MONITRONICS INTERNATIONAL, INC. Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, new service offerings, the availability of capital, financial prospects, anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated: •business or economic disruptions or global health concerns, including the outbreak of COVID-19, may materially and adversely affect our business, financial condition, future results and cash flow; •macroeconomic conditions and their effect on the general economy and on theU.S. housing market, in particular single family homes, which represent our largest demographic; •uncertainties in the development of our business strategies, including the rebranding to Brinks Home Security and market acceptance of new products and services; •the competitive environment in which we operate, in particular, increasing competition in the alarm monitoring industry from larger existing competitors and new market entrants, including well-financed technology, telecommunications and cable companies; •the development of new services or service innovations by competitors; •our ability to acquire and integrate additional accounts, including the impact of restrictions on selling our services door-to-door, and competition for dealers with other alarm monitoring companies which could cause dealers to leave our program or an increase in expected costs of acquiring an account ("Subscriber Acquisition Costs"); •technological changes which could result in the obsolescence of currently utilized technology with the need for significant upgrade expenditures, including the phase out of 2G, 3G and CDMA networks by cellular carriers; •the trend away from the use of public switched telephone network lines and the resultant increase in servicing costs associated with alternative methods of communication; •our high degree of leverage and the restrictive covenants governing its indebtedness; •the operating performance of our network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facility due to acts of nature or technology deficiencies, and the potential of security breaches related to network or customer information; •the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations; •the ability to continue to obtain insurance coverage sufficient to hedge our risk exposures, including as a result of acts of third parties and/or alleged regulatory violations; •changes in the nature of strategic relationships with original equipment manufacturers, dealers and other of our business partners; •the reliability and creditworthiness of our independent alarm systems dealers and subscribers; •changes in our expected rate of subscriber attrition; •availability of, and our ability to retain, qualified personnel; •integration of acquired assets and businesses; •the regulatory environment in which we operate, including the multiplicity of jurisdictions, state and federal consumer protection laws and licensing requirements to which we and/or our dealers are subject and the risk of new regulations, such as the increasing adoption of "false alarm" ordinances; and •general business conditions and industry trends. For additional risk factors, please see Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "2019 Form 10-K") and Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and the 2019 Form 10-K. 17 -------------------------------------------------------------------------------- T able of Contents OverviewMonitronics International, Inc. and its subsidiaries (collectively, "Monitronics" or the "Company", doing business as Brinks Home SecurityTM) provide residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, inthe United States ,Canada andPuerto Rico .Monitronics customers are obtained through our direct-to-consumer sales channel (the "Direct to Consumer Channel"), which offers both Do-It-Yourself and professional installation security solutions and our exclusive authorized dealer network (the "Dealer Channel"), which provides product and installation services, as well as support to customers. As previously disclosed, onJune 30, 2019 ,Monitronics and certain of its domestic subsidiaries (collectively, the "Debtors"), filed voluntary petitions for relief (collectively, the "Petitions" and, the cases commenced thereby, the "Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "). The Debtors' Chapter 11 Cases were jointly administered under the caption In reMonitronics International, Inc. , et al., Case No. 19-33650. OnAugust 7, 2019 , theBankruptcy Court entered an order, Docket No. 199 (the "Confirmation Order"), confirming and approving the Debtors' Joint Partial Prepackaged Plan of Reorganization (including all exhibits thereto and, as modified by the Confirmation Order, the "Plan") that was previously filed with theBankruptcy Court onJune 30, 2019 . OnAugust 30, 2019 (the "Effective Date"), the conditions to the effectiveness of the Plan were satisfied and the Company emerged from Chapter 11 after completing a series of transactions through which the Company and its former parent,Ascent Capital Group, Inc. ("Ascent Capital "), merged (the "Merger") in accordance with the terms of the Agreement and Plan of Merger, dated as ofMay 24, 2019 (the "Merger Agreement").Monitronics was the surviving corporation and, immediately following the Merger, was redomiciled inDelaware in accordance with the terms of the Merger Agreement. Upon emergence from Chapter 11 on the Effective Date, the Company has applied Accounting Standards Codification ("ASC") 852, Reorganizations, in preparing its condensed consolidated financial statements. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, a new entity for financial reporting purposes was created. The Company selected a convenience date ofAugust 31, 2019 for purposes of applying fresh start accounting as the activity between the convenience date and the Effective Date did not result in a material difference in the financial results. References to "Successor" or "Successor Company " relate to the balance sheet and results of operations ofMonitronics on and subsequent toSeptember 1, 2019 . References to "Predecessor" or "Predecessor Company " refer to the balance sheet and results of operations ofMonitronics prior toSeptember 1, 2019 . With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization. As such, references to the "Company" could refer to either the Predecessor or Successor periods, as defined.
Asset Purchase Agreement
OnJune 17, 2020 , the Company, as buyer, entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") withProtect America, Inc. ("Protect America"), as seller. Pursuant to the Asset Purchase Agreement, the Company acquired (the "Acquisition") certain contracts for the provision of alarm monitoring and related services (the "Accounts") as well as the related accounts receivable, intellectual property and equipment inventory of Protect America. The Asset Purchase Agreement provides for an up-front cash payment of approximately$16,600,000 at closing and provides for 50 subsequent monthly payments ("Earnout Payments") consisting of a portion of the revenue attributable to the Accounts, subject to adjustment for Accounts that are no longer active. The transaction was accounted for as an asset acquisition with the cost of the assets acquired recorded as ofJune 17, 2020 and an estimated liability for the Earnout Payments of approximately$86,000,000 . The Earnout Payments liability was estimated based on forecasted attrition of the Protect America subscriber base. The current portion of the Earnout Payments liability is included in current Other accrued liabilities on the condensed consolidated balance sheets and the long-term portion of the Earnout Payments is included in non-current Other liabilities on the condensed consolidated balance sheets.
Impact of COVID-19
InDecember 2019 , an outbreak of a novel strain of coronavirus ("COVID-19") originated inWuhan, China and has been detected globally on a widespread basis, including inthe United States . The COVID-19 pandemic has resulted in the closure of many corporate offices, retail stores, and manufacturing facilities and factories globally, as well as border closings, quarantines, cancellations, disruptions to supply chains and customer activity, and general concern and uncertainty. In response to the pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted onMarch 27, 2020 in theU.S. The CARES Act, among other things, provides for an acceleration of alternative minimum tax credit 18 -------------------------------------------------------------------------------- T able of Contents refunds, the deferral of certain employer payroll taxes and expands the availability of net operating loss usage. We do not expect the CARES Act to have material impact on the Company's annual effective income tax rate for the year. With respect to our call and alarm response centers, we have established certain policies and procedures to enable full continuity of our monitoring services moving forward, including distancing staff in the call centers, activating our backup call center facility and enabling our call center operators to operate from home. For employees that can work remotely, we have instituted measures to support them, including purchasing additional equipment to enable work from home capabilities. We are also ensuring we comply with our data security measures to guarantee that all employee and customer data remains protected and secure. As ofJune 30, 2020 , substantially all of our workforce is working remotely. In addition, our existing call centers still remain fully operational on premises. Administrative personnel are also working from home and those involved in the Company's financial reporting and internal controls over financial reporting have been able to continue their normal duties by accessing the Company's systems and records remotely. Regular communications, review of supporting documentation and tests of operating effectiveness via secured virtual channels have also continued without significant interruption. In regards to our operations and dealer operations in the field, in jurisdictions where local or state governments have implemented a "shelter in place" or similar orders, we have instructed our dealers to cease doing door-to-door sales until such measures are lifted. This has negatively impacted our Dealer Channel productivity starting in the latter half ofMarch 2020 . Dealer Channel volume has shown some recovery in the second quarter of 2020, but remains down year over year. Subject to a scheduled service or installation request, and adhering to certain safety protocols, we continue to send field technicians out to service a customer's home to service or to install a new system. We have taken measures to protect our supply chain of alarm monitoring equipment and, to date, have not experienced significant supply chain constraints to service our customers. With respect to our receivables from our customers, for the three and six months endedJune 30, 2020 , we have issued credits for relief to customers being impacted by hardships from the pandemic. Additionally, we have increased our allowances on collection of certain trade and dealer receivables based on the expected impact of the continuation of the pandemic into the second quarter of 2020. As a result of COVID-19, we experienced no material impact on our unit and Recurring Monthly Revenue ("RMR") attrition during the three and six months endedJune 30, 2020 . As noted in the financial statements, as ofMarch 31, 2020 , the Company determined that a goodwill triggering event had occurred as a result of the recent economic disruption and uncertainty due to the COVID-19 pandemic. Due to the Company's decision to cease door-to-door sales in jurisdictions with a "shelter in place" or similar orders and deteriorating economic conditions, we anticipate a reduction in projected account acquisitions. In response to the triggering event, the Company performed a quantitative goodwill impairment test at the Brinks Home Security entity level as we operate as a single reporting unit. The results of the quantitative assessment indicated that the carrying value was in excess of the fair value of the reporting unit, including goodwill, which resulted in a full goodwill impairment charge of$81,943,000 during the six months endedJune 30, 2020 . The factors leading to the goodwill impairment are lower projected overall account acquisition in future periods due to the estimated impact of COVID-19 on our account acquisition channels and an increase in the discount rate applied in the discounted cash flow model based on current economic conditions. This resulted in reductions in future cash flows and a lower fair value as calculated under the income approach. While we continue to assess the impact of these events, in future periods we may experience reduced revenue, reduced account acquisitions in the Dealer Channel and Direct to Consumer Channel and increased attrition and other costs as a result of the pandemic.
Strategic Initiatives
In recent years, we have implemented several initiatives related to account growth, creation costs, attrition and margin improvements to combat decreases in the generation of new subscriber accounts and negative trends in subscriber attrition.
Account Growth
We believe that generating account growth at a reasonable cost is essential to scaling our business and generating stakeholder value. We currently generate new accounts through both our Dealer Channel and Direct to Consumer Channel. Our ability to grow new accounts in the future will be impacted by our ability to adjust to changes in consumer buying behavior and increased competition from technology, telecommunications and cable companies. We currently have several initiatives in place to drive profitable account growth, which include:
•enhancing our brand recognition with consumers, which we believe is bolstered by the rebranding to Brinks Home Security;
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•differentiating and profitably growing our Direct to Consumer Channel under the
Brinks Home Security brand;
•recruiting and retaining high quality dealers into our Authorized Dealer
Program;
•assisting new and existing dealers with training and marketing initiatives to
increase productivity; and
•offering third-party equipment financing to consumers, which is expected to
assist in driving account growth at lower creation costs.
Creation Cost Efficiency
We also consider the management of creation costs to be a key driver in improving our financial results. Generating accounts at lower creation costs per account would improve our profitability and cash flows. The initiatives related to managing creation costs include: •improving performance in our Direct to Consumer Channel including generating higher quality leads at favorable cost; increasing sales close rates and enhancing our customer activation process; •improved unit economics, including negotiating lower subscriber account purchase price multiples in our Dealer Channel; and •expanding the use and availability of third-party financing, which will drive down net creation costs. Attrition While we have also experienced higher subscriber attrition rates in the past few years, we have continued to develop our efforts to manage subscriber attrition, which we believe will help drive increases in our subscriber base and stakeholder value. We currently have several initiatives in place to reduce subscriber attrition, which include: •maintaining high customer service levels; •effectively managing the credit quality of new customers; •expanding our efforts to both retain customers who have indicated a desire to cancel service and win-back previous customers; •using predictive modeling to identify subscribers with a higher risk of cancellation and engaging with these subscribers to obtain contract extensions on terms favorable to the Company; and •implementing effective pricing strategies.
Margin Improvement
We are also implementing initiatives to attempt to reduce expenses and improve our financial results, which include:
•reducing our operating costs by right sizing the cost structure to the business and leveraging our scale; •increasing use of automation; and •implementing more sophisticated purchasing techniques. While there are uncertainties related to the successful implementation of the foregoing initiatives impacting our ability to achieve net profitability and positive cash flows in the near term, we believe they will position us to improve our operating performance, increase cash flows and create stakeholder value over the long-term. Accounts Acquired
For the Three Months Ended
During the three months endedJune 30, 2020 and 2019, the Company acquired 126,781 and 22,743 subscriber accounts, respectively, through our Dealer Channel, Direct to Consumer Channel and bulk negotiated account acquisitions ("bulk buys"). The increase in accounts acquired for the three months endedJune 30, 2020 is due to a bulk buy of 113,013 accounts inJune 2020 from Protect America. There were no bulk buys during the three months endedJune 30, 2019 . The increase was partially offset by a year-over-year decline in accounts generated in the Direct to Consumer Channel and Dealer Channel. The decline in the Direct to Consumer Channel was primarily due to the Company's election to leverage more profitable organic leads while Dealer Channel production was impacted by restrictions on door-to-door selling related to the outbreak of COVID-19 starting in the latter half ofMarch 2020 .
RMR acquired during the three months ended
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For the Six Months Ended
During the six months endedJune 30, 2020 and 2019, the Company acquired 154,195 and 42,746 subscriber accounts, respectively, through our Dealer Channel, Direct to Consumer Channel and bulk buys. The increase in accounts acquired for the six months endedJune 30, 2020 is due to bulk buys of 113,013 accounts inJune 2020 and 10,960 accounts inMarch 2020 . There were no bulk buys during the six months endedJune 30, 2019 . The increase was partially offset by a year-over-year decline in accounts generated in the Dealer Channel, primarily due to the Company's election to cease purchasing accounts from two dealers in the fourth quarter of 2019 and restrictions on door-to-door selling related to the outbreak of COVID-19 starting in the latter half ofMarch 2020 . RMR acquired during the six months endedJune 30, 2020 and 2019 was$6,346,000 and$2,066,000 , respectively. RMR acquired during the six months endedJune 30, 2020 related to bulk buys was$4,866,000 .
Attrition
Account cancellations, otherwise referred to as subscriber attrition, have a direct impact on the number of subscribers that the Company services and on its financial results, including revenues, operating income and cash flow. A portion of the subscriber base can be expected to cancel their service every year. Subscribers may choose not to renew or to terminate their contract for a variety of reasons, including relocation, cost, switching to a competitor's service, limited use by the subscriber or low perceived value. The largest categories of cancelled accounts relate to subscriber relocation or those cancelled due to non-payment. The Company defines its attrition rate as the number of cancelled accounts in a given period divided by the weighted average number of subscribers for that period. The Company considers an account cancelled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons. If a subscriber relocates but continues its service, it is not a cancellation. If the subscriber relocates, discontinues its service and a new subscriber assumes the original subscriber's service and continues the revenue stream, it is also not a cancellation. The Company adjusts the number of cancelled accounts by excluding those that are contractually guaranteed by its dealers. The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the cancelled account with a new one or refund to the Company the cost paid to acquire the contract. To help ensure the dealer's obligation to the Company, the Company typically maintains a dealer funded holdback reserve ranging from 5-8% of subscriber accounts in the guarantee period. In some cases, the amount of the holdback liability is less than actual attrition experience.
The table below presents subscriber data for the twelve months ended
Twelve Months Ended
2020 2019
Beginning balance of accounts 885,436 955,853
Accounts acquired 192,835 96,736
Accounts cancelled (134,489) (162,318)Cancelled accounts guaranteed by dealer and other adjustments (a)
(7,114) (4,835)
Ending balance of accounts 936,668 885,436
Attrition rate - Core Unit (c) 16.0 % 17.6 %
Attrition rate - Core RMR (b) (c) 18.0 % 17.5 %
(a) Includes cancelled accounts that are contractually guaranteed to be
refunded from holdback.
(b) The RMR of cancelled accounts follows the same definition as subscriber
unit attrition as noted above. RMR attrition is defined as the RMR of cancelled
accounts in a given period, adjusted for the impact of price increases or
decreases in that period, divided by the weighted average of RMR for that
period.
(c) Core Unit and RMR attrition rates exclude the impact of the Protect America
bulk buy, where the Company is funding the purchase price through an earnout
payment structure.
The core unit attrition rate for the twelve months ended June 30, 2020 and 2019
was 16.0% and 17.6%, respectively. The core RMR attrition rate for the twelve
months ended June 30, 2020 and 2019 was 18.0% and 17.5%, respectively. The
decrease in core unit attrition rate for the twelve months ended June 30, 2020
includes the impact of fewer subscribers, as a percentage of the entire base,
reaching the end of their initial contract term, continued efforts around "at
risk" extensions and customer retention, and the benefit of improved credit
quality in our Direct to Consumer Channel. The increase in the core RMR
attrition
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rate for the twelve months ended June 30, 2020 was due to a combination of lower
RMR for accounts generated in the Direct to Consumer Channel, as a minimal
equipment subsidy is offered, lower production in the Dealer Channel, which
typically has higher RMR, and rate reductions relating to our "at risk"
retention program. Further, in light of COVID-19, starting in March 2020 , we
made the decision to defer taking ordinary course rate adjustments to our
customer base.
We analyze our attrition by classifying accounts into annual pools based on the
year of acquisition. We then track the number of cancelled accounts as a
percentage of the initial number of accounts acquired for each pool for each
year subsequent to its acquisition. Based on the average cancellation rate
across the pools, the Company's attrition rate is generally very low within the
initial 12 month period after considering the accounts which were replaced or
refunded by the dealers at no additional cost to the Company. Over the next few
years of the subscriber account life, the number of subscribers that cancel as a
percentage of the initial number of subscribers in that pool gradually increases
and historically has peaked following the end of the initial contract term,
which is typically three to five years. Subsequent to the peak following the end
of the initial contract term, the number of subscribers that cancel as a
percentage of the initial number of subscribers in that pool generally
normalizes. Accounts generated through the Direct to Consumer Channel have
homogeneous characteristics as accounts generated through the Dealer Channel and
follow the same attrition curves. However, accounts generated through the Direct
to Consumer Channel have attrition of approximately 10% in the initial 12 month
period following account acquisition which is higher than accounts generated in
the Dealer Channel due to the dealer guarantee period.
Adjusted EBITDA
We evaluate the performance of our operations based on financial measures such as revenue and "Adjusted EBITDA." Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts, dealer network and other intangible assets), restructuring charges, stock-based compensation, and other non-cash or non-recurring charges. We believe that Adjusted EBITDA is an important indicator of the operational strength and performance of our business. In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate the financial performance of companies in the security alarm monitoring industry and is one of the financial measures, subject to certain adjustments, by which our covenants are calculated under the agreements governing our debt obligations. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles inthe United States ("GAAP"), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs. It is, however, a measurement that we believe is useful to investors in analyzing our operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. As companies often define non-GAAP financial measures differently, Adjusted EBITDA as calculated byMonitronics should not be compared to any similarly titled measures reported by other companies. 22 -------------------------------------------------------------------------------- T able of Contents Results of Operations
Three Months Ended
Fresh Start Accounting Adjustments. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization of the Company inAugust 2019 and the application of fresh start accounting. We believe that certain of our consolidated operating results for the three months endedJune 30, 2020 is comparable to certain operating results from the comparable prior year period. The following table sets forth selected data from the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands). Predecessor Successor Company Company Three Months Ended Three Months Ended June 30, June 30, 2020 2019 Net revenue$ 120,808 $ 128,091 Cost of services 27,624 28,536
Selling, general and administrative, including stock-based and long-term incentive compensation
32,541 28,163
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
54,368 49,138 Interest expense 20,207 40,536 Loss before income taxes (21,050) (53,536) Income tax expense 602 666 Net loss (21,652) (54,202) Adjusted EBITDA (a) $ 64,101$ 68,276 Adjusted EBITDA as a percentage of Net revenue 53.1 % 53.3 % Expensed Subscriber acquisition costs, net Gross subscriber acquisition costs (b) $ 3,723 $ 8,921 Revenue associated with subscriber acquisition costs (1,444) (2,393) Expensed Subscriber acquisition costs, net $ 2,279 $ 6,528 (a) See reconciliation of Net income (loss) to Adjusted EBITDA below. (b) Gross subscriber acquisition costs for the three months endedJune 30, 2019 has been restated from$10,877,000 to$8,921,000 due to allocation adjustments made to align with current period presentation of expensed subscriber acquisition costs. Net revenue. Net revenue decreased$7,283,000 , or 5.7%, for the three months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease in net revenue is primarily attributable to a decrease in alarm monitoring revenue of$8,822,000 due to a lower average number of subscribers in 2020, partially offset by$2,200,000 of incremental revenue from the Protect America bulk buy, and an increase in product, installation and service revenue of$1,927,000 , largely due to an increase in field service jobs associated with contract extensions combined with higher revenue per transaction in the Direct to Consumer Channel. Also contributing to the decrease in net revenue is a decline in average RMR per subscriber from$45.40 as ofJune 30, 2019 to$43.95 as ofJune 30, 2020 due to the changing mix of customers generated through the Direct to Consumer Channel that typically have lower RMR as a result of lower subsidization of equipment and a lower average RMR of$40.81 for the the Protect America bulk buy. Cost of services. Cost of services decreased$912,000 , or 3.2%, for the three months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease includes the impact of a lower average number of subscribers in 2020 and a decline in subscriber acquisition costs related to reduced subscriber acquisitions in the Direct to Consumer Channel. 23 -------------------------------------------------------------------------------- T able of Contents Subscriber acquisition costs, which include expensed equipment and labor costs associated with the creation of new subscribers, decreased to$1,490,000 for the three months endedJune 30, 2020 , as compared to$2,915,000 for the three months endedJune 30, 2019 . The decrease is partially offset by an increase in cost to serve the incremental Protect America customers of$799,000 during the one month transition services period. Cost of services as a percentage of net revenue increased from 22.3% for the three months endedJune 30, 2019 to 22.9% for the three months endedJune 30, 2020 . Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased$4,378,000 , or 15.5%, for the three months endedJune 30, 2020 , as compared to the corresponding prior year period. The increase is primarily attributable to the Company receiving a$700,000 insurance settlement in second quarter of 2020, as compared to$4,800,000 received in the second quarter of 2019. These insurance receivable settlements were related to coverage provided by our insurance carriers in the 2017 class action litigation of alleged violation of telemarketing laws. Other increases included higher post-bankruptcy emergence salary expense, consulting fees on integration and implementation of company initiatives and severance expense related to transitioning executive leadership. These increases are partially offset by lower subscriber acquisition costs. Subscriber acquisition costs included in SG&A decreased to$2,233,000 for the three months endedJune 30, 2020 , as compared to$6,006,000 for the three months endedJune 30, 2019 due to decreased subscriber acquisition selling and marketing costs associated with the creation of new subscribers. SG&A as a percentage of net revenue increased from 22.0% for the three months endedJune 30, 2019 to 26.9% for the three months endedJune 30, 2020 . Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets. Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets increased$5,230,000 , or 10.6%, for the three months endedJune 30, 2020 , as compared to the corresponding prior year period. The increase is due to amortization of the dealer network intangible asset recognized upon the Company's emergence from bankruptcy. Additionally, as part of the fresh start accounting adjustments, the existing subscriber accounts as ofAugust 31, 2019 were stated at fair value and are amortized on the 14-year, 235% double-declining curve. This curve is shorter than the methodology utilized on newly generated subscriber accounts, due to the various aged vintages of the Company's subscriber base atAugust 31, 2019 . The shorter amortization curve results in higher amortization expense per period. These increases are partially offset by a lower number of subscriber accounts purchased in the last twelve months endedJune 30, 2020 , as compared to the corresponding prior year period. Interest expense. Interest expense decreased$20,329,000 , or 50.2%, for the three months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease in interest expense is attributable to the Company's decreased outstanding debt balances upon the reorganization, primarily related to the retirement of the Company's 9.125% Senior Notes. Income tax expense. The Company had pre-tax loss of$21,050,000 and income tax expense of$602,000 for the three months endedJune 30, 2020 . Income tax expense for the three months endedJune 30, 2020 is attributable to the Company's state tax expense incurred fromTexas margin tax. The Company had pre-tax loss of$53,536,000 and income tax expense of$666,000 for the three months endedJune 30, 2019 . Income tax expense for the three months endedJune 30, 2019 is attributable to the Company's state tax expense incurred fromTexas margin tax. Net loss. The Company had net loss of$21,652,000 for the three months endedJune 30, 2020 , as compared to a net loss of$54,202,000 for the three months endedJune 30, 2019 . The decrease in net loss for the three months endedJune 30, 2020 is primarily attributable to no restructuring and reorganization expense incurred in the current year period combined with lower interest expense. These decreases were partially offset by lower revenues and higher SG&A costs, radio conversion costs and amortization expense. 24
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Six Months Ended
Fresh Start Accounting Adjustments. With the exception of interest and amortization expense, the Company's operating results and key operating performance measures on a consolidated basis were not materially impacted by the reorganization of the Company inAugust 2019 and the application of fresh start accounting. We believe that certain of our consolidated operating results for the six months endedJune 30, 2020 is comparable to certain operating results from the comparable prior year period. The following table sets forth selected data from the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the periods indicated (dollar amounts in thousands). Predecessor Successor Company Company Six Months Ended Six Months Ended June 30, June 30, 2020 2019 Net revenue$ 243,383 $ 257,697 Cost of services 55,634 55,300
Selling, general and administrative, including stock-based and long-term incentive compensation
76,994 59,385
Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
107,649 98,283 Interest expense 40,549 77,969 Loss before income taxes (134,437) (84,635) Income tax expense 1,220 1,337 Net loss (135,657) (85,972) Adjusted EBITDA (a)$ 122,842 $ 142,015 Adjusted EBITDA as a percentage of Net revenue 50.5 % 55.1 % Expensed Subscriber acquisition costs, net Gross subscriber acquisition costs (b)$ 11,591 $ 14,777 Revenue associated with subscriber acquisition costs (3,304) (4,096) Expensed Subscriber acquisition costs, net $ 8,287$ 10,681 (a) See reconciliation of Net income (loss) to Adjusted EBITDA below. (b) Gross subscriber acquisition costs for the six months endedJune 30, 2019 has been restated from$18,192,000 to$14,777,000 due to allocation adjustments made to align with current period presentation of expensed subscriber acquisition costs. Net revenue. Net revenue decreased$14,314,000 , or 5.6%, for the six months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease in net revenue is primarily attributable to a decrease in alarm monitoring revenue of$19,493,000 due to a lower average number of subscribers in 2020, partially offset of$2,200,000 of incremental revenue from the Protect America bulk buy, and an increase in product, installation and service revenue of$5,889,000 , largely due to an increase in field service jobs associated with contract extensions combined with higher revenue per transaction in the Direct to Consumer Channel. Also contributing to the decrease in net revenue is a decline in average RMR per subscriber from$45.40 as ofJune 30, 2019 to$43.95 as ofJune 30, 2020 due to the changing mix of customers generated through the Direct to Consumer Channel that typically have lower RMR as a result of lower subsidization of equipment and a lower average RMR of$40.81 for the Protect America bulk buy. Cost of services. Cost of services increased$334,000 , or 0.6%, for the six months endedJune 30, 2020 , as compared to the corresponding prior year period. The increase is primarily attributable to an increase in field service jobs associated with contract extensions for our high propensity to churn population and cost to serve the incremental Protect America customers of$799,000 during the one month transition services period. Subscriber acquisition costs, which include expensed equipment and 25 -------------------------------------------------------------------------------- T able of Contents labor costs associated with the creation of new subscribers, decreased to$3,408,000 for the six months endedJune 30, 2020 , as compared to$4,586,000 for the six months endedJune 30, 2019 . Cost of services as a percentage of net revenue increased from 21.5% for the six months endedJune 30, 2019 to 22.9% for the six months endedJune 30, 2020 . Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased$17,609,000 , or 29.7%, for the six months endedJune 30, 2020 , as compared to the corresponding prior year period. The increase is partially attributable to the Company receiving a$700,000 insurance settlement in the second quarter of 2020, as compared to$4,800,000 received in the second quarter of 2019. These insurance receivable settlements were related to coverage provided by our insurance carriers in the 2017 class action litigation of alleged violation of telemarketing laws. Other increases included higher post-bankruptcy emergence salary expense, consulting fees on integration and implementation of company initiatives and severance expense related to transitioning executive leadership. These increases are partially offset by lower subscriber acquisition costs. Subscriber acquisition costs included in SG&A decreased to$8,183,000 for the six months endedJune 30, 2020 , as compared to$10,191,000 for the six months endedJune 30, 2019 due to decreased subscriber acquisition selling and marketing costs associated with the creation of new subscribers. SG&A as a percentage of net revenue increased from 23.0% for the six months endedJune 30, 2019 to 31.6% for the six months endedJune 30, 2020 . Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets. Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets increased$9,366,000 , or 9.5%, for the six months endedJune 30, 2020 , as compared to the corresponding prior year period. The increase is due to amortization of the dealer network intangible asset recognized upon the Company's emergence from bankruptcy. Additionally, as part of the fresh start accounting adjustments, the existing subscriber accounts as ofAugust 31, 2019 were stated at fair value and are amortized on the 14-year, 235% double-declining curve. This curve is shorter than the methodology utilized on newly generated subscriber accounts, due to the various aged vintages of the Company's subscriber base atAugust 31, 2019 . The shorter amortization curve results in higher amortization expense per period. These increases are partially offset by a lower number of subscriber accounts purchased in the last twelve months endedJune 30, 2020 , as compared to the corresponding prior year period. Interest expense. Interest expense decreased$37,420,000 , or 48.0%, for the six months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease in interest expense is attributable to the Company's decreased outstanding debt balances upon the reorganization, primarily related to the retirement of the Company's 9.125% Senior Notes. Income tax expense. The Company had pre-tax loss of$134,437,000 and income tax expense of$1,220,000 for the six months endedJune 30, 2020 . Income tax expense for the six months endedJune 30, 2020 is attributable to the Company's state tax expense incurred fromTexas margin tax. The Company had pre-tax loss of$84,635,000 and income tax expense of$1,337,000 for the six months endedJune 30, 2019 . Income tax expense for the six months endedJune 30, 2019 is attributable to the Company's state tax expense incurred fromTexas margin tax. Net loss. The Company had net loss of$135,657,000 for the six months endedJune 30, 2020 , as compared to a net loss of$85,972,000 for the six months endedJune 30, 2019 . The increase in net loss for the six months endedJune 30, 2020 is primarily attributable to a goodwill impairment charge recorded of$81,943,000 , combined with a decline in net revenue and less insurance settlements received, severance expense related to transitioning executive leadership, and increases in post-bankruptcy emergence employee costs and retention-related field service. Also impacting net loss for the six months endedJune 30, 2020 were radio conversion costs, with no such costs incurred in the six months endedJune 30, 2019 . The net loss for the six months endedJune 30, 2019 is due to higher interest expense, restructuring and reorganization expense, the realized and unrealized loss, net on derivative financial instruments and refinancing expense, partially offset by operating income. 26 -------------------------------------------------------------------------------- T able of Contents Adjusted EBITDA
Three Months Ended
The following table provide a reconciliation of Net loss to total Adjusted EBITDA for the periods indicated (amounts in thousands):
Predecessor
Successor Company Company
Three Months Ended Three Months Ended
June 30, June 30,
2020 2019
Net loss $ (21,652) $ (54,202) Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
54,368 49,138 Depreciation 3,451 3,121 Radio conversion costs 3,667 - Stock-based compensation - (413) Long-term incentive compensation 238 264 Legal settlement insurance recovery (700) (4,800) Severance expense (a) 1,352 - Integration / implementation of company initiatives 2,568 1,833 Restructuring and reorganization expense - 33,102 Interest expense 20,207 40,536 Unrealized gain, net on derivative financial instruments - (969) Income tax expense 602 666 Adjusted EBITDA $ 64,101$ 68,276
(a) Severance expense related to transitioning executive leadership in 2020.
Adjusted EBITDA decreased$4,175,000 , or 6.1%, for the three months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease for the three months endedJune 30, 2020 is primarily the result of the decrease in net revenue and the increase in SG&A expense as discussed above. Expensed Subscriber acquisition costs, net. Subscriber acquisition costs, net decreased to$2,279,000 for the three months endedJune 30, 2020 , as compared to$6,528,000 for the three months endedJune 30, 2019 . Expensed subscriber acquisition costs, net, for the three months endedJune 30, 2019 was restated from$8,484,000 to$6,528,000 to be comparable with how acquisition costs were allocated for the three months endedJune 30, 2020 . The change in subscriber acquisition cost allocation was done to better align us with how peer companies in the industry present subscriber acquisition costs. This change had no impact on the unaudited condensed consolidated statements of operations and comprehensive income (loss). The decrease in subscriber acquisition costs, net is primarily attributable to lower production volume in the Company's Direct to Consumer Channel year over year. 27 -------------------------------------------------------------------------------- T able of Contents Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019
The following table provide a reconciliation of Net loss to total Adjusted EBITDA for the periods indicated (amounts in thousands):
Predecessor
Successor Company Company
Six Months Ended Six Months Ended
June 30, June 30,
2020 2019
Net loss $ (135,657) $ (85,972) Amortization of subscriber accounts, deferred contract acquisition costs and other intangible assets
107,649 98,283 Depreciation 6,560 6,275 Radio conversion costs 8,491 - Stock-based compensation - (224) Long-term incentive compensation 401 550 LiveWatch acquisition contingent bonus charges - 63 Legal settlement insurance recovery (700) (4,800) Severance expense (a) 4,242 - Integration / implementation of company initiatives 8,144 3,414 Goodwill impairment 81,943 - Restructuring and reorganization expense - 33,102 Interest expense 40,549 77,969 Realized and unrealized loss, net on derivative financial instruments - 6,804 Refinancing expense - 5,214 Income tax expense 1,220 1,337 Adjusted EBITDA$ 122,842 $ 142,015
(a) Severance expense related to transitioning executive leadership in 2020.
Adjusted EBITDA decreased$19,173,000 , or 13.5%, for the six months endedJune 30, 2020 , as compared to the corresponding prior year period. The decrease for the six months endedJune 30, 2020 is primarily the result of decreases in net revenue and increases in retention-related field service costs and employee costs as discussed above. Expensed Subscriber acquisition costs, net. Subscriber acquisition costs, net decreased to$8,287,000 for the six months endedJune 30, 2020 , as compared to$10,681,000 for the six months endedJune 30, 2019 . Expensed subscriber acquisition costs, net, for the six months endedJune 30, 2019 was restated from$14,096,000 to$10,681,000 to be comparable with how acquisition costs were allocated for the six months endedJune 30, 2020 . The change in subscriber acquisition cost allocation was done to better align us with how peer companies in the industry present subscriber acquisition costs. This change had no impact on the unaudited condensed consolidated statements of operations and comprehensive income (loss). The decrease in subscriber acquisition costs, net is primarily attributable to lower production volume in the Company's Direct to Consumer Channel year over year.
Liquidity and Capital Resources
As ofJune 30, 2020 , we had$45,452,000 of cash and cash equivalents. Our primary sources of funds is our cash flows from operating activities which are generated from alarm monitoring and related service revenues. During the six months endedJune 30, 2020 and 2019, our cash flow from operating activities was$55,611,000 and$74,221,000 , respectively. The primary drivers of our cash flow from operating activities are the fluctuations in revenues and operating expenses as discussed in "Results of Operations" above. In addition, our cash flow from operating activities may be significantly impacted by changes in working capital. 28 -------------------------------------------------------------------------------- T able of Contents During the six months endedJune 30, 2020 and 2019, we used cash of$60,586,000 and$61,335,000 , respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations. In addition, during the six months endedJune 30, 2020 and 2019, we used cash of$7,781,000 and$6,767,000 , respectively, to fund our capital expenditures. Our existing long-term debt atJune 30, 2020 includes the aggregate principal balance of$1,029,831,000 under the Takeback Loan Facility, Term Loan Facility and the Revolving Credit Facility. The Takeback Loan Facility has an outstanding principal balance of$816,331,000 as ofJune 30, 2020 and requires principal payments of$2,056,250 per quarter, with the remaining amount becoming due onMarch 29, 2024 . The Term Loan Facility has an outstanding principal balance of$150,000,000 as ofJune 30, 2020 . The Revolving Credit Facility has an outstanding balance of$63,500,000 as ofJune 30, 2020 . We also had$600,000 available under a standby letter of credit issued as ofJune 30, 2020 . The maturity date of the loans made under the Term Loan Facility and the Revolving Credit Facility isJuly 3, 2024 , subject to a springing maturity ofMarch 29, 2024 , or earlier, depending on any repayment, refinancing or changes in the maturity date of the Takeback Loan Facility.
The Asset Purchase Agreement with Protect America provides for 50 monthly
Earnout Payments consisting of a portion of the revenue attributable to the
Accounts, subject to adjustment for Accounts that are no longer active. The
estimated liability for the Earnout Payments as of
In
Radio Conversion Costs Certain cellular carriers of 3G and CDMA cellular networks have announced that they will be retiring these networks between February and December of 2022. As ofJune 30, 2020 , we have approximately 393,000 subscribers with 3G or CDMA equipment which may have to be upgraded as a result of these retirements. Additionally, in the month of September of 2019, other certain cellular carriers of 2G cellular networks have announced that the 2G cellular networks will be sunsetting as ofDecember 31, 2020 . As ofJune 30, 2020 , we have approximately 19,000 subscribers with 2G cellular equipment which may have to be upgraded as a result of this retirement. The remaining subscribers with 3G or 2G equipment include approximately 50,000 subscribers acquired from Protect America. While we are in the early phase of offering equipment upgrades to our 3G and 2G population, we currently estimate that the total cost of converting our 3G and 2G subscribers, including those acquired from Protect America, will be between$80,000,000 and$90,000,000 . For the three and six months endedJune 30, 2020 , the Company incurred radio conversion costs of$3,667,000 and$8,491,000 , respectively. Cumulative throughJune 30, 2020 , we have spent approximately$12,700,000 on 3G and 2G conversions. Total costs for the conversion of such customers are subject to numerous variables, including our ability to work with our partners and subscribers on cost sharing initiatives, and the costs that we actually incur could be materially higher than our current estimates.
Liquidity Outlook
In considering our liquidity requirements for the next twelve months, we evaluated our known future commitments and obligations. We will require the availability of funds to finance our strategy to grow through the acquisition of subscriber accounts as well as completing our payment obligations under the Protect America earnout liability. We considered our expected operating cash flows as well as the borrowing capacity of our Revolving Credit Facility, under which we could borrow an additional$80,900,000 as ofJune 30, 2020 , subject to certain financial covenants. Based on this analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the Revolving Credit Facility will provide sufficient liquidity for the next twelve months, given our anticipated current and future requirements. Subject to our credit agreements, we may seek debt financing in the event of any new investment opportunities, additional capital expenditures or our operations requiring additional funds, but there can be no assurance that we will be able to obtain debt financing on terms that would be acceptable to us or at all.
Our
ability to seek additional sources of funding depends on our future financial
position and results of operations, which are subject to general conditions in
or affecting our industry and our customers and to general economic, political,
financial, competitive, legislative and regulatory factors beyond our control.
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