Introduction
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained herein and the consolidated financial statements and notes thereto for the year endedDecember 31, 2020 contained in our Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2020 filed with theSEC onMay 12, 2021 (the "Form 10-K/A"). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the Form 10-K/A. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references to "we", "us", "our", and "the Company" are intended to mean the business and operations ofVivint Smart Home, Inc. and its consolidated subsidiaries. The unaudited condensed consolidated financial statements for the three months endedMarch 31, 2021 and 2020, respectively, present the financial position and results of operations ofVivint Smart Home, Inc. and its wholly-owned subsidiaries. Business OverviewVivint Smart Home is a leading smart home platform company serving approximately 1.7 million subscribers as ofMarch 31, 2021 . Our mission is to redefine the home experience through intelligently designed cloud-enabled solutions, delivered to every home by peoplewho care. Our brand name,Vivint , represents "to live intelligently," and our solutions help our subscribers do just that. We make creating a smart home easy and affordable with an integrated platform, best-in-class products, hassle-free professional installation and zero percent interest rate consumer financing for most customers. We help consumers create a customized solution for their home by integrating smart cameras (indoor, outdoor, doorbell), locks, lights, thermostats, garage door control, car protection and a host of safety and security sensors. As ofMarch 31, 2021 , on average our subscribers had 15 security and smart home devices in each home. We provide a fully integrated solution for consumers with our vertically integrated business model which includes hardware, software, sales, installation, support and professional monitoring. This model strengthens our ability to deliver superior experiences at every customer touchpoint and a complete end-to-end smart home experience. This seamless integration of high-quality products and services results in an average subscriber lifetime of approximately eight years, as ofMarch 31, 2021 . Our cloud-based home platform currently manages more than 20 million in-home devices as ofMarch 31, 2021 . Our subscribers are able to interact with their connected home by using their voice or mobile device-anytime, anywhere. They can engage with people at their front door; view live and recorded video inside and outside their home; control thermostats, locks, lights, and garage doors; and proactively manage the comings and goings of family, friends and visitors. Our average subscriber engages with our smart home app multiple times per day. Our technology and people are the foundation of our business. Our trained professionals educate consumers on the value and affordability of a smart home, design a customized solution for their homes and their individual needs, teach them how to use our platform to enhance their experience, and provide ongoing tech-enabled services to manage, monitor and secure their home. Our SHaaS business model generates subscription-based, high-margin recurring revenue from subscriberswho sign up for our smart home services. More than 95% of our revenue is recurring, which provides long-term visibility and predictability to our business. Despite the many uncertainties pertaining to the COVID-19 pandemic, our recurring revenue model has proven resilient. Key Performance Measures In evaluating our results, we review several key performance measures discussed below. We believe that the presentation of such metrics is useful to our investors and lenders because they are used to measure the value of companies such as ours with 48 -------------------------------------------------------------------------------- Table of Contents recurring revenue streams. Management uses these metrics to analyze its continuing operations and to monitor, assess, and identify meaningful trends in the operating and financial performance of the company. Total Subscribers Total Subscribers is the aggregate number of active smart home and security subscribers at the end of a given period. Total Monthly Revenue Total monthly revenue, or Total MR, is the average monthly total revenue recognized during the period. Average Monthly Revenue per User Average monthly revenue per user, or AMRU, is Total MR divided by average monthly Total Subscribers during a given period. Total Monthly Service Revenue Total monthly service revenue, or MSR, is the contracted recurring monthly service billings to our smart home and security subscribers, based on the Total Subscribers number as of the end of a given period. Average Monthly Service Revenue per User Average monthly service revenue per user, or AMSRU, is Total MSR divided by Total Subscribers at the end of a given period. Attrition Rate Attrition rate is the aggregate number of canceled smart home and security subscribers during the prior 12 month period divided by the monthly weighted average number of Total Subscribers based on the Total Subscribers at the beginning and end of each month of a given period. Subscribers are considered canceled when they terminate in accordance with the terms of their contract, are terminated by us or if payment from such subscribers is deemed uncollectible (when at least four monthly billings become past due). If a sale of a service contract to third parties occurs, or a subscriber relocates but continues their service, we do not consider this as a cancellation. If a subscriber transfers their service contract to a new subscriber, we do not consider this as a cancellation. Average Subscriber Lifetime Average subscriber lifetime, in number of months, is 100% divided by our expected long-term annualized attrition rate (which is currently estimated at 13%) multiplied by 12 months. Net Service Cost per Subscriber Net service cost per subscriber is the average monthly service costs incurred during the period (both period and capitalized service costs), including monitoring, customer service, field service and other service support costs, less total non-recurring smart home services billings and cellular network maintenance fees for the period, divided by average monthly Total Subscribers for the same period. Net Service Margin Net service margin is the monthly average MSR for the period, less total average net service costs for the period divided by the monthly average MSR for the period. New Subscribers New subscribers is the aggregate number of net new smart home and security subscribers originated during a given period. This metric excludes new subscribers acquired by the transfer of a service contract from one subscriber to another. Net Subscriber Acquisition Costs per New Subscriber Net Subscriber Acquisition Costs per New Subscriber is the net cash cost to create new smart home and security subscribers during a given 12 month period divided by New Subscribers for that period. These costs include commissions, Products, installation, marketing, sales support and other allocations (general and administrative and overhead); less upfront payments received from the sale of Products associated with the initial installation, and installation fees. Upfront payments reflect gross proceeds prior to deducting fees related to consumer financing of Products. These costs exclude capitalized contract costs and upfront proceeds associated with contract modifications. Total Monthly Service Revenue for New Subscribers Total Monthly Service Revenue for New Subscribers is the contracted recurring monthly service billings to our New 49 -------------------------------------------------------------------------------- Table of Contents Subscribers during the prior 12 month period. Adjusted EBITDA Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation, amortization, stock-based compensation (or non-cash compensation), certain financing fees, changes in the fair value of the derivative liability associated with our public and private warrants and certain other non-recurring expenses or gains. During the first quarter of 2021, in connection with our re-assessment of our accounting for our public and private warrants, we updated our definition of "Adjusted EBITDA" to exclude the impact of changes in the fair value of the derivative liability associated with our public and private warrants. We do not consider changes in the fair value of the warrants to be directly attributable to our operations and we believe that excluding the impact of changes in the fair value of the warrants from our calculation of Adjusted EBITDA results in a metric that better reflects the results of our operations. Prior period disclosure of Adjusted EBITDA were updated to conform to our updated definition of Adjusted EBITDA. Adjusted EBITDA is not defined under GAAP and is subject to important limitations. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies. We believe that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. In addition, targets based on Adjusted EBITDA are among the measures we use to evaluate our management's performance for purposes of determining their compensation under our incentive plans. Adjusted EBITDA and other non-GAAP financial measures have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, Adjusted EBITDA: •excludes certain tax payments that may represent a reduction in cash available to us; •does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized, including capitalized contract costs, that may have to be replaced in the future; •does not reflect changes in, or cash requirements for, our working capital needs; •does not reflect the significant interest expense to service our debt; •does not reflect the monthly financing fees incurred associated with our obligations under the Consumer Financing Program; •does not include changes in the fair value of the warrant liabilities; and •does not include non-cash stock-based employee compensation expense and other non-cash charges. We believe that the most directly comparable GAAP measure to Adjusted EBITDA is net income (loss). We have included the calculation of Adjusted EBITDA and reconciliation of Adjusted EBITDA to net loss for the periods presented below under Key Operating Metrics - Adjusted EBITDA. Recent Developments COVID-19 update InDecember 2019 , COVID-19 was first reported and onMarch 11, 2020 , theWorld Health Organization (WHO ) characterized COVID-19 as a pandemic. Operational update. We have implemented a number of operational changes to continue to provide the same level of service our customers have come to rely on, while caring for the well-being of our customers and employees: •We transitioned more than 1,500 customer care professionals to effective work-from-home environments where they continue to provide uninterrupted customer service. •We are maintaining our geographically dispersed central monitoring stations to provide 24/7 professional monitoring services for all emergencies. •We have instituted work-from-home capabilities for most corporate employees across all our facilities, following state and local guidelines. •Based on the latest CDC guidelines, we have implemented new operating and safety procedures to keep both our customers and employees safe, including: 50 -------------------------------------------------------------------------------- Table of Contents •Conducting daily "fitness-for-duty" assessments for all customer-facing employees, which includes a temperature and symptoms check. •Contacting customers before our visit to determine if anyone in the home is experiencing signs of illness or flu-like symptoms, or has been exposed to COVID-19, and rescheduling appointments when needed. •Following CDC guidelines for social distancing and hand washing, including cleaning workspaces and surfaces, and not shaking hands with customers. •Using protective sanitary equipment during service visits, such as disposable gloves, masks and hand sanitizer. •For most company campus facilities, requiring employees to wear face coverings in all common areas and meeting rooms where social distancing is not practical. •We are providing up to 14 days of paid time off for any employeewho has contracted COVID-19 or is required to be quarantined by a public health authority. •Although not required, we are encouraging our employees to receive COVID-19 vaccinations by offering incentives to customer facing employees and by providing vaccines at our on site clinic located at ourProvo, Utah headquarters. •We are developing a plan for employees to return to the office later in 2021, utilizing a hybrid model in which employees split their time between working from the office and from home. In addition, we have made a change to our business inCanada . Each account sold inCanada has historically required a significant cash investment by our company. EffectiveJune 2020 ,Vivint Canada, Inc. no longer sells new equipment or accounts through its door-to-door sales channel. We will continue to sell inCanada through online marketing and our inside sales channels. We will continue to operate inCanada , with dedicated support and services. Despite the recent overall reduction in new COVID-19 cases and the increase in the percentage of the US population receiving vaccinations,the United States continues to struggle with rolling outbreaks of the COVID-19 virus, and the full impact of the pandemic on our business and results of operations will depend on the ultimate duration of the pandemic as well as the severity of any resurgence in COVID-19 cases in the future. While we did not experience a significant adverse financial impact from the COVID-19 pandemic in 2020, our business could be adversely impacted in the future if the COVID-19 pandemic continues for an extended period of time and regions of the country are forced to either delay or roll back plans for reopening their economies, or if government stimulus programs are discontinued or reduced. Financial update. We have implemented business continuity plans intended to continue to ensure the health, safety, and well-being of our customers, employees and communities, and to protect the financial and operational strength of the company. These plans included reduced discretionary spending, temporarily suspended certain employee benefit programs for a portion of 2020 and received pricing concessions from certain of our key vendors, some of which are short-term in nature, in each case to preserve cash and improve our cost structure. This reduced spending may not be sustainable over time without negatively impacting our results of operations. Although the COVID-19 pandemic did not have a material impact on our fiscal year 2020 results of operations, as discussed above with respect to the operational challenges posed by the pandemic the broader implications of COVID-19 on our future results of operations and overall financial performance remain uncertain. Depending on the breadth and duration of the ongoing outbreak, which we are not currently able to predict, the adverse impact could be material. Our future business could be adversely affected by COVID-19, including our ability to maintain compliance with our debt covenants, due to the following: •Our ability to generate new subscribers, particularly in our direct-to-home sales channel. •Increases in customer attrition and deferment or forgiveness of our customers' monthly service fees, due to the increased unemployment rates and reduced wages. These could increase our allowance for bad debt, provision for credit losses, and losses on our derivative liability associated with the consumer financing program. •The impact of the pandemic and actions taken in response thereto on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending. •Ability to obtain the equipment necessary to generate new subscriber accounts or service our existing subscriber base, due to potential supply chain disruption. For example, although it has not yet had a significant impact on our business, some technology companies are facing shortages of certain components used in our Products, which if prolonged could impact our ability to obtain the equipment needed to support our operations. Such shortages will 51 -------------------------------------------------------------------------------- Table of Contents also likely require us to utilize expedited shipping methods to maintain adequate supply, which would result in increased transportation costs for this equipment. •Limitations on our ability to enter our customer's homes to perform installs or equipment repairs. •Our ability to access capital, or to access such capital at reasonable economic terms. •Inefficiencies and potential incremental costs resulting from the requirement for many of our employees to work from home. These factors could become indicators of asset impairments in the future, depending on the significance and duration of the disruption. While short-term, temporary disruptions may not indicate an impairment; the effects of a prolonged outbreak may cause asset impairments. We continue to monitor the situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may be required or elect to take additional actions based on their recommendations. Critical Accounting Policies and Estimates In preparing our unaudited Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, loss from operations and net loss, as well as on the value of certain assets and liabilities on our unaudited Condensed Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, deferred revenue, capitalized contract costs, derivatives, retail installment contract receivables, allowance for doubtful accounts, loss contingencies, valuation of intangible assets, impairment of long-lived assets, fair value and income taxes have the greatest potential impact on our unaudited Condensed Consolidated Financial Statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 1 to our accompanying unaudited Condensed Consolidated Financial Statements. Revenue Recognition We offer our customers smart home services combining Products, including our proprietary Vivint Smart Hub, door and window sensors, door locks, cameras and smoke alarms; installation; and a proprietary back-end cloud platform software and Services. These together create an integrated system that allows our customers to monitor, control and protect their home. Our customers are buying this integrated system that provides them with these smart home services. The number and type of Products purchased by a customer depends on their desired functionality. Because the Products and Services included in the customer's contract are integrated and highly interdependent, and because they must work together to deliver the smart home services, we have concluded that installed Products, related installation and Services contracted for by the customer are generally not distinct within the context of the contract and, therefore, constitute a single, combined performance obligation. Revenues for this single, combined performance obligation are recognized on a straight-line basis over the customer's contract term, which is the period in which the parties to the contract have enforceable rights and obligations. We have determined that certain contracts that do not require a long-term commitment for monitoring services by the customer contain a material right to renew the contract, because the customer does not have to purchase Products upon renewal. Proceeds allocated to the material right are recognized over the period of benefit, which is generally three years. The majority of our subscription contracts are between three and five years in length and are generally non-cancelable. These contracts with customers generally convert into month-to-month agreements at the end of the initial term, and some customer contracts are month-to-month from inception. Payment for recurring monitoring and other smart home services is generally due in advance on a monthly basis. Sales of Products and other one-time fees such as service or installation fees are invoiced to the customer at the time of sale. Any Products or Services that are considered separate performance obligations are recognized when those Products or Services are delivered. Taxes collected from customers and remitted to governmental authorities are not included in revenue. Payments received or amounts billed in advance of revenue recognition are reported as deferred revenue. We consider Products, related installation, and our proprietary back-end cloud platform software and services an integrated system that allows our customers to monitor, control and protect their homes. These smart home services are 52 -------------------------------------------------------------------------------- Table of Contents accounted for as a single performance obligation that is recognized over the customer's contract term, which is generally three to five years. Deferred Revenue Our deferred revenues primarily consist of amounts for sales (including upfront proceeds) of smart home services. Deferred revenues are recognized over the term of the related performance obligation, which is generally three to five years. Capitalized Contract Costs Capitalized contract costs represent the costs directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts. These include commissions, other compensation and related costs incurred directly for the origination and installation of new or upgraded customer contracts, as well as the cost of Products installed in the customer home at the commencement or modification of the contract. We calculate amortization by accumulating all deferred contract costs into separate portfolios based on the initial month of service and amortize those deferred contract costs on a straight-line basis over the expected period of benefit that we have determined to be five years, consistent with the pattern in which we provide services to our customers. We believe this pattern of amortization appropriately reduces the carrying value of the capitalized contract costs over time to reflect the decline in the value of the assets as the remaining period of benefit for each monthly portfolio of contracts decreases. The period of benefit of five years is longer than a typical contract term because of anticipated contract renewals. We apply this period of benefit to our entire portfolio of contracts. We update our estimate of the period of benefit periodically and whenever events or circumstances indicate that the period of benefit could change significantly. Such changes, if any, are accounted for prospectively as a change in estimate. Amortization of capitalized contract costs is included in "Depreciation and Amortization" on the consolidated statements of operations. The carrying amount of the capitalized contract costs is periodically reviewed for impairment. In performing this review, we consider whether the carrying amount of the capitalized contract costs will be recovered. In estimating the amount of consideration we expect to receive in the future related to capitalized contract costs, we consider factors such as attrition rates, economic factors, and industry developments, among other factors. If it is determined that capitalized contract costs are impaired, an impairment loss is recognized for the amount by which the carrying amount of the capitalized contract costs and the anticipated costs that relate directly to providing the future services exceed the consideration that has been received and that is expected to be received in the future. Contract costs not directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts are expensed as incurred. These costs include those associated with housing, marketing and recruiting, non-direct lead generation costs, certain portions of sales commissions and residuals, overhead and other costs considered not directly and specifically tied to the origination of a particular subscriber. On the unaudited condensed consolidated statement of cash flows, capitalized contract costs are classified as operating activities and reported as "Capitalized contract costs - deferred contract costs" as these assets represent deferred costs associated with subscriber contracts. Consumer Financing Program Vivint Flex Pay became our primary equipment financing model beginning inMarch 2017 . Under Vivint Flex Pay, customers pay separately for the products (including control panel, security peripheral equipment, smart home equipment, and related installation) ("Products") andVivint's smart home and security services ("Services"). The customer has the following three ways to pay for the Products: (1) qualified customers inthe United States may finance the purchase of Products through third-party financing providers ("Consumer Financing Program" or "CFP"), (2) we offer to a limited number of customers not eligible for the CFP, butwho qualify under our underwriting criteria, the option to enter into a retail installment contract ("RIC") directly withVivint , or (3) customers may purchase the Products at the outset of the service contract by check, automatic clearing house payments ("ACH"), credit or debit card. Although customers pay separately for Products and Services under theVivint Flex Pay plan, we have determined that the sale of Products and Services are one single performance obligation. As a result, all forms of transactions under Vivint Flex Pay create deferred revenue for the gross amount of Products sold. For RICs, gross deferred revenues are reduced by imputed interest and estimated write-offs. For Products financed through the CFP, gross deferred revenues are reduced by (i) any fees 53 -------------------------------------------------------------------------------- Table of Contents the third-party financing provider ("Financing Provider") is contractually entitled to receive at the time of loan origination, and (ii) the present value of expected future payments due to Financing Providers. Under the CFP, qualified customers are eligible for financing offerings ("Loans") originated by Financing Providers of between$150 and$6,000 . The terms of most Loans are determined based on the customer's credit quality. The annual percentage rates on these Loans is either 0% or 9.99%, depending on the customer's credit quality, and are either installment or revolving loans with repayment terms ranging from 6- to 60-months. For certain Financing Provider Loans, we pay a monthly fee based on either the average daily outstanding balance of the installment loans, or the number of outstanding Loans. For certain Loans, we incur fees at the time of the Loan origination and receive proceeds that are net of these fees. For certain Loans, we also share liability for credit losses, with us being responsible for between 2.6% and 100% of lost principal balances. Additionally, we are responsible for reimbursing certain Financing Providers for merchant transaction fees and other fees associated with the Loans. Because of the nature of these provisions, we record a derivative liability at its fair value when the Financing Provider originates Loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services. The derivative liability is reduced as payments are made by us to the Financing Provider. Subsequent changes to the fair value of the derivative liability are realized through other expenses (income), net in the unaudited condensed consolidated statement of operations. For certain other Loans, we receive net proceeds (net of fees and expected losses) for which we have no further obligation to the Financing Provider. We record these net proceeds to deferred revenue. Retail Installment Contract Receivables For subscribers that enter into a RIC to finance the purchase of Products and related installation, we record a receivable for the amount financed. Gross RIC receivables are reduced for (i) expected write-offs of uncollectible balances over the term of the RIC and (ii) a present value discount of the expected cash flows using a risk adjusted market interest rate. Therefore, the RIC receivables equal the present value of the expected cash flows to be received by us over the term of the RIC, evaluated on a pool basis. RICs are pooled based on customer credit quality, contract length and geography. At the time of installation, we record a long-term note receivable within long-term notes receivables and other assets, net on the unaudited condensed consolidated balance sheets for the present value of the receivables that are expected to be collected beyond 12 months of the reporting date. The unbilled receivable amounts that are expected to be collected within 12 months of the reporting date are included as a short-term notes receivable within accounts and notes receivable, net on the unaudited condensed consolidated balance sheets. The billed amounts of notes receivables are included in accounts receivable within accounts and notes receivable, net on the unaudited condensed consolidated balance sheets. We impute the interest on the RIC receivable using a risk adjusted market interest rate and record it as a reduction to deferred revenue and as an adjustment to the face amount of the related receivable. The risk adjusted interest rate considers a number of factors, including credit quality of the subscriber base and other qualitative considerations such as macro-economic factors. The imputed interest income is recognized over the term of the RIC contract as recurring and other revenue on the unaudited condensed consolidated statements of operations. When we determine that there are RIC receivables that have become uncollectible, we record an adjustment to the allowance and reduce the related note receivable balance. On a regular basis, we also reassess the expected remaining cash flows, based on historical RIC write-off trends, current market conditions and both Company and third-party forecast data . If we determine there is a change in expected remaining cash flows, the total amount of this change for all RICs is recorded in the current period to the provision for credit losses, which is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. Account balances are written-off if collection efforts are unsuccessful and future collection is unlikely based on the length of time from the day accounts become past due. Accounts Receivable Accounts receivable consists primarily of amounts due from subscribers for recurring monthly monitoring Services, amounts due from third-party financing providers and the billed portion of RIC receivables. The accounts receivable are recorded at invoiced amounts and are non-interest bearing and are included within accounts and notes receivable, net on the unaudited condensed consolidated balance sheets. We estimate this allowance based on historical collection experience, subscriber attrition rates, current market conditions and both Company and third-party forecast data. When we determine that there are accounts receivable that are uncollectible, they are charged off against the allowance for doubtful accounts. The provision for doubtful accounts is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. 54 -------------------------------------------------------------------------------- Table of Contents Loss Contingencies We record accruals for various contingencies including legal and regulatory proceedings and other matters that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of legal counsel. We record an accrual when a loss is deemed probable to occur and is reasonably estimable. We evaluate these matters each quarter to assess our loss contingency accruals, and make adjustments in such accruals, upward or downward, as appropriate, based on our management's best judgment after consultation with counsel. Factors that we consider in the determination of the likelihood of a loss and the estimate of the range of that loss in respect of legal and regulatory matters include the merits of a particular matter, the nature of the litigation or claim, the length of time the matter has been pending, the procedural posture of the matter, whether we intend to defend the matter, the likelihood of settling for an insignificant amount and the likelihood of the plaintiff or regulator accepting an amount in this range. However, the outcome of such legal and regulatory matters is inherently unpredictable and subject to significant uncertainties.There is no assurance that these accruals for loss contingencies will not need to be adjusted in the future or that, in light of the uncertainties involved in such matters, the ultimate resolution of these matters will not significantly exceed the accruals that we have recorded.Goodwill and Intangible Assets Purchase accounting requires that all assets and liabilities acquired in a transaction be recorded at fair value on the acquisition date, including identifiable intangible assets separate from goodwill. For significant acquisitions, we obtain independent appraisals and valuations of the intangible (and certain tangible) assets acquired and certain assumed obligations as well as equity. Identifiable intangible assets include customer relationships and other purchased and internally developed technology.Goodwill represents the excess of cost over the fair value of net assets acquired. The estimated fair values and useful lives of identified intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, estimates of cost avoidance, the nature of the business acquired, the specific characteristics of the identified intangible assets and our historical experience and that of the acquired business. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including product demand, market conditions, regulations affecting the business model of our operations, technological developments, economic conditions and competition. We conduct a goodwill impairment analysis annually in the fourth fiscal quarter, as ofOctober 1 , and as necessary if changes in facts and circumstances indicate that the fair value of our reporting units may be less than their carrying amounts. When indicators of impairment do not exist and certain accounting criteria are met, we are able to evaluate goodwill impairment using a qualitative approach. When necessary, our quantitative goodwill impairment test consists of two steps. The first step requires that we compare the estimated fair value of our reporting units to the carrying value of the reporting unit's net assets, including goodwill. If the fair value of the reporting unit is greater than the carrying value of its net assets, goodwill is not considered to be impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value of its net assets, we would be required to complete the second step of the test by analyzing the fair value of its goodwill. If the carrying value of the goodwill exceeds its fair value, an impairment charge is recorded. Our reporting units are determined based on our current reporting structure, which as ofMarch 31, 2021 consisted of one reporting unit. As ofMarch 31, 2021 , there were no changes in facts and circumstances since the most recent annual impairment analysis to indicate impairment existed. Property, Plant and Equipment and Long-lived Assets Property, plant and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives of the assets or the lease term for assets under finance leases, whichever is shorter. Intangible assets with definite lives are amortized over the remaining estimated economic life of the underlying technology or relationships, which ranges from two to ten years. Definite-lived intangible assets are amortized on the straight-line method over the estimated useful life of the asset or in a pattern in which the economic benefits of the intangible asset are consumed. Amortization expense associated with leased assets is included in depreciation expense. Routine repairs and maintenance are charged to expense as incurred. We review long-lived assets, including property, plant and equipment, capitalized contract costs, and definite-lived intangibles for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider whether or not indicators of impairment exist on a regular basis and as part of each quarterly and annual financial statement close process. Factors we consider in determining whether or not indicators of impairment exist include market factors and patterns of customer attrition. If indicators of impairment are identified, we estimate the fair value of the assets. An 55 -------------------------------------------------------------------------------- Table of Contents impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. We conduct an indefinite-lived intangible impairment analysis annually as ofOctober 1 , and as necessary if changes in facts and circumstances indicate that the fair value of our indefinite-lived intangibles may be less than the carrying amount. When indicators of impairment do not exist and certain accounting criteria are met, we are able to evaluate indefinite-lived intangible impairment using a qualitative approach. When necessary, our quantitative impairment test consists of two steps. The first step requires that we compare the estimated fair value of our indefinite-lived intangibles to the carrying value. If the fair value is greater than the carrying value, the intangibles are not considered to be impaired and no further testing is required. If the fair value is less than the carrying value, an impairment loss in an amount equal to the difference is recorded. Derivative Warrant Liabilities We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is assessed as part of this evaluation. We have private placement warrants to purchase common stock outstanding that we account for as a derivative warrant liability in accordance with ASC 815-40. Accordingly, we recognize the warrant instruments as a liability at fair value and adjust the liability's fair value at each reporting period. The liability is re-measured at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations. Income Taxes We account for income taxes based on the asset and liability method. Under the asset and liability method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets when it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. We recognize the effect of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Our policy for recording interest and penalties is to record such items as a component of the provision for income taxes. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We record the effect of a tax rate or law change on our deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on our results of operations, financial condition, or cash flows. Recent Accounting Pronouncements See Note 1 to our accompanying unaudited Condensed Consolidated Financial Statements. Key Factors Affecting Operating Results Our future operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including our ability to grow our subscriber base in a cost-effective manner, expand our Product and Service offerings to generate increased revenue per user, provide high quality Products and subscriber service to maximize subscriber lifetime value and improve the leverage of our business model. Key factors affecting our operating results include the following: Subscriber Lifetime and Associated Cash Flows Our subscribers are the foundation of our recurring revenue-based model. Our operating results are significantly affected by the level of our Net Acquisition Costs per New Subscriber and the value of Products and Services purchased by those New Subscribers. A reduction in Net Subscriber Acquisition Costs per New Subscriber or an increase in the total value of Products 56 -------------------------------------------------------------------------------- Table of Contents or Services purchased by a New Subscriber increases the life-time value of that subscriber, which in turn, improves our operating results and cash flows over time. The net upfront cost of adding subscribers is a key factor impacting our ability to scale and our operating cash flows. Vivint Flex Pay, which became our primary equipment financing model in early 2017, has made it significantly more affordable to accelerate the growth in New Subscribers. Prior to Vivint Flex Pay, we recovered the cost of equipment installed in subscribers' homes over time through their monthly service billings. We offer to a limited number of customerswho are not eligible for the CFP, or do not choose to Pay-in-Full at the time of origination, butwho qualify under our underwriting criteria, the option to enter into a RIC directly with us, which we fund through our balance sheet. Under Vivint Flex Pay, we've experienced the following financing mix for New Subscribers: Three Months Ended March 31, 2021 2020 New Subscribers (U.S. only): Financed through CFP 67 % 64 % Paid in Full (ACH, credit or debit card) 31 % 29 % Purchased through RICs 2 % 7 % This shift in financing from RICs to the CFP has significantly reduced our Net Subscriber Acquisition Cost per New Subscriber, as well as the cash required to acquire New Subscribers. Our Net Subscriber Acquisition Cost per New Subscriber has decreased from$960 as ofMarch 31, 2020 to$66 as ofMarch 31, 2021 , a reduction of 93%. Going forward, we expect the percentage of subscriber contracts financed through RICs to remain relatively flat compared to the three months endedMarch 31, 2021 . We will also continue to explore ways of growing our subscriber base in a cost-effective manner through our existing sales and marketing channels, through the growth of our financing programs, as well as through strategic partnerships and new channels, as these opportunities arise. Existing subscribers are also able to use Vivint Flex Pay to upgrade their systems or to add new Products, which we believe further increases subscriber lifetime value. This positively impacts our operating performance, and we anticipate that adding additional financing options to the CFP will generate additional opportunities for revenue growth and a subsequent increase in subscriber lifetime value. We seek to increase our average monthly revenue per user, or AMRU, by continually innovating and offering new smart home solutions that further leverage the investments made to date in our existing platform and sales channels. Since 2010, we have successfully expanded our smart home platform, which has allowed us to generate higher AMRU and in turn realize higher smart home device revenue from new subscribers for these additional offerings. For example, the introduction of our proprietary Vivint Smart Hub,Vivint SkyControl Panel , Vivint Glance Display, Vivint DoorbellCamera Pro , Vivint Indoor Camera, Vivint OutdoorCamera Pro , Vivint Smart Thermostat, Vivint Smart Sensor and Vivint Motion Sensor has expanded our smart home platform. Due to the high rate of adoption of additional smart home devices and tech-enabled services, our AMRU has increased from$56.14 in 2013 to$67.24 for the three months endedMarch 31, 2021 , an increase of 20%. We believe that continuing to grow our AMRU will improve our operating results and operating cash flows over time. Our ability to improve our operating results and cash flows, however, is subject to a number of risks and uncertainties as described in greater detail elsewhere in this filing and there can be no assurance that we will achieve such improvements. To the extent that we do not scale our business efficiently, we will continue to incur losses and require a significant amount of cash to fund our operations, which in turn could have a material adverse effect on our business, cash flows, operating results and financial condition. Our ability to retain our subscribers also has a significant impact on our financial results, including revenues, operating income, and operating cash flows. Because we operate a business built on recurring revenues, subscriber lifetime is a key determinant of our operating success. Our Average Subscriber Lifetime is approximately 92 months (or approximately 8 years) as ofMarch 31, 2021 . If our expected long-term annualized attrition rate increased by 1% to 14%, Average Subscriber Lifetime would decrease to approximately 86 months. Conversely, if our expected attrition decreased by 1% to 12%, our Average Subscriber Lifetime would increase to approximately 100 months. Our ability to service our existing customer base in a cost-effective manner, while minimizing customer attrition, also has a significant impact on our financial results and operating cash flows. Critical to managing the cost of servicing our subscribers is limiting the number of calls into our customer care call centers, and in turn, limiting the number of calls requiring the deployment of a smart home professional ("Smart Home Pro") to the customer's home to resolve the issue. We believe that our 57 -------------------------------------------------------------------------------- Table of Contents proprietary end-to-end solution allows us to proactively manage the costs to service our customers by directly controlling the design, interoperability and quality of our Products. It also provides us the ability to identify and resolve potential product issues through remote software or firmware updates, typically before the customer is even aware of an issue. Through continued focus in these areas, our Net Service Cost per Subscriber has decreased from$11.76 for the three months endedMarch 31, 2020 to$10.77 for the three months endedMarch 31, 2021 , a decrease of 8%, while effectively managing subscriber attrition. In 2021, we anticipate service activity returning to more normal levels and therefore expect Net Service Cost per Subscriber to increase compared to 2020. A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or may terminate their contracts for a variety of reasons, including, but not limited to, relocation, cost, switching to a competitor's service or service issues. We analyze our attrition by tracking the number of subscriberswho cancel their service as a percentage of the monthly average number of subscribers at the end of each 12-month period. We caution investors that not all companies, investors and analysts in our industry define attrition in this manner. The table below presents our smart home and security subscriber data for the twelve months endedMarch 31, 2021 andMarch 31, 2020 : Twelve months ended Twelve months ended March 31, 2021 March 31, 2020 Beginning balance of subscribers 1,548,201 1,445,349 New subscribers 353,508 318,920 Attrition (195,640) (216,068) Ending balance of subscribers 1,706,069 1,548,201 Monthly average subscribers 1,653,982 1,528,761 Attrition rate 11.8 % 14.1 % Historically, we have experienced an increased level of subscriber cancellations in the months surrounding the expiration of such subscribers' initial contract term. Attrition in any twelve month period may be impacted by the number of subscriber contracts reaching the end of their initial term in such period. Attrition in the twelve months endedMarch 31, 2021 includes the effect of the 2015 60-month and 2016 42-month contracts reaching the end of their initial contract term. Attrition in the twelve months endedMarch 31, 2020 includes the effect of the 2014 60-month and 2015 42-month contracts reaching the end of their initial contract term. Sales and Marketing Efficiency As discussed above, our continued ability to attract and sign new subscribers in a cost-effective manner will be a key determinant of our future operating performance. Because our direct-to-home and national inside sales channels are currently our primary means of subscriber acquisition, we have invested heavily in scaling these channels. There is a lag in the productivity of new hires, which we anticipate will improve over the course of their tenure, impacting our subscriber acquisition rates and overall operating success. The continued productivity of our sales teams is instrumental to our subscriber growth and vital to our future success. Generating subscriber growth through these investments in our sales teams depends, in part, on our ability to launch cost-effective marketing campaigns, both online and offline. This is particularly true for our national inside sales channel, because national inside sales fields inbound requests from subscriberswho find us using online search and submitting our online contact form. Our marketing campaigns are created to attract potential subscribers and build awareness of our brand across all our sales channels. We also believe that building brand awareness is important to countering the competition we face from other companies selling their solutions in the geographies we serve, particularly in those markets where our direct-to-home sales representatives are present. As a result, we expect to continue increasing our investments in building our brand awareness and also expect advertising costs to increase. Expand Monetization of Platform and Related Services To date, we have made significant investments in our smart home platform and the development of our organization, and expect to leverage these investments to continue expanding the breadth and depth of our Product and Service offerings over time, including integration with third party products to drive future revenue. As smart home technology develops, we will continue expanding these offerings to reflect the growing needs of our subscriber base and focus on expanding our platform 58 -------------------------------------------------------------------------------- Table of Contents through the addition of new smart home Products, experiences and use cases. As a result of our investments to date, we have over 1.7 million active customers on our smart home platform. We intend to continue developing this platform to include new complex automation capabilities, use case scenarios, and comprehensive device integrations. Our platform supports over 20 million connected devices, as ofMarch 31, 2021 . We believe that the smart home of the future will be an ecosystem in which businesses seek to deliver products and services to subscribers in a way that addresses the individual subscriber's lifestyle and needs. As smart home technology becomes the setting for the delivery of a wide range of these products and services, including healthcare, entertainment, home maintenance, aging in place and consumer goods, we hope to become the hub of this ecosystem and the strategic partner of choice for the businesses delivering these products and services. Our success in connecting with business partnerswho integrate with our smart home platform in order to reach and interact with our subscriber base is expected to be a part of our continued operating success. We expect that additional partnerships will generate incremental revenue by increasing the value of Products purchased by our customers as a result of integration of these partners' products with our smart home platform. If we are able to continue expanding our partnerships with influential companies, as we already have with
Basis of Presentation
We conduct business through one operating segment,Vivint , and primarily operate in two geographic regions:The United States andCanada . See Note 17 in the accompanying unaudited condensed consolidated financial statements for more information about our geographic segments. Components of Results of Operations Total Revenues Recurring and other revenue. Our revenues are generated through the sale and installation of our smart home services contracted for by our subscribers. Recurring smart home services for our subscriber contracts are billed directly to the subscriber in advance, generally monthly, pursuant to the terms of subscriber contracts and recognized ratably over the service period. Revenues from Products are deferred and generally recognized on a straight-line basis over the customer contract term, the amount of which is dependent on the total sales price of Products sold. Imputed interest associated with RIC receivables is recognized over the initial term of the RIC. The amount of revenue from Services is dependent upon which of our service offerings is included in the subscriber contracts. Our smart home and video offerings generally provide higher service revenue than our base smart home service offering. Historically, we have generally offered contracts to subscribers that range in length from 36 to 60 months, which are subject to automatic monthly renewal after the expiration of the initial term. In addition, to a lesser extent, we offer month-to-month contracts to subscriberswho pay-in-full for their Products at the time of contract origination. At the end of each monthly period, the portion of recurring fees related to services not yet provided are deferred and recognized as these services are provided. Total Costs and Expenses Operating expenses. Operating expenses primarily consists of labor associated with monitoring and servicing subscribers, costs associated with Products used in service repairs, stock-based compensation and housing for our Smart Home Proswho perform subscriber installations for our direct-to-home sales channel. We also incur equipment costs associated with excess and obsolete inventory and rework costs related to Products removed from subscribers' homes. In addition, a portion of general and administrative expenses, primarily comprised of certain human resources, facilities and information technology costs are allocated to operating expenses. This allocation is primarily based on employee headcount and facility square footage occupied. Because our full-time Smart Home Pros perform most subscriber installations related to customer moves, customer upgrades or those generated through our national inside sales channels, the costs incurred within field service associated with these installations are allocated to capitalized contract costs. We generally expect our operating expenses to increase in absolute 59 -------------------------------------------------------------------------------- Table of Contents dollars as the total number of subscribers we service continues to grow, but to remain relatively constant in the near to intermediate term as a percentage of our revenue. Selling expenses. Selling expenses are primarily comprised of costs associated with housing for our direct-to-home sales representatives, advertising and lead generation, marketing and recruiting, certain portions of sales commissions (residuals), stock-based compensation, overhead (including allocation of certain general and administrative expenses as discussed above) and other costs not directly tied to a specific subscriber origination. These costs are expensed as incurred. We generally expect our selling expenses to increase in the near to intermediate term, both in absolute dollars and as a percentage of our revenue, resulting from increases in the total number of subscriber originations and our investments in brand marketing. General and administrative expenses. General and administrative expenses consist largely of research and development, or R&D, finance, legal, information technology, human resources, facilities and executive management expenses, including stock-based compensation expense. Stock-based compensation expense is recorded within various components of our costs and expenses. General and administrative expenses also include the provision for doubtful accounts. We allocate between one-fourth and one-third of our gross general and administrative expenses, excluding stock-based compensation and the provision for doubtful accounts, into operating and selling expenses in order to reflect the overall costs of those components of the business. We generally expect our general and administrative expenses to decrease in the near to intermediate term, both in absolute dollars and as a percentage of our revenues, resulting from economies of scale as we grow our business. Depreciation and amortization. Depreciation and amortization consists of depreciation from property, plant and equipment, amortization of equipment leased under finance leases, capitalized contract costs and intangible assets. We generally expect our depreciation and amortization expenses to increase in absolute dollars as we grow our business and increase the number of new subscribers originated on an annual basis, but to remain relatively constant in the near to intermediate term as a percentage of our revenue. Restructuring Expenses. Restructuring expenses are comprised of costs incurred in relation to activities to exit or dispose of portions of our business that do not qualify as discontinued operations. Expenses for related termination benefits are recognized at the date we notify the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period. Liabilities related to termination of a contract are measured and recognized at fair value when the contract does not have any future economic benefit to the entity and the fair value of the liability is determined based on the present value of the remaining obligation. Results of operations Three Months Ended March 31, 2021 2020 (in thousands) Total revenues$ 343,293 $ 303,232 Total costs and expenses 424,332 344,496 Loss from operations (81,039) (41,264) Other expenses 6,097 104,620 Loss before taxes (87,136) (145,884) Income tax expense (benefit) 244 (788) Net loss$ (87,380) $ (145,096) Key performance measures As of March 31, 2021 2020
Total Subscribers (in thousands) 1,706.1
1,548.2
Total MSR (in thousands)$ 82,101 $
78,578
AMSRU$ 48.12 $
50.75
Net subscriber acquisition costs per new subscriber$ 66 $ 960 Average subscriber lifetime (months) 92 92 60
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Table of Contents Three Months Ended March 31, 2021 2020 Total MR (in thousands)$ 114,431 $ 101,077 AMRU$ 67.24 $ 65.27
Net service cost per subscriber$ 10.77 $
11.76 Net service margin 78 % 77 % Adjusted EBITDA The following table sets forth a reconciliation of net loss to Adjusted EBITDA (in millions): Three Months Ended March 31, 2021 2020 Net loss$ (87.4) $ (145.1) Interest expense, net 49.8 65.1 Income tax expense (benefit), net 0.2 (0.8) Depreciation 4.1 5.7 Amortization (1) 142.8 133.6 Stock-based compensation (2) 87.0 10.7 MDR fee (3) 9.3 5.2 Restructuring expenses (4) - 20.9 Change in fair value of warrant derivative liabilities (5) (29.1) 16.7 Other (income) expense, net (6) (14.6) 22.9 Adjusted EBITDA$ 162.1 $ 134.9 ____________________ (1)Excludes loan amortization costs that are included in interest expense. (2)Reflects stock-based compensation costs related to employee and director stock incentive plans. (3)Costs related to certain of the financing fees incurred under the Vivint Flex Pay program. (4)Employee severance and termination benefits expenses associated with restructuring plans. (5)Reflects the change in fair value of the derivative liability associated with our public and private warrants. (6)Primarily consists of changes in our consumer financing program derivative instrument, foreign currency exchange and other gains and losses associated with financing and other transactions. Three Months EndedMarch 31, 2021 Compared to the Three Months EndedMarch 31, 2020 Revenues The following table provides our revenue for the three month periods endedMarch 31, 2021 andMarch 31, 2020 (in thousands, except for percentage): Three Months Ended March 31, 2021 2020 % Change Recurring and other revenue$ 343,293 $ 303,232
13 %
Recurring and other revenue for the three months endedMarch 31, 2021 increased$40.1 million , or 13%, as compared to the three months endedMarch 31, 2020 . The increase was primarily a result of: •$31.2 million increase resulting from the change in Total Subscribers; •$6.2 million increase from certain pilot programs; and •$1.8 million increase from the change in AMRU. 61 -------------------------------------------------------------------------------- Table of Contents Costs and Expenses The following table provides the significant components of our costs and expenses for the three month periods endedMarch 31, 2021 andMarch 31, 2020 (in thousands, except for percentages): Three Months Ended March 31, 2021 2020 % Change Operating expenses$ 96,531 $ 83,160 16 % Selling expenses 114,541 50,723 126 % General and administrative 66,348 50,423 32 % Depreciation and amortization 146,912 139,249 6 % Restructuring expenses - 20,941 NM Total costs and expenses$ 424,332 $ 344,496 23 % Operating expenses for the three months endedMarch 31, 2021 increased by$13.4 million , or 16%, as compared to the three months endedMarch 31, 2020 . Excluding an increase in stock-based compensation of$8.3 million , operating expenses increased by$5.1 million , or 6%, primarily due to increases of: •$2.9 million in third-party contracted servicing costs, •$2.4 million in equipment and related costs, and •$1.2 million in information technology costs. These increases were partially offset by a decrease of$1.7 million in personnel and related support costs. Selling expenses, excluding capitalized contract costs, increased by$63.8 million , or 126%, for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Excluding an increase in stock-based compensation of$58.5 million associated with equity awards granted during the three months endedMarch 31, 2021 , selling expenses increased by$5.3 million , or 11%. This increase was primarily due to increases of: •$3.3 million in marketing costs, and •$2.3 million in personnel and related support costs. This increase was partially offset by a decrease of$1.4 million in information technology costs. General and administrative expenses increased$15.9 million , or 32%, for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . This included a$9.1 million increase in stock-based compensation primarily associated with grants of equity awards during 2020. Excluding stock-based compensation, general and administrative expenses increased by$6.8 million , or 15%. This increase was primarily due to increases of: •$5.6 million in the loss contingency accrual recorded in the three months endedMarch 31, 2021 relating to certain legal matters, and •$4.9 million in third-party contracted costs primarily for legal and finance services. These increases were partially offset by decreases of: •$4.9 million in provisions for bad debt and credit losses and •$1.3 million in personnel and related support costs. Depreciation and amortization for the three months endedMarch 31, 2021 increased$7.7 million , or 6%, as compared to the three months endedMarch 31, 2020 , primarily due to increased amortization of capitalized contract costs related to new subscribers. Restructuring expenses for the three months endedMarch 31, 2020 related to employee severance and termination benefits expenses (See Note 16 to the accompanying unaudited condensed consolidated financial statements). Other Expenses, net 62 -------------------------------------------------------------------------------- Table of Contents The following table provides the significant components of our other expenses, net for the three month periods endedMarch 31, 2021 andMarch 31, 2020 (in thousands, except for percentages): Three Months Ended March 31, 2021 2020 % Change Interest expense$ 49,803 $ 65,293 (24) % Interest income (44) (229) NM Change in fair value of warrant liabilities (29,103) 16,717 NM Other (income) expense, net (14,559) 22,839 NM Total other expenses, net$ 6,097 $ 104,620 (94) % Interest expense decreased$15.5 million , or 24%, for the three months endedMarch 31, 2021 , as compared with the three months endedMarch 31, 2020 , primarily due to lower outstanding debt as a result of the use of proceeds from the Business Combination to pay down debt and the refinancing transaction that occurred inFebruary 2020 (See Note 3 to the accompanying unaudited condensed consolidated financial statements). Change in fair value of warrant liabilities for each of the three months endedMarch 31, 2021 andMarch 31, 2020 represents the change in fair value measurements of our outstanding public and private placement warrants. Other (income) expense, net resulted in income of$14.6 million for the three months endedMarch 31, 2021 compared to a loss of$22.8 million for the three months endedMarch 31, 2020 . The other income, net during the three months endedMarch 31, 2021 was primarily due to: •$13.8 million decrease in our CFP derivative liability, and •$0.6 million foreign currency exchange gain. The other expense, net during the three months endedMarch 31, 2020 was primarily due to: •$12.7 million loss on debt modification and extinguishment, •$6.3 million foreign currency exchange loss, and •$2.2 million increase in our CFP derivative liability. Income Taxes The following table provides the significant components of our income tax expense for the three month periods endedMarch 31, 2021 andMarch 31, 2020 (in thousands, except for percentages): Three Months Ended March 31, 2021 2020 % Change Income tax expense (benefit) $ 244$ (788) NM Income tax provision resulted in a tax expense of$0.2 million for the three months endedMarch 31, 2021 and a tax benefit of$0.8 million for the three months endedMarch 31, 2020 . The income tax expense for the three months endedMarch 31, 2021 resulted primarily from US state minimum taxes and income taxes from our Canadian subsidiary. The income tax benefit for the three months endedMarch 31, 2020 resulted primarily from losses in our Canadian subsidiary. Liquidity and Capital Resources Cash from operations may be affected by various risks and uncertainties, including, but not limited to, the continued effects of the COVID-19 pandemic and other risks detailed in the Risk Factors section of Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2020 . Despite the challenging economic environment caused by the pandemic, based on our current business plan and revenue prospects, we continue to believe that our existing cash and cash equivalents, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months from the date of this filing. Our primary source of liquidity has historically been cash from operations, proceeds from issuances of debt securities, borrowings under our credit facilities and, to a lesser extent, capital contributions and issuances of equity. As ofMarch 31 , 63 -------------------------------------------------------------------------------- Table of Contents 2021, we had$274.3 million of cash and cash equivalents and$315.5 million of availability under our revolving credit facility (after giving effect to$15.3 million of letters of credit outstanding and no borrowings). As market conditions warrant, we and our equity holders, including the Sponsor, its affiliates and members of our management, may from time to time, seek to purchase our outstanding debt securities or loans in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including additional borrowings under our revolving credit facility. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the "adjusted issue price" (as defined forU.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us. Depending on conditions in the credit and capital markets and other factors, we will, from time to time, consider various financing transactions, the proceeds of which could be used to refinance our indebtedness or for other purposes. Cash Flow and Liquidity Analysis Our cash flows provided by operating activities include recurring monthly billings, cash received from the sale of Products to our customers that either pay-in-full at the time of installation or finance their purchase of Products under the CFP and other fees received from the customers we service. Cash used in operating activities includes the cash costs to monitor and service our subscribers, a portion of subscriber acquisition costs, interest associated with our debt and general and administrative costs. Historically, we financed subscriber acquisition costs through our operating cash flows, the issuance of debt, and to a lesser extent, through the issuance of equity. Currently, the upfront proceeds from the CFP, and subscribers that pay-in-full at the time of the sale of Products, offset a significant portion of the upfront investment associated with subscriber acquisition costs. Sales from our direct-to-home channel are seasonal in nature. We make investments in the recruitment of our direct-to-home sales representatives, inventory and other support costs for the April through August sales period prior to each sales season. We experience increases in capitalized contract costs, as well as costs to support the sales force throughout theU.S. , prior to and during this time period. The incremental inventory purchased to support the direct-to-home sales season is generally consumed prior to the end of the calendar year in which it is purchased. The following table provides a summary of cash flow data (in thousands, except for percentages): Three Months Ended March 31, 2021 2020 % Change Net cash used in operating activities$ (14,156) $ (32,869) (57) % Net cash used in investing activities (4,548) (1,901) 139 % Net cash (used in) provided by financing activities (20,757) 161,661 NM Cash Flows from Operating Activities We generally reinvest the cash flows from our recurring monthly billings and cash received from the sale of Products through the Vivint Flex Pay Program associated with the initial installation of the customer's equipment, primarily to (1) maintain and grow our subscriber base, (2) expand our infrastructure to support this growth, (3) enhance our existing smart home services offering, (4) develop new smart home Product and Service offerings and (5) expand into new sales channels. These investments are focused on generating new subscribers, increasing the revenue from our existing subscriber base, enhancing the overall quality of service provided to our subscribers, and increasing the productivity and efficiency of our workforce and back-office functions necessary to scale our business. For the three months endedMarch 31, 2021 , net cash used in operating activities was$14.2 million . This cash used was primarily from a net loss of$87.4 million , adjusted for: •$233.1 million in non-cash amortization, depreciation, and stock-based compensation; •$29.1 million gain on warrant derivative change in fair value; •$4.7 million in provisions for doubtful accounts and credit losses; and 64 -------------------------------------------------------------------------------- Table of Contents •$5.0 million in deferred income taxes. Cash provided by operating activities resulting from changes in operating assets and liabilities, including: •a$19.4 million increase in deferred revenue due primarily to the growth in deferred revenues associated with the sale of Products under the Vivint Flex Pay plan and the increased subscriber base; •a$8.5 million decrease in long-term notes receivables and other assets, net primarily due to decreases in RIC receivables; and •a$2.4 million decrease in right of use assets. These sources of operating cash were partially offset by the following changes in operating assets and liabilities: •a$98.9 million increase in capitalized contract costs; •a$43.5 million decrease in accrued payroll and commissions, accrued expenses, other current and long-term liabilities; •a$36.5 million increase in accounts payable, primarily due to timing of vendor payments; •a$33.0 million increase in inventories due to the ramp down of our direct-to-home summer selling season; •a$7.5 million increase in accounts receivable; •a$2.7 million decrease in right of use liabilities; and •a$11.9 million increase in prepaid expenses and other current assets. For the three months endedMarch 31, 2020 , net cash used in operating activities was$32.9 million . This cash used was primarily from a net loss of$145.1 million , adjusted for: •$157.3 million in non-cash amortization, depreciation, and stock-based compensation; •a$16.7 million loss on warrant derivative change in fair value; •a$12.7 million loss on early extinguishment of debt; •$11.1 million in non-cash restructuring expenses; and •provisions for doubtful accounts and credit losses of$8.1 million . Cash used in operating activities resulting from changes in operating assets and liabilities, including: •a$84.5 million increase in capitalized contract costs, •a$20.7 million increase in accounts receivable driven primarily by the increase in RIC billings under Vivint Flex Pay and the growth in the number of our Total Subscribers; •a$18.4 million decrease in accrued payroll and commissions, accrued expenses, other current and long-term liabilities; •a$15.5 million increase in inventories to support our direct-to-home summer selling season, and • a$4.4 million increase in prepaid expenses and other current assets. These uses of operating cash were partially offset by the following changes in operating assets and liabilities: •a$40.0 million increase in accounts payable due primarily to increased inventory purchases, •a$9.3 million increase in deferred revenue due primarily to the growth in deferred revenues associated with the sale of Products under the Vivint Flex Pay plan and the increased subscriber base, and •a$7.1 million decrease in long-term notes receivables, other assets, net and right-of-use assets primarily due to amortization of right-of-use lease assets and a decrease in notes receivables associated with RICs. Net cash interest paid for the three months endedMarch 31, 2021 and 2020 related to our indebtedness (excluding finance leases) totaled$48.0 million and$53.2 million , respectively. Our net cash flows from operating activities for the three months endedMarch 31, 2021 and 2020, before these interest payments, were cash inflows of$33.9 million and$20.3 million , respectively. Accordingly, our net cash provided by operating activities were insufficient to cover interest payments for the three months endedMarch 31, 2021 and 2020. 65 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Investing Activities Historically, our investing activities have primarily consisted of capital expenditures, business combinations and technology acquisitions. Capital expenditures primarily consist of periodic additions to property, plant and equipment to support the growth in our business. For the three months endedMarch 31, 2021 , net cash used in investing activities was$4.5 million primarily associated with capital expenditures of$4.6 million . For the three months endedMarch 31, 2020 , net cash used in investing activities was$1.9 million primarily associated with capital expenditures of$2.9 million , offset by proceeds from the sale of assets of$1.3 million . Cash Flows from Financing Activities Historically, our cash flows provided by financing activities primarily related to the issuance of equity securities and debt, primarily to fund the portion of upfront costs associated with generating new subscribers that are not covered through our operating cash flows or through our Vivint Flex Pay program. Uses of cash for financing activities are generally associated with the return of capital to our stockholders, the repayment of debt and the payment of financing costs associated with the issuance of debt. For the three months endedMarch 31, 2021 , net cash used by financing activities was$20.8 million , consisting of$28.7 million for taxes paid related to net share settlements of stock-based compensation awards and$2.4 million of repayments on existing notes. These cash uses were offset by$10.8 million from the exercise of warrants . For the three months endedMarch 31, 2020 , net cash provided by financing activities was$161.6 million , consisting of proceeds from the issuance of$600.0 million aggregate principal amount of 2027 Notes and$950.0 million in borrowings under Term Loans,$465.1 million capital contribution associated with the Merger, and$190.0 million in borrowings on our revolving credit facility. These cash proceeds were offset by$1,747.2 million of repayments on existing notes,$270.0 million of repayments on our revolving credit facility,$11.9 million in financing costs,$2.2 million of repayments under our finance lease obligations and$1.0 million for taxes paid related to net share settlements of stock-based compensation awards. Long-Term Debt We are a highly leveraged company with significant debt service requirements. As ofMarch 31, 2021 , we had$2.84 billion of total debt outstanding, consisting of$677.0 million of outstanding 7.875% senior secured notes due 2022 (the "2022 notes"),$400.0 million of outstanding 7.625% senior notes due 2023 (the "2023 notes"),$225.0 million of outstanding 8.50% senior secured notes due 2024 (the "2024 notes"),$600.0 million of outstanding 6.75% senior secured notes due 2027 (the "2027 notes," and together with the 2022 notes, 2023 notes and 2024 notes, the "Notes"),$940.5 million of borrowings outstanding under the 2025 Term Loan B (as defined below) and no borrowings outstanding under our revolving credit facility (with$315.5 million of additional availability under the revolving credit facility after giving effect to$15.3 million of letters of credit outstanding).
2022 Notes
As ofMarch 31, 2021 , APX had$677.0 million outstanding aggregate principal amount of its 2022 notes. Interest on the 2022 notes is payable semi-annually in arrears onJune 1 andDecember 1 of each year. We may, at our option, redeem at any time and from time to time some or all of the 2022 notes at 100.000% of the aggregate principal amount of the 2022 notes redeemed, plus any accrued and unpaid interest to the date of redemption. The 2022 notes mature onDecember 1, 2022 , or on such earlier date when any outstanding pari passu lien indebtedness matures as a result of the operation of any springing maturity provisions set forth in the agreements governing such pari passu lien indebtedness.
2023 Notes
As ofMarch 31, 2021 , APX had$400.0 million outstanding aggregate principal amount of its 2023 notes. Interest on the 2023 notes is payable semi-annually in arrears onSeptember 1 andMarch 1 of each year. The 2023 notes mature onSeptember 1, 2023 . 66
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From and afterSeptember 1, 2020 , we may, at our option, redeem at any time and from time to time some or all of the 2023 notes at 103.813% of the aggregate principal amount of the 2023 notes redeemed, declining to par from and afterSeptember 1, 2022 , in each case, plus any accrued and unpaid interest to the date of redemption.
2024 Notes
As ofMarch 31, 2021 , APX had$225.0 million outstanding aggregate principal amount of its 2024 notes. Interest on the 2024 notes is payable semi-annually in arrears onMay 1 andNovember 1 of each year. We may, at our option, redeem at any time and from time to time prior toMay 1, 2021 , some or all of the 2024 notes at 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date plus the applicable "make-whole premium." From and afterMay 1, 2021 , we may, at our option, redeem at any time and from time to time some or all of the 2024 notes at 104.25%, declining to par from and afterMay 1, 2023 , in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior toMay 1, 2021 , we may, at our option, redeem up to 40% of the aggregate principal amount of the 2024 notes with the proceeds from certain equity offerings at 108.50%, plus accrued and unpaid interest to the date of redemption. In addition, on or prior toMay 1, 2021 , during any 12 month period, we also may, at our option, redeem at any time and from time to time up to 10% of the aggregate principal amount of the 2024 notes at a price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, to but excluding the redemption date. The 2024 notes mature onNovember 1, 2024 , unless, under "Springing Maturity" provisions, onJune 1, 2023 (the 91st day prior to the maturity of the 2023 notes) more than an aggregate principal amount of$125.0 million of such 2023 notes remain outstanding or have not been refinanced as permitted under the indenture governing the 2023 notes, in which case the 2024 Notes will mature onJune 1, 2023 . 2027 Notes As ofMarch 31, 2021 , APX had$600.0 million outstanding aggregate principal amount of its 2027 notes. Interest on the 2027 notes is payable semiannually in arrears onFebruary 15 andAugust 15 each year. We may, at our option, redeem at any time and from time to time prior toFebruary 15, 2023 , some or all of the 2027 notes at 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date plus the applicable "make-whole premium." From and afterFebruary 15, 2023 , we may, at our option, redeem at any time and from time to time some or all of the 2027 notes at 103.375%, declining to par from and afterMay 1, 2025 , in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior toFebruary 15, 2021 , we may, at our option, redeem up to 40% of the aggregate principal amount of the 2027 notes with the proceeds from certain equity offerings at 100% plus an applicable premium, plus accrued and unpaid interest to the date of redemption. In addition, on or prior toFebruary 15, 2023 , during any 12 month period, we also may, at our option, redeem at any time and from time to time up to 10% of the aggregate principal amount of the 2027 notes at a price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, to but excluding the redemption date. The 2027 notes will mature onFebruary 15, 2027 , unless, under "Springing Maturity" provisions onJune 1, 2023 (the 91st day prior to the maturity of the 2023 notes) more than an aggregate principal amount of$125.0 million of such 2023 notes remain outstanding or have not been refinanced as permitted under the indenture governing the 2023 notes, in which case the 2027 Notes will mature onJune 1, 2023 . The 2027 notes are secured, on a pari passu basis, by the collateral securing obligations under the existing senior secured notes, the revolving credit facility and the Term Loan, in each case, subject to certain exceptions and permitted liens. 2025 Term Loan B As ofMarch 31, 2021 , APX had$940.5 million outstanding aggregate principal amount of its term loans (the "2025 Term Loan B"). Pursuant to the terms of the 2025 Term Loan B, quarterly amortization payments are due in an amount equal to 0.25% of the aggregate principal amount of the 2025 Term Loan B outstanding on the closing date. The remaining principal amount outstanding under the 2025 Term Loan B will be due and payable in full on (x) if the Term Springing Maturity Condition (as defined below) does not apply,December 31, 2025 and (y) if the Term Springing Maturity Condition does apply, the 2023 Springing Maturity Date (which date is the date that is 91 days before the maturity date with respect to the 2023 Notes). 67 -------------------------------------------------------------------------------- Table of Contents The "Term Springing Maturity Condition" applies if on the 2023 Springing Maturity Date (which date is the date that is 91 days before the maturity date with respect to the 2023 Notes), an aggregate principal amount of the 2023 Notes in excess of$125.0 million are either outstanding or have not been repaid or redeemed. Revolving Credit Facility OnFebruary 14, 2020 , we amended and restated the credit agreement governing the senior secured revolving credit facility (the "Fourth Amended and Restated Credit Agreement") to provide for, among other things, (1) an increase in the aggregate commitments previously available to us to$350.0 million and (2) the extension of the maturity date with respect to certain of the previously available commitments. As ofMarch 31, 2021 we had$315.5 million of availability under our revolving credit facility (after giving effect to$15.3 million of letters of credit outstanding and no borrowings). Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate ofBank of America, N.A . and (c) the LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined by reference to theLondon interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based borrowings (1)(a) under the Series A Revolving Commitments of approximately$10.9 million and the Series C Revolving Commitments of approximately$330.8 million is currently 2.0% and (b) under the Series B Revolving Commitments of approximately$8.3 million is currently 3.0% and (2) the applicable margin for LIBOR rate-based borrowings (a) under the Series A Revolving Commitments and the Series C Revolving Commitments is currently 3.0% per annum and (b) under the Series B Revolving Commitments is currently 4.0%. The applicable margin for borrowings under the revolving credit facility is subject to one step-down of 25 basis points based on our meeting a consolidated first lien net leverage ratio test. In addition to paying interest on outstanding principal under the revolving credit facility, APX is required to pay a quarterly commitment fee (which is subject to one interest rate step-down of 12.5 basis points, based on APX meeting a consolidated first lien net leverage ratio test) to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. APX also pays a customary letter of credit and agency fees. APX is not required to make any scheduled amortization payments under the revolving credit facility. The commitments under the revolving credit facility expired onMarch 31, 2021 with respect to the commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility. The principal amount outstanding under the Series C Revolving Credit Commitments will be due and payable in full onFebruary 14, 2025 (or the applicable springing maturity date if the Revolving Springing Maturity Condition applies) with respect to the$330.8 million of availability. The "Revolver Springing Maturity Condition" applies if (i) on the 2022 Springing Maturity Date, an aggregate principal amount of the Borrower's 7.875% Senior Secured Notes Due 2022 (the "2022 Notes") in excess of$350.0 million are either outstanding or have not been repaid or redeemed with certain qualifying proceeds specified in the Fourth Amended and Restated Credit Agreement, (ii) on the 2023 Springing Maturity Date, an aggregate principal amount of the 2023 Notes in excess of$125.0 million are either outstanding or have not been repaid or redeemed with certain qualifying proceeds specified in the Fourth Amended and Restated Credit Agreement or (iii) on the 2024 Springing Maturity Date, an aggregate principal amount of the Borrower's 8.500% Senior Secured Notes Due 2024 (the "2024 Notes") in excess of$125.0 million are either outstanding or have not been repaid or redeemed with certain qualifying proceeds specified in the Fourth Amended and Restated Credit Agreement. The "2022 Springing Maturity Date" means the date that is 91 days before the maturity date with respect to the 2022 Notes, the "2023 Springing Maturity Date" means the date that is 91 days before the maturity date with respect to the 2023 Notes and the "2024 Springing Maturity Date" means the date that is 91 days before the maturity date with respect to the 2024 Notes. Guarantees and Security (Revolving Credit Facility, 2025 Term Loan B and Notes) All of the obligations under the credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes are guaranteed byVivint Smart Home, Inc. ,APX Group Holdings, Inc. and each ofAPX Group, Inc.'s existing and future material wholly-ownedU.S. restricted subsidiaries (subject to customary exclusions and qualifications). However, such subsidiaries shall only be required to guarantee the obligations under the debt agreements governing the Notes for so long as such entities guarantee the obligations under the revolving credit facility, the credit agreement governing the 2025 Term Loan B or our other indebtedness. The obligations under the revolving credit facility, 2025 Term Loan B, 2022 notes, the 2024 notes and the 2027 notes (collectively with the 2022 notes and 2024 notes, the "existing senior secured notes") are secured by a security interest in (1) substantially all of the present and future tangible and intangible assets ofAPX Group, Inc. , and the guarantors, including without limitation equipment, subscriber contracts and communication paths, intellectual property, material fee-owned real 68 -------------------------------------------------------------------------------- Table of Contents property, general intangibles, investment property, material intercompany notes and proceeds of the foregoing, subject to permitted liens and other customary exceptions, (2) substantially all personal property ofAPX Group, Inc. and the guarantors consisting of accounts receivable arising from the sale of inventory and other goods and services (including related contracts and contract rights, inventory, cash, deposit accounts, other bank accounts and securities accounts), inventory and intangible assets to the extent attached to the foregoing books and records ofAPX Group, Inc. and the guarantors, and the proceeds thereof, subject to permitted liens and other customary exceptions, in each case held byAPX Group, Inc. and the guarantors and (3) a pledge of all of the capital stock ofAPX Group, Inc. , each of its subsidiary guarantors and each restricted subsidiary ofAPX Group, Inc. and its subsidiary guarantors, in each case other than excluded assets and subject to the limitations and exclusions provided in the applicable collateral documents. Under the terms of the applicable security documents and intercreditor agreement, the proceeds of any collection or other realization of collateral received in connection with the exercise of remedies will be applied first to repay up to$350.0 million of amounts due under the revolving credit facility, before the holders of the existing senior secured notes or 2025 Term Loan B receive any such proceeds. Guarantor Summarized Financial Information InMay 2020 , the Company provided a parent guarantee ofAPX Group's obligations under the indentures governing the Notes, in each case, in order to enableAPX Group to satisfy its reporting obligations under the indentures governing the Notes by furnishing financial information relating to the Company. We are providing the following information with respect to the Revolving Credit Facility, 2025 Term Loan B and the Notes. The financial information ofVivint Smart Home, Inc. ,APX Group Holdings, Inc. ,APX Group, Inc. and each guarantor subsidiary (collectively the "Guarantors") is presented on a combined basis with intercompany balances and transactions between the Guarantors eliminated. The Guarantors' amounts due from, amounts due to, and transactions with non-guarantor subsidiaries are separately disclosed. Twelve months Three months ended ended December 31, March 31, 2021 2020 (in thousands) Recurring and other revenues$ 327,343 $ 1,193,638 Intercompany revenues 5,421 24,000 Total revenues 332,764 1,217,638 Total costs and expenses 413,873 1,470,044 Loss from operations (81,109) (252,406) Other expenses 6,678 340,628 Income tax expense 89 3,037 Net loss$ (87,876) $ (596,071) 69
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Table of Contents March 31, 2021 December 31, 2020 (in thousands) Current assets$ 433,920 $ 425,165 Amounts due from Non-Guarantor Subsidiaries 259,389 251,853 Non-current assets: Capitalized contract costs 1,246,725 1,270,678 Goodwill 810,130 810,130 Intangible assets, net 89,242 102,981 Other non-current assets 143,773 153,079 Total non-current assets 2,289,870 2,336,868 Current liabilities 742,522 752,343 Amounts due to Non-Guarantor Subsidiaries 212,947 199,381 Non-current liabilities$ 3,644,420 $ 3,667,402 Debt Covenants The credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes contain a number of covenants that, among other things, restrict, subject to certain exceptions,APX Group, Inc. and its restricted subsidiaries' ability to: •incur or guarantee additional debt or issue disqualified stock or preferred stock; •pay dividends and make other distributions on, or redeem or repurchase, capital stock; •make certain investments; •incur certain liens; •enter into transactions with affiliates; •merge or consolidate; •materially change the nature of their business; •enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments toAPX Group, Inc. ; •designate restricted subsidiaries as unrestricted subsidiaries; •amend, prepay, redeem or purchase certain subordinated debt; and •transfer or sell certain assets. The credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes contain change of control provisions and certain customary affirmative covenants and events of default. As ofMarch 31, 2021 ,APX Group, Inc. was in compliance with all covenants related to its long-term obligations. Subject to certain exceptions, the credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes permitAPX Group, Inc. and its restricted subsidiaries to incur additional indebtedness, including secured indebtedness. Our future liquidity requirements will be significant, primarily due to debt service requirements. The actual amounts of borrowings under the revolving credit facility will fluctuate from time to time. Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under "Part I. Item 1A-Risk Factors" in Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year endedDecember 31, 2020 . If those factors significantly change or other unexpected factors adversely affect us, our business may not 70 -------------------------------------------------------------------------------- Table of Contents generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under the revolving credit facility, incurring other indebtedness, additional equity or other financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all. Covenant Compliance Under the credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes, our subsidiary,APX Group's ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Covenant Adjusted EBITDA (which measure is defined as "Consolidated EBITDA" in the credit agreements governing the revolving credit facility and 2025 Term Loan B and "EBITDA" in the debt agreements governing the existing notes) for the applicable four-quarter period. Such tests include an incurrence-based maximum consolidated secured debt ratio and consolidated total debt ratio of 4.00 to 1.0 (or, in the case of each of the credit agreements governing the revolving credit facility and the 2025 Term Loan B, 4.25 to 1.00), an incurrence-based minimum fixed charge coverage ratio of 2.00 to 1.0, and, solely in the case of the credit agreement governing the revolving credit facility, a maintenance-based maximum consolidated first lien secured debt ratio of 5.95 to 1.0, each as determined in accordance with the credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes, as applicable. Non-compliance with these covenants could restrict our ability to undertake certain activities or result in a default under the credit agreement governing the revolving credit facility, the credit agreement governing the 2025 Term Loan B and the debt agreements governing the Notes. As ofMarch 31, 2021 , our consolidated first lien secured debt ratio was 2.60 to 1.0, our consolidated total debt ratio was 3.46 to 1.0 and our fixed charge coverage ratio was 4.15 to 1.0, in each case based on Covenant Adjusted EBITDA for the four quarters endedMarch 31, 2021 and as calculated in accordance with the applicable debt agreements. "Covenant Adjusted EBITDA" is defined as net income (loss) before interest expense (net of interest income), income and franchise taxes and depreciation and amortization (including amortization of capitalized subscriber acquisition costs), further adjusted to exclude the effects of certain contract sales to third parties, non-capitalized subscriber acquisition costs, stock based compensation, changes in the fair value of the derivative liability associated with our public and private warrants and certain unusual, non-cash, non-recurring and other items permitted in certain covenant calculations under the agreements governing our Notes, the credit agreement governing the 2025 Term Loan B and the credit agreement governing our revolving credit facility. We believe that the presentation of Covenant Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants contained in the agreements governing the Notes and the credit agreements governing the revolving credit facility and the 2025 Term Loan B. We caution investors that amounts presented in accordance with our definition of Covenant Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Covenant Adjusted EBITDA in the same manner. Covenant Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net loss or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.
The following table sets forth a reconciliation of net loss to Covenant Adjusted EBITDA (in thousands):
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Table of Contents Twelve months ended March 31, 2021 Net loss$ (537,482) Interest expense, net 205,162 Other income, net (26,925) Income tax expense, net 3,869 Depreciation and amortization (1) 85,656 Amortization of capitalized contract costs 492,838 Non-capitalized contract costs (2) 273,394 Stock-based compensation (3) 274,484 Change in fair value of warrant derivative liabilities (4) 63,430 Other adjustments (5) 77,964 Adjustment for a change in accounting principle (Topic 606) (6) (88,636) Covenant Adjusted EBITDA$ 823,754
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(1)Excludes loan amortization costs that are included in interest expense. (2)Reflects subscriber acquisition costs that are expensed as incurred because they are not directly related to the acquisition of specific subscribers. Certain other industry participants purchase subscribers through subscriber contract purchases, and as a result, may capitalize the full cost to purchase these subscriber contracts, as compared to our organic generation of new subscribers, which requires us to expense a portion of our subscriber acquisition costs under GAAP. (See Note 1 to the accompanying unaudited condensed consolidated financial statements) (3)Reflects stock-based compensation costs related to employee and director stock and stock incentive plans. (4)Reflects the change in fair value of the derivative liability associated with our public and private warrants. (5)Other adjustments represent primarily the following items (in thousands): Twelve months ended March 31, 2021 Loss contingency (a) $ 23,200 Consumer financing fees (b) 21,350 Product development (c) 15,110 Monitoring fee (d) 7,953 Certain legal and professional fees (e) 5,947 Hiring, retention and termination payments (f) 3,668 All other adjustments (g) 736 Total other adjustments $ 77,964 ____________________ (a)Reflects an increase to the loss contingency accrual relating to the regulatory matters described in Note 12 to the accompanying consolidated financial statements. (b)Monthly financing fees incurred under the Consumer Financing Program. (c)Costs related to the development of control panels, including associated software, and peripheral devices. (d)BMP monitoring fee (See Note 14 to the accompanying unaudited condensed consolidated financial statements). (e)Legal and professional fees associated with strategic initiatives and financing transactions. (f)Expenses associated with retention bonus, relocation and severance payments to management. (g)Other adjustments primarily reflect adjustments to eliminate the impact of changes in other accounting principles, add back revenue reduction directly related to purchase accounting deferred revenue adjustments and costs associated with payments to third parties related to various strategic, legal and financing activities.
(6)The adjustments to eliminate the impact of the Company's adoption of Topic 606, are as follows (in thousands):
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Table of Contents Twelve months ended March 31, 2021 Net loss $ 69,927 Amortization of capitalized contract costs
(492,841)
Amortization of subscriber acquisition costs 332,367 Income tax expense 1,911 Topic 606 adjustments $ (88,636) Other Factors Affecting Liquidity and Capital Resources Vivint Flex Pay. Vivint Flex Pay became our primary sales model beginning inMarch 2017 . Under the Consumer Financing Program, qualified customers are eligible for loans provided by third-party financing providers up to$4,000 . The annual percentage rates on these loans range between 0% and 9.99%, and are either installment loans or revolving loans with a 42 or 60 month term. Most loan terms are determined by the customer's credit quality. For certain third-party provider loans, we pay a monthly fee based on either the average daily outstanding balance of the loans or the number of outstanding loans, depending on the third-party financing provider. Additionally, we share in the liability for credit losses depending on the credit quality of the customer, with our Company being responsible for between 5% to 100% of lost principal balances, depending on factors specified in the agreement with such provider. Because of the nature of these provisions, we record a derivative liability at its fair value when the third-party financing provider originates loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services. The derivative liability represents the estimated remaining amounts to be paid to the third-party provider by us related to outstanding loans, including the monthly fees based on either the outstanding loan balances or the number of outstanding loans, shared liabilities for credit losses and customer payment processing fees. The derivative liability is reduced as payments are made by us to the third-party financing provider. Subsequent changes to the fair value of the derivative liability are realized through other expenses (income), net in the Condensed Consolidated Statement of Operations. As ofMarch 31, 2021 andDecember 31, 2020 , the fair value of this derivative liability was$217.1 million and$227.9 million , respectively. As we continue to use of Vivint Flex Pay as our primary sales model, we expect our liability to third-party providers to continue to increase substantially and the rate of such increases may accelerate. For other third-party provider loans, we receive net proceeds (net of fees and expected losses) for which we have no further obligation to the third-party. We record these net proceeds to deferred revenue. Vehicle Leases. Since 2010, we have leased, and expect to continue leasing, vehicles primarily for use by our Smart Home Pros. For the most part, these leases have 36 month durations and we account for them as finance leases. At the end of the lease term for each vehicle we have the option to either (i) purchase it for the estimated end-of-lease fair market value established at the beginning of the lease term; or (ii) return the vehicle to the lessor to be sold by them and in the event the sale price is less than the estimated end-of-lease fair market value we are responsible for such deficiency. As ofMarch 31, 2021 , our total finance lease obligations were$4.9 million , of which$3.2 million is due within the next 12 months. Off-Balance Sheet Arrangements Currently we do not engage in off-balance sheet financing arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K. 73
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