, 2019 and December 31, 2018

 

Additional paid-in capital
436,734

 
439,711

Accumulated deficit
(1,122,266
)
 
(1,036,294
)
Accumulated other comprehensive income, net
6,668

 
7,608

Total stockholder's deficit
(678,864
)
 
(588,975
)
Total liabilities and stockholder's deficit
$
1,289,724

 
1,305,768

 

See accompanying notes to condensed consolidated financial statements.

2


MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-In-Possession)
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Net revenue
$
128,091

 
135,013

 
$
257,697

 
268,766

Operating expenses:
 
 
 
 
 
 
 
Cost of services
28,536

 
33,047

 
55,300

 
65,748

Selling, general and administrative, including stock-based and long-term incentive compensation
28,163

 
32,655

 
59,385

 
64,669

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
49,138

 
53,891

 
98,283

 
108,302

Depreciation
3,121

 
2,865

 
6,275

 
5,480

Loss on goodwill impairment

 
214,400

 

 
214,400

 
108,958

 
336,858

 
219,243

 
458,599

Operating income (loss)
19,133

 
(201,845
)
 
38,454

 
(189,833
)
Other expense:
 
 
 
 
 
 
 
Restructuring and reorganization expense
33,102

 

 
33,102

 

Interest expense
40,536

 
38,600

 
77,969

 
75,473

Realized and unrealized (gain) loss, net on derivative financial instruments
(969
)
 

 
6,804

 

Refinancing expense

 

 
5,214

 

 
72,669

 
38,600

 
123,089

 
75,473

Loss before income taxes
(53,536
)
 
(240,445
)
 
(84,635
)
 
(265,306
)
Income tax expense
666

 
1,347

 
1,337

 
2,693

Net loss
(54,202
)
 
(241,792
)
 
(85,972
)
 
(267,999
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative contracts, net
(472
)
 
5,521

 
(940
)
 
19,927

Total other comprehensive income (loss), net of tax
(472
)
 
5,521

 
(940
)
 
19,927

Comprehensive loss
$
(54,674
)
 
(236,271
)
 
$
(86,912
)
 
(248,072
)
 
See accompanying notes to condensed consolidated financial statements.


3


MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-In-Possession)
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
 
Six Months Ended 
 June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(85,972
)
 
(267,999
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
98,283

 
108,302

Depreciation
6,275

 
5,480

Stock-based and long-term incentive compensation
466

 
406

Deferred income tax expense

 
1,324

Amortization of debt discount and deferred debt costs

 
3,613

Restructuring and reorganization expense
33,102

 

Unrealized loss on derivative financial instruments, net
4,577

 

Refinancing expense
5,214

 

Bad debt expense
5,903

 
5,623

Loss on goodwill impairment

 
214,400

Other non-cash activity, net
(545
)
 
1,463

Changes in assets and liabilities:
 
 
 
Trade receivables
(5,327
)
 
(5,434
)
Prepaid expenses and other assets
869

 
(2,276
)
Subscriber accounts - deferred contract acquisition costs
(1,781
)
 
(2,586
)
Payables and other liabilities
39,308

 
5,181

Net cash provided by operating activities
100,372

 
67,497

Cash flows from investing activities:
 

 
 

Capital expenditures
(6,767
)
 
(8,928
)
Cost of subscriber accounts acquired
(61,335
)
 
(69,695
)
Net cash used in investing activities
(68,102
)
 
(78,623
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
43,100

 
105,300

Payments on long-term debt
(18,400
)
 
(95,200
)
Payments of restructuring and reorganization costs
(35,352
)
 

Payments of refinancing costs
(7,404
)
 

Value of shares withheld for share-based compensation
(3
)
 
(69
)
Dividend to Ascent Capital
(5,000
)
 

Net cash provided by (used in) financing activities
(23,059
)
 
10,031

Net increase (decrease) in cash, cash equivalents and restricted cash
9,211

 
(1,095
)
Cash, cash equivalents and restricted cash at beginning of period
2,377

 
3,302

Cash, cash equivalents and restricted cash at end of period
$
11,588

 
2,207

Supplemental cash flow information:
 
 
 
State taxes paid, net
$
2,637

 
2,710

Interest paid
36,848

 
71,713

Accrued capital expenditures
461

 
616

 

See accompanying notes to condensed consolidated financial statements.

4


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

 
$

 
436,734

 
(1,122,266
)
 
6,668

 
$
(678,864
)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive
Income (Loss)
 
Total Stockholder’s Equity (Deficit)
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
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
)
 
See accompanying notes to condensed consolidated financial statements.

5


MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-In-Possession)
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) are wholly owned subsidiaries of Ascent Capital Group, Inc. ("Ascent Capital").  Monitronics 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.  Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel") or our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers. Our Direct to Consumer Channel offers both Do-It-Yourself and professional installation security solutions. As described in note 2, Bankruptcy, on June 30, 2019 (the "Petition Date"), Monitronics and certain of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (collectively, the "Petitions" and, the cases commenced thereby, the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). The Debtors' Chapter 11 Cases are being jointly administered under the caption In re Monitronics International, Inc., et al., Case No. 19-33650. The Debtors will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

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 June 30, 2019, and for the three and six months ended June 30, 2019 and 2018, include Monitronics and all of its direct and indirect subsidiaries. The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the Monitronics Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period.  The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of subscriber accounts and valuation of deferred tax assets. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.

Restructuring Support Agreement

On May 20, 2019, Monitronics entered into a Restructuring Support Agreement (the "RSA") with (i) holders of in excess of 66 2/3% in dollar amount of its 9.125% Senior Notes due 2020 (the "Senior Notes"), (ii) holders of in excess of 66 2/3% in dollar amount of term loans under that certain Credit Facility, dated as of March 23, 2012 (as amended, the "Credit Facility"), and (iii) Ascent, to support the restructuring of the capital structure of the Debtors on the terms set forth in the term sheet annexed to the RSA (the "Restructuring Term Sheet"). Under the terms of the RSA, up to approximately $685,000,000 of debt will be converted to equity, including up to approximately $585,000,000 aggregate principal amount of the Senior Notes and $100,000,000 aggregate principal amount of the Company’s term loan under the Credit Facility. The Company expects to also receive $200,000,000 in cash from a combination of an equity rights offering to the Company's noteholders and up to $23,000,000 of a deemed contribution of cash on hand through a merger with Ascent Capital (as discussed below). This cash will be used to, among other things, repay remaining term loan debt.

In accordance with the RSA, if, among other things, Ascent Capital receives approval from its stockholders and has a cash amount of greater than $20,000,000, net of all of its liabilities (as determined in good faith by Ascent Capital, Monitronics and certain of its noteholders) concurrently with the emergence of Monitronics from bankruptcy, Ascent Capital will merge with and into Monitronics, with Monitronics as the surviving company (the "Merger"). At the time of the Merger, all assets of Ascent Capital shall become assets of a "Reorganized" Monitronics and Ascent Capital stockholders will receive up to 5.82% of the outstanding shares of Reorganized Monitronics, depending on the final amount of cash Ascent Capital contributes, which

6


is capped at $23,000,000. If the Merger is not completed for any reason as noted in the RSA, then the restructuring of Monitronics will be completed without the participation of Ascent Capital and Ascent Capital's equity interests in Monitronics will be cancelled without Ascent Capital recovering any property or value on account of such equity interests. Furthermore, Ascent Capital will be obligated to make a cash contribution to Monitronics in the amount of $3,500,000 upon Monitronics' emergence from bankruptcy if the Merger is not consummated.

(2)    Bankruptcy

On the Petition Date, the Chapter 11 Cases were filed in order to effect the Debtors' joint partial prepackaged plan of reorganization (as amended from time to time, the "Plan").

On the Petition Date, the Debtors filed certain motions and applications intended to limit the disruption of the bankruptcy proceedings on its operations (the "First Day Motions"), which were subsequently approved by the Bankruptcy Court. Pursuant to the First Day Motions, and subject to certain terms and dollar limits included therein, the Debtors were authorized to continue to use their unrestricted cash on hand, as well as all cash generated from daily operations, to continue their operations without interruption during the course of the Chapter 11 Cases. Also pursuant to the First Day Motions, the Debtors received Bankruptcy Court authorization to, among other things and subject to the terms and conditions set forth in the applicable orders, pay certain pre-petition employee wages, salaries, health benefits and other employee obligations during their Chapter 11 Cases, pay certain pre-petition claims of their dealers, creditors in the normal course and taxes, continue their cash management programs and insurance policies, as well as continue to honor their dealer program post-petition. The Debtors are authorized under the Bankruptcy Code to pay post-petition expenses incurred in the ordinary course of business without seeking Bankruptcy Court approval. Until the Plan is effective, the Debtors will continue to manage their properties and operate their businesses as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Plan confirmation hearing is currently scheduled for August 7, 2019.

The Company has applied Accounting Standards Codification (“ASC”) Topic 852 Reorganizations ("ASC 852") in preparing its condensed consolidated financial statements. ASC 852 requires the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses incurred during the bankruptcy proceedings are recorded as Restructuring and reorganization expense in the unaudited condensed consolidated statements of operations. In addition, pre-petition obligations that may be impacted by the Company's bankruptcy proceedings have been classified on the unaudited condensed consolidated balance sheets at June 30, 2019 as Liabilities subject to compromise. These liabilities are reported at the amounts the Company currently anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See below for more information regarding restructuring and reorganization items.

Debtor-in-possession ("DIP") Financing

In connection with the Chapter 11 Cases and subsequent to June 30, 2019, the Debtors received approval from the Bankruptcy Court to enter into a secured superpriority and priming debtor-in-possession revolving credit facility (the “DIP Facility”) with the lenders party thereto, KKR Credit Markets LLC, as lead arranger and bookrunner, KKR Credit Advisors (US) LLC, as structuring advisor, Encina Private Credit SPV, LLC, as administrative agent, swingline lender and letter of credit issuer (the “DIP Administrative Agent”), and certain other financial parties thereto.

The DIP Facility is in an amount of up to $245,000,000, subject to availability under the Debtors’ borrowing base thereunder, including a letter of credit subfacility in the amount of $10,000,000 and a swingline loan commitment of $10,000,000. Interest on the DIP Facility will accrue at a rate per year equal to the LIBOR rate (with a floor of 1.50%) plus 5.00% or a base rate (with a floor of 4.50%) plus 4.00%.

The Debtors are required to pay fees in relation to the DIP Facility, including the following:
unused commitment fee: 0.75% per annum on the daily unused amount of the revolving credit portion of the DIP Facility;
letter of credit commitment fronting fee: 0.25% per annum on the average daily amount of the letter of credit exposure of the DIP Facility; and
agent fees: separately agreed upon between the Debtors and the DIP Administrative Agent;

The DIP Facility will mature on the earlier of: (i) 45 days after the date of entry of the interim DIP order, if the final DIP order has not been entered by the Bankruptcy Court on or prior to such date; (ii) 12 months after June 30, 2019; (iii) the effective date with respect to any Chapter 11 plan of reorganization, including the Plan; (iv) the filing of a motion by the Debtors seeking the

7


dismissal of any of the Chapter 11 Cases, the dismissal of any Chapter 11 Case, the filing of a motion by the Debtors seeking to convert any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code or the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code; (v) the date of a sale of all or substantially all of the Debtors’ assets consummated under section 363 of the Bankruptcy Code; (vi) acceleration of the DIP Facility following an occurrence of an event of default thereunder; or (vii) the appointment of a Chapter 11 trustee.

Proceeds of the DIP Facility can be used by the Debtors to (i) pay certain costs, fees and expenses related to the Chapter 11 Cases, (ii) pay in full the claims of the revolving lenders under the Credit Facility, (iii) cash collateralize certain letters of credit previously issued under the Credit Facility, and other letters of credit as approved by the majority lenders under the DIP Facility from time to time, (iv) to fund certain carve-out expenses and (v) fund working capital and general corporate purposes of the Debtors, in all cases, subject to the terms of the DIP Facility and applicable orders of the Bankruptcy Court.

The obligations and liabilities of Monitronics under the DIP Facility are secured by a first priority, senior priming lien on, and security interest in, substantially all assets and property of the estate of the Debtors, and the equity in Monitronics owned by Ascent, and are guaranteed by each of Monitronics’ existing and future subsidiaries, subject to certain exceptions.

The DIP Facility contains mandatory prepayments (a) if the amount of loans outstanding under the DIP Facility exceeds the lesser of the DIP Facility and the borrowing base thereunder and (b) with the proceeds of certain (i) asset sales, (ii) casualty events (subject, in each case, to certain reinvestment rights) and (iii) issuances of indebtedness not permitted by the DIP Facility.

The DIP Facility contains customary representations and warranties and affirmative and negative covenants for agreements of this type, including, among others covenants regarding minimum liquidity, relating to financial reporting, compliance with laws, payment of taxes, preservation of existence, books and records, maintenance of properties and insurance, limitations on liens, restrictions on mergers and restrictions on sales of all or substantially all of the Debtors’ assets, and limitations on changes in the nature of the Debtors’ businesses.

Amendment No. 8 to Monitronics' Credit Facility

In connection with the Chapter 11 Cases and subsequent to June 30, 2019, the Debtors entered into an Amendment No. 8 to the Credit Facility and Consent to Agency Resignation and Appointment Agreement (“Amendment No. 8”), among Cortland Capital Market Services LLC (“Cortland”), as successor administrative agent, and the lenders party thereto. Pursuant to Amendment No. 8, the Debtors and the required lenders under the Credit Facility approved the resignation of Bank of America, N.A. as administrative agent, and the appointment of Cortland as the successor administrative agent. Amendment No. 8 also made certain other amendments to the Credit Facility to accommodate the appointment of Cortland as the successor administrative agent.

Restructuring and reorganization expense

The Company has incurred and will continue to incur significant costs associated with the reorganization. Restructuring and reorganization expense for both the three and six months ended June 30, 2019 was $33,102,000 which primarily represent legal and professional fees. The amount of these costs are being expensed as incurred and have been recorded in Restructuring and reorganization expense within the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2019. The Company has recorded a prepaid expense of $2,250,000 for retainer fees as of June 30, 2019 which is included in Prepaid and other current assets on the condensed consolidated balance sheets.

Financial statement classification of Liabilities subject to compromise

The accompanying unaudited condensed consolidated balance sheet as of June 30, 2019 includes amounts classified as Liabilities subject to compromise, which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 Cases. These amounts represent the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust estimates as necessary. Such adjustments may be material. See note 9, Liabilities Subject to Compromise, for further information.


8


(3)    Going Concern

The Company has substantial indebtedness at June 30, 2019, including $585,000,000 principal of Senior Notes, maturing on April 1, 2020, and an existing credit facility under the Credit Facility with a term loan in principal of $1,072,500,000 as of June 30, 2019, maturing September 30, 2022, and a revolving credit facility with an outstanding balance of  $181,400,000 as of June 30, 2019, maturing September 30, 2021 (the term loan and the revolver, together, the "Credit Facility").

Based on the Company's substantial level of indebtedness and, as described in note 1, Basis of Presentation and note 2, Bankruptcy, the Company's filing of the Chapter 11 Cases as well as the uncertainty surrounding such filings, management continues to conclude there is substantial doubt regarding our ability to continue as a going concern within one year from the issuance date of these condensed consolidated financial statements. 

Management continues to pursue completion of the Chapter 11 Cases and consummation of all the transactions contemplated in the RSA and the Plan to greatly reduce its debt leverage. Emergence from the Chapter 11 Cases will require the Company to obtain new exit refinancing, which generally has been agreed to in principal, but the exact terms of which are currently under negotiation. No assurance can be provided as to the outcome of the Chapter 11 Cases, and should the Bankruptcy Court not approve the Plan in its current state, or at all, the Company may be forced to seek alternative forms of restructuring or commence liquidation procedures.

Our condensed consolidated financial statements as of June 30, 2019 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.

(4)    Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. The Company adopted ASU 2016-02 using a modified retrospective approach at January 1, 2019, as outlined in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method of adoption, there is no impact to the comparative condensed consolidated statements of operations and condensed consolidated balance sheets. The Company determined that there was no cumulative effect adjustment to beginning Accumulated deficit on the condensed consolidated balance sheets. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications.

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


9


(5)    Other Accrued Liabilities
 
Other accrued liabilities consisted of the following (amounts in thousands): 
 
June 30,
2019
 
December 31,
2018
Accrued payroll and related liabilities
$

 
$
4,459

Interest payable

 
14,446

Income taxes payable

 
2,742

Operating lease liabilities
3,795

 

Other

 
9,438

Total Other accrued liabilities
$
3,795

 
$
31,085


Given the Petition Date of the Chapter 11 Cases, Accrued payroll and related liabilities, Interest payable, Income taxes payable and Other accrued liabilities as of June 30, 2019 are classified as Liabilities subject to compromise on the condensed consolidated balance sheet due to their unsecured nature. Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. The Company plans on affirming all of its operating leases during the Chapter 11 Cases. Also, since all of the operating leases are secured against the fair value of the underlying assets and the fair value of the underlying assets are greater than the operating lease liability, all Operating lease liabilities as of June 30, 2019 have been classified as Liabilities not subject to compromise.

(6)    Debt
 
Long-term debt consisted of the following (amounts in thousands):
 
June 30,
2019
 
December 31,
2018
9.125% Senior Notes due April 1, 2020 with an effective interest rate of 9.1%
$
585,000

 
$
585,000

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

 
12,000

Term loan, matures September 30, 2022, LIBOR plus 5.50%, subject to a LIBOR floor of 1.00%, with an effective rate of 8.6%
1,072,500

 
1,075,250

$295 million revolving credit facility, matures September 30, 2021, LIBOR plus 4.00%, subject to a LIBOR floor of 1.00%, with an effective rate of 7.5%
181,400

 
144,200

 
1,838,900

 
1,816,450

Less: Current portion of long-term debt, not subject to compromise
(181,400
)
 
(1,816,450
)
Long-term debt subject to compromise
1,657,500

 

Less: Amounts reclassified to Liabilities subject to compromise
(1,657,500
)
 

Long-term debt
$

 
$


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.

In connection with management’s negotiations with its creditors, the Company did not make its Senior Notes interest payment of $26,691,000 due on April 1, 2019. Under the terms of the RSA, which is pending approval in Bankruptcy Court, the Senior Notes will be converted to equity. See note 1, Basis of Presentation for further information. As the Senior Notes are unsecured debt, they have been reclassified to Liabilities subject to compromise on the unaudited condensed consolidated balance sheets. See note 9, Liabilities Subject to Compromise for further information.

The Senior Notes are guaranteed by all of the Company's existing domestic subsidiaries. See note 14, Consolidating Guarantor Financial Information for further information.


10


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

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

As of June 30, 2019, the Credit Facility term loan has an outstanding principal balance of $1,072,500,000, maturing on September 30, 2022. The Credit Facility term loan requires quarterly interest payments and quarterly principal payments of $2,750,000. The Company did not make its quarterly principal repayment in the second quarter of 2019. The Credit Facility 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 $181,400,000 and an aggregate of $1,000,000 available under two standby letters of credit issued as of June 30, 2019, maturing on September 30, 2021. The Credit Facility revolver typically 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. In conjunction with negotiations around certain defaults of the Credit Facility in the first quarter of 2019, the Credit Facility revolver lenders allowed us to continue to borrow under the revolving credit facility for up to $195,000,000 at an alternate base rate plus 3.0% and the Credit Facility term loan lenders allowed the term loan to renew with interest due on an alternate base rate plus 4.5%. Additionally, for the period of April 24, 2019 through May 20, 2019, an additional 2.0% default interest rate was accrued and paid on the Credit Facility term loan and revolver. On July 3, 2019, with approval from the Bankruptcy Court, the Credit Facility revolver principal and interest was repaid in full with proceeds from the DIP Facility. As such, the Credit Facility revolver principal amount is presented as Current portion of long-term debt and a liability not subject to compromise on the unaudited condensed consolidated balance sheets.

Under the terms of the RSA, which is pending approval in Bankruptcy Court, $100,000,000 of the Credit Facility term loan will be converted into equity and the remaining portion will be repaid upon emergence with proceeds from exit financing that are currently being negotiated. See note 1, Basis of Presentation for further information. As the Credit Facility term loan will be partially repaid and partially converted to equity, it has been reclassified to Liabilities subject to compromise on the unaudited condensed consolidated balance sheets. See note 9, Liabilities Subject to Compromise for further information.

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.

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

11


As of June 30, 2019, principal payments scheduled to be made on the Company’s debt obligations, assuming certain accelerated maturities due to Chapter 11 Cases, are as follows (amounts in thousands):
Remainder of 2019
$
1,838,900

2020

2021

2022

2023

2024

Thereafter

Total principal payments
1,838,900

Less:
 
Unamortized deferred debt costs and discounts

Total debt carrying value
$
1,838,900


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

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 three months ended June 30, 2019, the Company recorded an Unrealized gain on derivative financial instruments of $3,196,000. For the six months ended June 30, 2019, the Company recorded an Unrealized loss on derivative financial instruments of $4,577,000. On April 30, 2019, the various counterparties and the Company agreed to settle and terminate all of the outstanding swap agreements, which required us to pay $8,767,000 in termination amount to certain counterparties and required a certain counterparty to pay $6,540,000 in termination amount to us, resulting in a Realized net loss on derivative financial instruments of $2,227,000.

Amounts recognized in Accumulated other comprehensive income (loss) as of the de-designation date will be amortized to Interest expense on the condensed consolidated statements of operations and comprehensive income (loss) over the remaining term of the hedged forecasted transactions of the Swaps which were 3 month LIBOR interest payments. Amounts in Accumulated other comprehensive income (loss) expected to be recognized in Interest expense in the coming 12 months total approximately $1,888,000.


12


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Effective portion of gain recognized in Accumulated other comprehensive income (loss)
$

 
5,096

 
$

 
18,764

Effective portion of loss reclassified from Accumulated other comprehensive income (loss) into Net loss (a)
$
(472
)
 
(425
)
 
$
(940
)
 
(1,163
)
 
(a)        Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

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

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

The following summarizes the fair value level of assets and liabilities that are measured on a recurring basis at June 30, 2019 and December 31, 2018 (amounts in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2019
 
 
 
 
 
 
 
Interest rate swap agreements - assets (a)
$

 

 

 

Interest rate swap agreements - liabilities (a)

 

 

 

Total
$

 

 

 

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

 
10,552

 

 
10,552

Interest rate swap agreements - liabilities (a)

 
(6,039
)
 

 
(6,039
)
Total
$

 
4,513

 

 
4,513

 
(a)
Swap asset values are included in non-current Other assets and Swap liability values are included in non-current Derivative financial instruments on the condensed consolidated balance sheets.
 
The Company has determined that the significant inputs used to value the Swaps fall within Level 2 of the fair value hierarchy.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
 
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
 
June 30, 2019
 
December 31, 2018
Long term debt, including current portion and amounts classified as Liabilities subject to compromise:
 
 
 
Carrying value
$
1,838,900

 
1,816,450

Fair value (a)
1,215,943

 
1,218,606

 
(a) 
The fair value is based on market quotations from third party financial institutions and is classified as Level 2 in the hierarchy.
 

13


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.

(9)    Liabilities Subject to Compromise
 
As discussed in note 1, Basis of Presentation, beginning on the Petition Date, the Company has been operating as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. On the accompanying unaudited condensed consolidated balance sheets, the caption "Liabilities subject to compromise" reflects the expected allowed amount of the prepetition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount. Liabilities subject to compromise at June 30, 2019 consisted of the following (in thousands):
 
June 30,
2019
Current liabilities:
 
Accounts payable
$
10,471

Accrued payroll and related liabilities
5,276

Interest payable
56,534

Income taxes payable
1,449

Other accrued liabilities
7,373

Deferred revenue
11,802

Dealer holdback liability
12,673

Senior Notes
585,000

Credit Facility term loan
1,072,500

Total current liabilities subject to compromise
1,763,078

Non-current liabilities:
 
Long-term dealer holdback liability
1,817

Other liabilities
2,181

Total liabilities subject to compromise
1,767,076


Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves the Plan. The Company will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.

(10)    Accumulated Other Comprehensive Income (Loss)
 
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the six months ended June 30, 2019 (amounts in thousands):
 
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

 
(a)
Amounts reclassified into Net loss are included in Interest expense on the condensed consolidated statements of operations.  See note 7, Derivatives, for further information.

14


The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the six months ended June 30, 2018 (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

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

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

In addition to the above, the Company is also involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management's estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In 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.


15


(12)    Revenue Recognition

Disaggregation of Revenue

Revenue is disaggregated by source of revenue as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Alarm monitoring revenue
$
119,085

 
124,844

 
$
240,564

 
249,685

Product and installation revenue
7,585

 
9,477

 
14,118

 
17,624

Other revenue
1,421

 
692

 
3,015

 
1,457

Total Net revenue
$
128,091

 
135,013

 
$
257,697

 
268,766


Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
June 30,
2019
 
December 31,
2018
Trade receivables, net
$
12,545

 
13,121

Contract assets, net - current portion (a)
11,985

 
13,452

Contract assets, net - long-term portion (b)
13,743

 
16,154

Deferred revenue
11,802

 
13,060

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

(13)    Leases

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

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

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

Components of Lease Expense

The components of lease expense were as follows (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease cost (a)
$
120

 
251

Operating lease cost (b)
975

 
1,971

Total operating lease cost
$
1,095

 
2,222

 
(a)        Amount is included in Cost of services in the unaudited condensed consolidated statements of operations.
(b)        Amount is included in Selling, general and administrative, including stock-based and long-term incentive compensation in the unaudited condensed consolidated statements of operations.


16


Remaining Lease Term and Discount Rate

The following table presents the weighted-average remaining lease term and the weighted-average discount rate:
 
As of June 30, 2019
Weighted-average remaining lease term for operating leases (in years)
10.1

Weighted-average discount rate for operating leases
11.8
%

All of the Company's lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company's estimated incremental borrowing rate is based on information available either upon adoption of ASU 2016-02 or at the inception of the lease.

Supplemental Cash Flow Information

The following is the supplemental cash flow information associated with the Company's leases (in thousands):
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
2,132


Maturities of Lease Liabilities

As of June 30, 2019, maturities of lease liabilities were as follows:
Remainder of 2019
$
1,749

2020
3,923

2021
3,195

2022
3,069

2023
3,087

Thereafter
20,329

Total lease payments
$
35,352

Less: Interest
(15,240
)
Total lease obligations
$
20,112


Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. The Company plans on affirming all of its operating leases during the Chapter 11 Cases. Also, all of the operating leases are secured against the fair value of the underlying assets and the fair value of the underlying assets are greater than the operating lease liability, all Operating lease liabilities as of June 30, 2019 have been classified as Liabilities not subject to compromise.


17


Disclosures Related to Periods Prior to Adoption of ASU 2016-02

The Company adopted ASU 2016-02 using a modified retrospective method at January 1, 2019 as described in note 4, Recent Accounting Pronouncements. As required, the following disclosure is provided for periods prior to adoption. Minimum lease commitments as of December 31, 2018 that have initial or remaining noncancelable lease terms in excess of one year are as follows (in thousands):
Year Ended December 31:
 
2019
$
4,628

2020
4,207

2021
3,093

2022
3,068

2023
3,087

Thereafter
20,329

Minimum lease commitments
$
38,412


(14)    Consolidating Guarantor Financial Information

The Senior Notes were issued by Monitronics (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:


18


MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-In-Possession)
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of June 30, 2019
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
11,282

 
213

 

 

 
11,495

Restricted cash
93

 

 

 

 
93

Trade receivables, net
12,413

 
132

 

 

 
12,545

Prepaid and other current assets
63,977

 

 

 
(35,751
)
 
28,226

Total current assets
87,765

 
345

 

 
(35,751
)
 
52,359

 
 
 
 
 
 
 
 
 
 
Property and equipment, net
36,940

 

 

 

 
36,940

Subscriber accounts and deferred contract acquisition costs, net
1,147,972

 
13,500

 

 

 
1,161,472

Deferred income tax asset, net
783

 

 

 

 
783

Operating lease right-of-use asset
19,521

 

 

 

 
19,521

Other assets, net
18,649

 

 

 

 
18,649

Total assets
$
1,311,630

 
13,845

 

 
(35,751
)
 
1,289,724

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 

 

 

 

Other accrued liabilities
3,795

 

 

 

 
3,795

Deferred revenue

 

 

 

 

Holdback liability

 

 

 

 

Current portion of long-term debt
181,400

 

 

 

 
181,400

Total current liabilities not subject to compromise
185,195

 

 

 

 
185,195

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term holdback liability

 

 

 

 

Derivative financial instruments

 

 

 

 

Operating lease liabilities
16,317

 

 

 

 
16,317

Other liabilities
22,166

 

 

 
(22,166
)
 

Total liabilities not subject to compromise
223,678

 

 

 
(22,166
)
 
201,512

Liabilities subject to compromise
1,766,816

 
36,011

 

 
(35,751
)
 
1,767,076

Total liabilities
1,990,494

 
36,011

 

 
(57,917
)
 
1,968,588

 
 
 
 
 
 
 
 
 
 
Total stockholder's deficit
(678,864
)
 
(22,166
)
 

 
22,166

 
(678,864
)
Total liabilities and stockholder's deficit
$
1,311,630

 
13,845

 

 
(35,751
)
 
1,289,724


19


MONITRONICS INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-In-Possession)
Condensed Consolidating Balance Sheet
(unaudited)
 
 
As of December 31, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,697

 
491

 

 

 
2,188

Restricted cash
189

 

 

 

 
189

Trade receivables, net
12,362

 
759

 

 

 
13,121

Prepaid and other current assets
118,119

 
4,042

 

 
(93,983
)
 
28,178

Total current assets
132,367

 
5,292

 

 
(93,983
)
 
43,676

 
 
 
 
 
 
 
 
 
 
Property and equipment, net
34,960

 
1,579

 

 

 
36,539

Subscriber accounts and deferred contract acquisition costs, net
1,160,698

 
34,765

 

 

 
1,195,463

Deferred income tax asset, net
783

 

 

 

 
783

Other assets, net
29,270

 
37

 

 

 
29,307

Total assets
$
1,358,078

 
41,673

 

 
(93,983
)
 
1,305,768

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholder's Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
11,110

 
989

 

 

 
12,099

Other accrued liabilities
29,016

 
96,052

 

 
(93,983
)
 
31,085

Deferred revenue
11,357

 
1,703

 

 

 
13,060

Holdback liability
11,342

 
171

 

 

 
11,513

Current portion of long-term debt
1,816,450

 

 

 

 
1,816,450

Total current liabilities not subject to compromise
1,879,275

 
98,915

 

 
(93,983
)
 
1,884,207

 
 
 
 
 
 
 
 
 
 
Non-current liabilities:
 
 
 
 
 
 
 
 
 
Long-term holdback liability
1,770

 

 

 

 
1,770

Derivative financial instruments
6,039

 

 

 

 
6,039

Other liabilities
59,969

 

 

 
(57,242
)
 
2,727

Total liabilities not subject to compromise
1,947,053

 
98,915

 

 
(151,225
)
 
1,894,743

Liabilities subject to compromise

 

 

 

 

Total liabilities
1,947,053

 
98,915

 

 
(151,225
)
 
1,894,743

 
 
 
 
 
 
 
 
 
 
Total stockholder's deficit
(588,975
)
 
(57,242
)
 

 
57,242

 
(588,975
)
Total liabilities and stockholder's deficit
$
1,358,078

 
41,673

 

 
(93,983
)
 
1,305,768


20


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

 
Three Months Ended June 30, 2019
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
126,784

 
1,307

 

 

 
128,091

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

 
 
Cost of services
28,496

 
40

 

 

 
28,536

Selling, general, and administrative, including stock-based compensation
28,051

 
112

 

 

 
28,163

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
48,567

 
571

 

 

 
49,138

Depreciation
3,121

 

 

 

 
3,121

 
108,235

 
723

 

 

 
108,958

Operating income
18,549

 
584

 

 

 
19,133

Other expense (income):
 

 
 

 
 

 
 

 
 

Equity in income of subsidiaries
(584
)
 

 

 
584

 

Restructuring and reorganization items
33,102

 

 

 

 
33,102

Interest expense
40,536

 

 

 

 
40,536

Realized loss on derivative financial instruments
(969
)
 

 

 

 
(969
)
Refinancing expense

 

 

 

 

 
72,085

 

 

 
584

 
72,669

Income (loss) before income taxes
(53,536
)
 
584

 

 
(584
)
 
(53,536
)
Income tax expense
666

 

 

 

 
666

Net income (loss)
(54,202
)
 
584

 

 
(584
)
 
(54,202
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Unrealized loss on derivative contracts
(472
)
 

 

 

 
(472
)
Total other comprehensive loss
(472
)
 

 

 

 
(472
)
Comprehensive income (loss)
$
(54,674
)
 
584

 

 
(584
)
 
(54,674
)

21


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

 
Three Months Ended June 30, 2018
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
124,126

 
10,887

 

 

 
135,013

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

 
 
Cost of services
27,865

 
5,182

 

 

 
33,047

Selling, general, and administrative, including stock-based compensation
22,616

 
10,039

 

 

 
32,655

Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
52,091

 
1,800

 

 

 
53,891

Depreciation
2,622

 
243

 

 

 
2,865

Loss on goodwill impairment
214,089

 
311

 

 

 
214,400

 
319,283

 
17,575

 

 

 
336,858

Operating loss
(195,157
)
 
(6,688
)
 

 

 
(201,845
)
Other expense:
 

 
 

 
 

 
 

 
 

Equity in loss of subsidiaries
6,870

 

 

 
(6,870
)
 

Interest expense
38,600

 

 

 

 
38,600

 
45,470

 

 

 
(6,870
)
 
38,600

Loss before income taxes
(240,627
)
 
(6,688
)
 

 
6,870

 
(240,445
)
Income tax expense
1,165

 
182

 

 

 
1,347

Net loss
(241,792
)
 
(6,870
)
 

 
6,870

 
(241,792
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

 
 

Unrealized gain on derivative contracts
5,521

 

 

 

 
5,521

Total other comprehensive income
5,521

 

 

 

 
5,521

Comprehensive loss
$
(236,271
)
 
(6,870
)
 

 
6,870

 
(236,271
)

22


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

 
Six Months Ended June 30, 2019
 
Parent Issuer
 
Subsidiary Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(amounts in thousands)
Net revenue
$
255,044

 
2,653

 

 

 
257,697

 
 
 
 
 
 
 
 
 
 
Operating expenses: