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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Monitronics International, Inc.    SCTY

MONITRONICS INTERNATIONAL, INC.

(SCTY)
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MONITRONICS INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/10/2020 | 01:28pm EDT
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 the
U.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 ended December 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.

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Overview

Monitronics International, Inc. and its subsidiaries (collectively,
"Monitronics" or the "Company", doing business as Brinks Home SecurityTM)
provide residential customers and commercial client accounts with monitored home
and business security systems, as well as interactive and home automation
services, in the United States, Canada and Puerto Rico.  Monitronics customers
are obtained through our direct-to-consumer sales channel (the "Direct to
Consumer Channel"), which offers both Do-It-Yourself and professional
installation security solutions and our exclusive authorized dealer network (the
"Dealer Channel"), which provides product and installation services, as well as
support to customers.

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

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

Asset Purchase Agreement


On June 17, 2020, the Company, as buyer, entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") with Protect 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 of June 17, 2020 and an estimated
liability for the Earnout Payments of approximately $86,000,000. The Earnout
Payments liability was estimated based on 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


In December 2019, an outbreak of a novel strain of coronavirus ("COVID-19")
originated in Wuhan, China and has been detected globally on a widespread basis,
including in the 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 on March 27, 2020 in the U.S. The CARES Act, among
other things, provides for an acceleration of alternative minimum tax credit
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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
of June 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 of March 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
ended June 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
ended June 30, 2020.

As noted in the financial statements, as of March 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 ended June 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 June 30, 2020


During the three months ended June 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 ended
June 30, 2020 is due to a bulk buy of 113,013 accounts in June 2020 from Protect
America. There were no bulk buys during the three months ended June 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 of March 2020.

RMR acquired during the three months ended June 30, 2020 and 2019 was $5,272,000 and $1,103,000, respectively. RMR acquired during the three months ended June 30, 2020 related to bulk buys was $4,612,000.

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For the Six Months Ended June 30, 2020


During the six months ended June 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 ended June 30, 2020 is due to bulk buys of 113,013 accounts in June 2020
and 10,960 accounts in March 2020. There were no bulk buys during the six months
ended June 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 of March 2020.

RMR acquired during the six months ended June 30, 2020 and 2019 was $6,346,000
and $2,066,000, respectively. RMR acquired during the six months ended June 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 June 30, 2020 and 2019:

Twelve Months Ended June 30,

                                                                                    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 in the 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 by Monitronics should not be
compared to any similarly titled measures reported by other companies.

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Results of Operations

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019


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 in August 2019 and the application of fresh start
accounting. We believe that certain of our consolidated operating results for
the three months ended June 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 ended June 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
ended June 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 of June 30, 2019 to $43.95
as of June 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 ended June 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.
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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 ended June 30, 2020, as compared to $2,915,000 for the three months
ended June 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 ended June 30, 2019 to 22.9% for the
three months ended June 30, 2020.

Selling, general and administrative.  Selling, general and administrative costs
("SG&A") increased $4,378,000, or 15.5%, for the three months ended June 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 ended June 30, 2020, as
compared to $6,006,000 for the three months ended June 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 ended June 30, 2019 to 26.9% for the three months ended
June 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 ended June 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 of August 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 at August 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 ended June 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 ended June 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 ended June 30, 2020. Income tax expense
for the three months ended June 30, 2020 is attributable to the Company's state
tax expense incurred from Texas margin tax. The Company had pre-tax loss of
$53,536,000 and income tax expense of $666,000 for the three months ended
June 30, 2019. Income tax expense for the three months ended June 30, 2019 is
attributable to the Company's state tax expense incurred from Texas margin tax.

Net loss. The Company had net loss of $21,652,000 for the three months ended
June 30, 2020, as compared to a net loss of $54,202,000 for the three months
ended June 30, 2019. The decrease in net loss for the three months ended
June 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.

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Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019


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 in August 2019 and the application of fresh start
accounting. We believe that certain of our consolidated operating results for
the six months ended June 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 ended June 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
ended June 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 of June 30, 2019 to $43.95
as of June 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 ended June 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
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labor costs associated with the creation of new subscribers, decreased to
$3,408,000 for the six months ended June 30, 2020, as compared to $4,586,000 for
the six months ended June 30, 2019. Cost of services as a percentage of net
revenue increased from 21.5% for the six months ended June 30, 2019 to 22.9% for
the six months ended June 30, 2020.

Selling, general and administrative.  Selling, general and administrative costs
("SG&A") increased $17,609,000, or 29.7%, for the six months ended June 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 ended June 30, 2020, as compared
to $10,191,000 for the six months ended June 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 ended June 30, 2019 to 31.6% for the six months ended June 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 ended June 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 of August 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 at August 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 ended June 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 ended June 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 ended June 30, 2020. Income tax expense
for the six months ended June 30, 2020 is attributable to the Company's state
tax expense incurred from Texas margin tax. The Company had pre-tax loss of
$84,635,000 and income tax expense of $1,337,000 for the six months ended
June 30, 2019. Income tax expense for the six months ended June 30, 2019 is
attributable to the Company's state tax expense incurred from Texas margin tax.

Net loss. The Company had net loss of $135,657,000 for the six months ended
June 30, 2020, as compared to a net loss of $85,972,000 for the six months ended
June 30, 2019. The increase in net loss for the six months ended June 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
ended June 30, 2020 were radio conversion costs, with no such costs incurred in
the six months ended June 30, 2019. The net loss for the six months ended
June 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.
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Adjusted EBITDA

Three Months Ended June 30, 2020 Compared to Three Months Ended June 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
                                                              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 ended
June 30, 2020, as compared to the corresponding prior year period.  The decrease
for the three months ended June 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 ended June 30, 2020, as compared to
$6,528,000 for the three months ended June 30, 2019. Expensed subscriber
acquisition costs, net, for the three months ended June 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 ended June 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.
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Six Months Ended June 30, 2020 Compared to Six Months Ended June 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 ended
June 30, 2020, as compared to the corresponding prior year period.  The decrease
for the six months ended June 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 ended June 30, 2020, as compared to
$10,681,000 for the six months ended June 30, 2019. Expensed subscriber
acquisition costs, net, for the six months ended June 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 ended June 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 of June 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 ended June 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.

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During the six months ended June 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 ended
June 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 at June 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 of June 30, 2020 and requires
principal payments of $2,056,250 per quarter, with the remaining amount becoming
due on March 29, 2024.  The Term Loan Facility has an outstanding principal
balance of $150,000,000 as of June 30, 2020. The Revolving Credit Facility has
an outstanding balance of $63,500,000 as of June 30, 2020. We also had $600,000
available under a standby letter of credit issued as of June 30, 2020. The
maturity date of the loans made under the Term Loan Facility and the Revolving
Credit Facility is July 3, 2024, subject to a springing maturity of March 29,
2024, or earlier, depending on any repayment, refinancing or changes in the
maturity date of the Takeback Loan Facility.

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 June 30, 2020 is approximately $86,000,000.

In March 2020, we borrowed $50,000,000 on our Revolving Credit Facility to address any unforeseen liquidity needs during the COVID-19 pandemic.


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
of June 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 of December 31, 2020. As of June 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 ended June 30, 2020,
the Company incurred radio conversion costs of $3,667,000 and $8,491,000,
respectively. Cumulative through June 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 of June 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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