VIVINT SMART HOME : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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 ended December 31, 2020 contained in our Amendment
No. 1 to the Annual Report on Form 10-K/A for the fiscal year ended December 31,
2020 filed with the SEC on May 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 of Vivint Smart Home, Inc. and its consolidated
subsidiaries. The unaudited condensed consolidated financial statements for the
three months ended March 31, 2021 and 2020, respectively, present the financial
position and results of operations of Vivint Smart Home, Inc. and its
wholly-owned subsidiaries.
Business Overview
Vivint Smart Home is a leading smart home platform company serving approximately
1.7 million subscribers as of March 31, 2021. Our mission is to redefine the
home experience through intelligently designed cloud-enabled solutions,
delivered to every home by people who 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 of March 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 of March 31, 2021.
Our cloud-based home platform currently manages more than 20 million in-home
devices as of March 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 subscribers who 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
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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
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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
In December 2019, COVID-19 was first reported and on March 11, 2020, the World
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:
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•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 employee who 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 our Provo, 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 in Canada. Each account sold
in Canada has historically required a significant cash investment by our
company. Effective June 2020, Vivint Canada, Inc. no longer sells new equipment
or accounts through its door-to-door sales channel. We will continue to sell in
Canada through online marketing and our inside sales channels. We will continue
to operate in Canada, 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
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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
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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 in March
2017. Under Vivint Flex Pay, customers pay separately for the products
(including control panel, security peripheral equipment, smart home equipment,
and related installation) ("Products") and Vivint's smart home and security
services ("Services"). The customer has the following three ways to pay for the
Products: (1) qualified customers in the 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, but who qualify under our underwriting criteria, the option to
enter into a retail installment contract ("RIC") directly with Vivint, 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 the Vivint
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
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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.
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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 of October 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 of March 31, 2021 consisted of one
reporting unit. As of March 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
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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 of
October 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
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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
customers who are not eligible for the CFP, or do not choose to Pay-in-Full at
the time of origination, but who 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 of March 31, 2020 to $66 as of March 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 ended March 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 Doorbell Camera Pro, Vivint Indoor Camera,
Vivint Outdoor Camera 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 ended March 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 of March 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
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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 ended March 31, 2020 to $10.77 for the three months ended March 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 subscribers who 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 ended March 31, 2021 and March 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 ended March 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 ended March 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 subscribers
who 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
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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 of March 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 partners who 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
Google, Amazon, Chamberlain and Philips, we believe that this will help us to
further increase our revenue and resulting profitability.
Any new Products, Services, or features we add to our ecosystem creates an
opportunity to generate revenue, either through sales to our existing
subscribers or through the acquisition of New Subscribers. Furthermore, we
believe that by vertically integrating the development and design of our
Products and Services with our existing sales and subscriber service activities
allows us to quickly respond to market needs, and better understand our
subscribers' interactions and engagement with our Products and Services. This
provides critical data that we expect will enable us to continue improving the
power, usability and intelligence of these Products and Services. As a result,
we anticipate that continuing to invest in technologies that make our platform
more engaging for subscribers, and by offering a broader range of smart home
experiences and adjacent in-home services, will allow us to grow revenue and
further monetize our subscriber base, because it improves our ability to offer
tailored service packages to subscribers with different needs.

Basis of Presentation

  We conduct business through one operating segment, Vivint, and primarily
operate in two geographic regions: The United States and Canada. 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 subscribers who 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 Pros
who 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
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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



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                                                 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 Ended March 31, 2021 Compared to the Three Months Ended March 31,
2020
Revenues
The following table provides our revenue for the three month periods ended
March 31, 2021 and March 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 ended March 31, 2021 increased
$40.1 million, or 13%, as compared to the three months ended March 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.
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Costs and Expenses
The following table provides the significant components of our costs and
expenses for the three month periods ended March 31, 2021 and March 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 ended March 31, 2021 increased by $13.4
million, or 16%, as compared to the three months ended March 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 ended March 31, 2021 as compared to the
three months ended March 31, 2020. Excluding an increase in stock-based
compensation of $58.5 million associated with equity awards granted during the
three months ended March 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 ended March 31, 2021 as compared to the three months ended
March 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 ended
March 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 ended March 31, 2021
increased $7.7 million, or 6%, as compared to the three months ended March 31,
2020, primarily due to increased amortization of capitalized contract costs
related to new subscribers.
Restructuring expenses for the three months ended March 31, 2020 related to
employee severance and termination benefits expenses (See Note 16 to the
accompanying unaudited condensed consolidated financial statements).
Other Expenses, net
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The following table provides the significant components of our other expenses,
net for the three month periods ended March 31, 2021 and March 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 ended
March 31, 2021, as compared with the three months ended March 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 in February 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 ended
March 31, 2021 and March 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 ended March 31, 2021 compared to a loss of $22.8 million for the three
months ended March 31, 2020. The other income, net during the three months ended
March 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 ended March 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 ended March 31, 2021 and March 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 ended March 31, 2021 and a tax benefit of $0.8 million for the three
months ended March 31, 2020. The income tax expense for the three months ended
March 31, 2021 resulted primarily from US state minimum taxes and income taxes
from our Canadian subsidiary. The income tax benefit for the three months ended
March 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 ended December 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 of March 31,
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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 for U.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 the U.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 ended March 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
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•$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 ended March 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 ended March 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 ended March 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 ended March 31, 2021 and 2020.
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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 ended March 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 ended March 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 ended March 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 ended March 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
of March 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 of March 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 on June 1 and December 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 on December 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 of March 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 on September 1 and March 1 of each year. The 2023 notes mature on
September 1, 2023.
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  From and after September 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 after
September 1, 2022, in each case, plus any accrued and unpaid interest to the
date of redemption.

2024 Notes

  As of March 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 on May 1 and November 1 of each year.
  We may, at our option, redeem at any time and from time to time prior to May
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 after May 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 after May 1, 2023, in each case, plus any accrued and
unpaid interest to the date of redemption. In addition, on or prior to May 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 to May 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 on November 1, 2024, unless, under "Springing Maturity"
provisions, on June 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 on
June 1, 2023.
2027 Notes
  As of March 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 on February 15 and August 15 each year.
  We may, at our option, redeem at any time and from time to time prior to
February 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 after February 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 after May 1, 2025, in each case,
plus any accrued and unpaid interest to the date of redemption. In addition, on
or prior to February 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 to February 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 on February 15, 2027, unless, under "Springing
Maturity" provisions on June 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 on
June 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 of March 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).
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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
On February 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 of March 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 of Bank of
America, N.A. and (c) the LIBOR rate determined by reference to the costs of
funds for U.S. dollar deposits for an interest period of one month, plus 1.00%
or (2) the LIBOR rate determined by reference to the London 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 on March 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 on February 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 by Vivint Smart Home, Inc., APX
Group Holdings, Inc. and each of APX Group, Inc.'s existing and future material
wholly-owned U.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 of APX Group, Inc., and the guarantors, including without
limitation equipment, subscriber contracts and communication paths, intellectual
property, material fee-owned real
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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 of APX 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 of APX Group, Inc. and the guarantors, and the proceeds thereof,
subject to permitted liens and other customary exceptions, in each case held by
APX Group, Inc. and the guarantors and (3) a pledge of all of the capital stock
of APX Group, Inc., each of its subsidiary guarantors and each restricted
subsidiary of APX 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
In May 2020, the Company provided a parent guarantee of APX Group's obligations
under the indentures governing the Notes, in each case, in order to enable APX
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 of Vivint
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)



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                                                 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 to APX 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 of March 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 permit APX 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 ended December 31, 2020. If those
factors significantly change or other unexpected factors adversely affect us,
our business may not
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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 of March 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 ended March 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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                                                                                            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

____________________

(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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                                                            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 in
March 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
of March 31, 2021 and December 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 of March 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.



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