Vivint Smart Home, Inc. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
FORM 10-Q
_______________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 001-38246
__________________________________________________________
Vivint Smart Home, Inc.
(Exact name of Registrant as specified in its charter)
__________________________________________________________
| Delaware | 98-1380306 | |||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
4931 North 300 West
Provo, UT 84604
(Address of Principal Executive Offices and zip code)
(801) 377-9111
(Registrant’s Telephone Number, Including Area Code)
__________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A common stock, par value $0.0001 per share | VVNT | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ¨ | |||||||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||||||||||||||||
| Emerging growth company | ¨ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of May 13, 2021, there were 208,670,866 shares of Class A common stock outstanding.
1
Vivint Smart Home, Inc.
FORM 10-Q
TABLE OF CONTENTS
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| Item 1A. | ||||||||
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BASIS OF PRESENTATION AND GLOSSARY
As used in this Quarterly Report on Form 10-Q, unless otherwise noted or the context otherwise requires:
•references to “Vivint,” “we,” “us,” “our” and “the Company” are to Vivint Smart Home, Inc. and its consolidated subsidiaries;
•references to “Sponsor” are to certain investment funds affiliated with The Blackstone Group Inc.;
•references to the “Reorganization” are to the acquisition of APX Group and two of its affiliates, Vivint Solar, Inc. and 2GIG Technologies, Inc., on November 16, 2012, by an investor group comprised of certain investment funds affiliated with our Sponsor, and certain co-investors and management investors;
•references to the “Merger” or the “Business Combination” are to the merger, which closed on January 17, 2020, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 15, 2019, by and among Legacy Vivint Smart Home, Inc. (“Legacy Vivint Smart Home”), Vivint Smart Home, Inc. (f/k/a Mosaic Acquisition Corp.) (the “Company”) and Maiden Merger Sub, Inc., a wholly owned subsidiary of Vivint Smart Home, Inc. (“Merger Sub”), as amended by Amendment No. 1 to the Agreement and Plan of Merger (the “Amendment” and as amended, the “Merger Agreement”), dated as of December 18, 2019, by and among the Company, Merger Sub and Legacy Vivint Smart Home pursuant to which Merger Sub merged with and into Legacy Vivint Smart Home with Legacy Vivint Smart Home surviving the merger as a wholly owned subsidiary of Vivint Smart Home; and
•the terms “subscriber” and “customer” are used interchangeably.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements regarding, among other things, our plans, strategies and prospects, both business and financial. These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning our possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. You should understand that the following important factors, in addition to those discussed in “Risk Factors” in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on May 12, 2021 (the “Form 10-K/A”), as such factors may be updated in our periodic reports filed with the SEC, and contained elsewhere in this Quarterly Report, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
•the duration and scope of the COVID-19 pandemic;
•actions governments, the company’s counterparties, and the company’s customers or potential customers take in response to the COVID-19 pandemic;
•the impact of the pandemic and actions taken in response to the pandemic on the global economies and economic activity;
•the pace of recovery when the COVID-19 pandemic subsides;
•the impact of the COVID-19 pandemic on our liquidity and capital resources, including the impact of the pandemic on our customers and timing of payments, the sufficiency of credit facilities, and the company’s compliance with lender covenants;
•the ineffectiveness of steps we take to reduce operating costs;
•risks of the smart home and security industry, including risks of and publicity surrounding the sales, subscriber origination and retention process;
3
•the highly competitive nature of the smart home and security industry and product introductions and promotional activity by our competitors;
•litigation, complaints, product liability claims and/or adverse publicity;
•the impact of changes in consumer spending patterns, consumer preferences, local, regional, and national economic conditions, crime, weather, demographic trends and employee availability;
•adverse publicity and product liability claims;
•increases and/or decreases in utility and other energy costs, increased costs related to utility or governmental requirements;
•cost increases or shortages in smart home and security technology products or components;
•the introduction of unsuccessful new Smart Home Services;
•privacy and data protection laws, privacy or data breaches, or the loss of data;
•the impact to our business, results of operations, financial condition, regulatory compliance and customer experience of the Vivint Flex Pay plan (as described in Note 1 - Basis of Presentation in the unaudited condensed consolidated financial statements) and our ability to successfully compete in retail sales channels;
•risks related to our exposure to variable rates of interest with respect to our revolving credit facility and term loan facility; and
•our inability to develop and maintain effective internal control over financial reporting.
In addition, the origination and retention of new subscribers will depend on various factors, including, but not limited to, market availability, subscriber interest, the availability of suitable components, the negotiation of acceptable contract terms with subscribers, local permitting, licensing and regulatory compliance, and our ability to manage anticipated expansion and to hire, train and retain personnel, the financial viability of subscribers and general economic conditions.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report are more fully described in the “Risk Factors” section of the Form 10-K/A, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov. The risks described herein or in the “Risk Factors” sections referenced above are not exhaustive. Other sections of this Quarterly Report describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
4
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website (www.vivint.com), our company blogs (vivint.com/resources, innovation.vivint.com), corporate Twitter and Facebook accounts (@VivintHome), our corporate Instagram account (@Vivint) and our corporate LinkedIn account as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about the Company when you enroll your e-mail address by visiting the “Email Alerts” section of our website at www.investors.vivint.com. The contents of our website and social media channels are not, however, a part of this report.
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PART I. FINANCIAL INFORMATION
| ITEM 1. | UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | ||||
Vivint Smart Home, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per-share amounts)
6
| March 31, 2021 | December 31, 2020 | ||||||||||
| (As Restated) | |||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 274,344 | $ | 313,799 | |||||||
| Accounts and notes receivable, net | 66,985 | 64,697 | |||||||||
| Inventories | 80,296 | 47,299 | |||||||||
| Prepaid expenses and other current assets | 26,175 | 14,338 | |||||||||
| Total current assets | 447,800 | 440,133 | |||||||||
| Property, plant and equipment, net | 51,644 | 52,379 | |||||||||
| Capitalized contract costs, net | 1,290,176 | 1,318,498 | |||||||||
| Deferred financing costs, net | 1,567 | 1,667 | |||||||||
| Intangible assets, net | 96,666 | 111,474 | |||||||||
| Goodwill | 837,386 | 837,077 | |||||||||
| Operating lease right-of-use assets | 50,486 | 52,880 | |||||||||
| Long-term notes receivables and other assets, net | 57,534 | 62,510 | |||||||||
| Total assets | $ | 2,833,259 | $ | 2,876,618 | |||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 121,505 | $ | 85,656 | |||||||
| Accrued payroll and commissions | 47,063 | 87,943 | |||||||||
| Accrued expenses and other current liabilities | 233,020 | 247,324 | |||||||||
| Deferred revenue | 334,154 | 321,143 | |||||||||
| Current portion of notes payable, net | 9,500 | 9,500 | |||||||||
| Current portion of operating lease liabilities | 12,062 | 12,135 | |||||||||
| Current portion of finance lease liabilities | 3,208 | 3,356 | |||||||||
| Total current liabilities | 760,512 | 767,057 | |||||||||
| Notes payable, net | 2,350,284 | 2,372,235 | |||||||||
| Notes payable, net - related party | 464,290 | 443,865 | |||||||||
| Revolving credit facility | — | — | |||||||||
| Finance lease liabilities, net of current portion | 1,701 | 2,460 | |||||||||
| Deferred revenue, net of current portion | 622,287 | 615,598 | |||||||||
| Operating lease liabilities | 47,081 | 49,692 | |||||||||
| Warrant derivative liabilities | 45,568 | 75,531 | |||||||||
| Other long-term obligations | 124,948 | 121,235 | |||||||||
| Deferred income tax liabilities | 557 | 2,168 | |||||||||
| Total liabilities | 4,417,228 | 4,449,841 | |||||||||
| Commitments and contingencies (See Note 12) | |||||||||||
| Stockholders’ deficit: | |||||||||||
Class A Common stock, $0.0001 par value, 3,000,000,000 shares authorized; 208,670,866 and 202,216,341 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 21 | 20 | |||||||||
Preferred stock, $0.0001 par value, 300,000,000 shares authorized; none issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | — | — | |||||||||
| Additional paid-in capital | 1,625,027 | 1,548,786 | |||||||||
| Accumulated deficit | (3,182,600) | (3,095,220) | |||||||||
| Accumulated other comprehensive loss | (26,417) | (26,809) | |||||||||
| Total stockholders’ deficit | (1,583,969) | (1,573,223) | |||||||||
| Total liabilities and stockholders’ deficit | $ | 2,833,259 | $ | 2,876,618 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements
7
Vivint Smart Home, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (As Restated) | |||||||||||
| Revenues: | |||||||||||
| Recurring and other revenue | $ | 343,293 | $ | 303,232 | |||||||
| Costs and expenses: | |||||||||||
| Operating expenses (exclusive of depreciation and amortization shown separately below) | 96,531 | 83,160 | |||||||||
Selling expenses (exclusive of amortization of deferred commissions of $52,078 and $32,466, respectively, which are included in depreciation and amortization shown separately below) | 114,541 | 50,723 | |||||||||
| General and administrative expenses | 66,348 | 50,423 | |||||||||
| Depreciation and amortization | 146,912 | 139,249 | |||||||||
| Restructuring expenses | — | 20,941 | |||||||||
| Total costs and expenses | 424,332 | 344,496 | |||||||||
| Loss from operations | (81,039) | (41,264) | |||||||||
| Other expenses (income): | |||||||||||
| Interest expense | 49,803 | 65,293 | |||||||||
| Interest income | (44) | (229) | |||||||||
| Change in fair value of warrant liabilities | (29,103) | 16,717 | |||||||||
| Other (income) expense, net | (14,559) | 22,839 | |||||||||
| Loss before income taxes | (87,136) | (145,884) | |||||||||
| Income tax expense (benefit) | 244 | (788) | |||||||||
| Net loss | $ | (87,380) | $ | (145,096) | |||||||
| Net loss attributable per share to common stockholders: | |||||||||||
| Basic | $ | (0.42) | $ | (0.96) | |||||||
| Diluted | $ | (0.56) | $ | (0.96) | |||||||
| Weighted-average shares used in computing net loss attributable per share to common stockholders: | |||||||||||
| Basic | 206,791,625 | 151,010,847 | |||||||||
| Diluted | 208,989,080 | 151,010,847 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements
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Vivint Smart Home, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (As Restated) | |||||||||||
| Net loss | $ | (87,380) | $ | (145,096) | |||||||
| Other comprehensive income (loss), net of tax effects: | |||||||||||
| Foreign currency translation adjustment | 392 | (2,429) | |||||||||
| Total other comprehensive income (loss) | 392 | (2,429) | |||||||||
| Comprehensive loss | $ | (86,988) | $ | (147,525) | |||||||
See accompanying notes to unaudited condensed consolidated financial statements
9
Vivint Smart Home, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity (Deficit)
(In thousands, except shares)
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, beginning of period | 202,216,341 | $ | 20 | $ | 1,548,786 | $ | (3,095,220) | $ | (26,809) | $ | (1,573,223) | ||||||||||||||||||||||||
| Issuance of earnout shares | 1,237,211 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Tax withholdings related to net share settlement of equity awards | (1,663,202) | — | (28,735) | — | — | (28,735) | |||||||||||||||||||||||||||||
| Forfeited shares | (17,198) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Warrants exercised | 825,016 | — | 19,743 | — | — | 19,743 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise or vesting of equity awards | 6,072,698 | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||
| Net Loss | — | — | — | (87,380) | — | (87,380) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | 392 | 392 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 85,233 | — | — | 85,233 | |||||||||||||||||||||||||||||
| Balance, end of period | 208,670,866 | $ | 21 | $ | 1,625,027 | $ | (3,182,600) | $ | (26,417) | $ | (1,583,969) | ||||||||||||||||||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| (As Restated) | |||||||||||||||||||||||||||||||||||
| Balance, beginning of period | 94,937,597 | $ | 9 | $ | 740,121 | $ | (2,500,022) | $ | (27,466) | $ | (1,787,358) | ||||||||||||||||||||||||
| Recapitalization transaction | 59,793,021 | 6 | 422,242 | — | — | 422,248 | |||||||||||||||||||||||||||||
| Issuance of earnout shares | 23,196,214 | 3 | (3) | — | — | — | |||||||||||||||||||||||||||||
| Tax withholdings related to net share settlement of earnout shares | (52,981) | — | (1,198) | — | — | (1,198) | |||||||||||||||||||||||||||||
| Forfeited shares | (161,941) | — | — | — | — | — | |||||||||||||||||||||||||||||
| Net Loss | — | — | — | (145,096) | — | (145,096) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | (2,429) | (2,429) | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 10,791 | — | — | 10,791 | |||||||||||||||||||||||||||||
| Restructuring expenses | — | — | 11,106 | — | — | 11,106 | |||||||||||||||||||||||||||||
| Balance, end of period | 177,711,910 | $ | 18 | $ | 1,183,059 | $ | (2,645,118) | $ | (29,895) | $ | (1,491,936) | ||||||||||||||||||||||||
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Vivint Smart Home, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (As Restated) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (87,380) | $ | (145,096) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Amortization of capitalized contract costs | 127,768 | 116,143 | |||||||||
| Amortization of customer relationships | 14,521 | 16,476 | |||||||||
| Depreciation and amortization of property, plant and equipment and other intangible assets | 4,623 | 6,630 | |||||||||
| Amortization of deferred financing costs and bond premiums and discounts | 949 | 951 | |||||||||
| Loss on sale or disposal of assets | 19 | 365 | |||||||||
| (Gain) loss on warrant derivative liabilities | (29,103) | 16,717 | |||||||||
| Loss on early extinguishment of debt | — | 12,710 | |||||||||
| Expensed issuance costs | — | 723 | |||||||||
| Stock-based compensation | 85,251 | 10,791 | |||||||||
| Provision for doubtful accounts and expected credit losses | 4,712 | 8,083 | |||||||||
| Deferred income taxes | (4,953) | (1,095) | |||||||||
| Non-cash restructuring expenses | — | 11,106 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts and notes receivable, net | (7,454) | (20,656) | |||||||||
| Inventories | (32,985) | (15,526) | |||||||||
| Prepaid expenses and other current assets | (11,894) | (4,445) | |||||||||
| Capitalized contract costs, net | (98,923) | (84,532) | |||||||||
| Long-term notes receivables, other assets, net | 8,494 | 7,121 | |||||||||
| Right-of-use assets | 2,394 | 1,487 | |||||||||
| Accounts payable | 36,521 | 39,990 | |||||||||
| Accrued payroll and commissions, accrued expenses, and other current and long-term liabilities | (43,457) | (18,384) | |||||||||
| Current and long-term operating lease liabilities | (2,684) | (1,687) | |||||||||
| Deferred revenue | 19,425 | 9,259 | |||||||||
| Net cash used in operating activities | (14,156) | (32,869) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (4,647) | (2,867) | |||||||||
| Proceeds associated with disposal of capital assets | 99 | 1,287 | |||||||||
| Acquisition of intangible assets | — | (321) | |||||||||
| Net cash used in investing activities | (4,548) | (1,901) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from notes payable | — | 1,241,000 | |||||||||
| Proceeds from notes payable - related party | — | 309,000 | |||||||||
| Repayment of notes payable | (2,375) | (1,572,374) | |||||||||
| Repayment of notes payable - related party | — | (174,800) | |||||||||
| Borrowings from revolving credit facility | — | 190,000 | |||||||||
| Taxes paid related to net share settlements of stock-based compensation awards | (28,701) | (1,011) | |||||||||
| Repayments on revolving credit facility | — | (270,000) | |||||||||
| Proceeds from warrant exercises | 10,819 | — | |||||||||
| Proceeds from Mosaic recapitalization | — | 465,087 | |||||||||
| Repayments of finance lease obligations | (500) | (2,243) | |||||||||
| Financing costs | — | (11,061) | |||||||||
| Deferred financing costs | — | (11,937) | |||||||||
| Net cash (used in) provided by financing activities | (20,757) | 161,661 | |||||||||
| Effect of exchange rate changes on cash | 6 | (351) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (39,455) | 126,540 | |||||||||
| Cash and cash equivalents: | |||||||||||
| Beginning of period | 313,799 | 4,549 | |||||||||
| End of period | $ | 274,344 | $ | 131,089 | |||||||
| Supplemental non-cash investing and financing activities: | |||||||||||
| Finance lease additions | $ | 413 | $ | 592 | |||||||
| Intangible asset acquisitions included within accounts payable, accrued expenses and other current liabilities and other long-term obligations | $ | 382 | $ | 1,448 | |||||||
| Reclassification of warrant derivative liability for exercised warrants | $ | 8,924 | $ | — | |||||||
| Capital expenditures included within accounts payable | $ | 1,553 | $ | 1,869 | |||||||
| Debt and equity financing costs included within accounts payable | $ | — | $ | 2,455 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements
11
Vivint Smart Home, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Basis of Presentation and Significant Accounting Policies
Unaudited Interim Financial Statements
The accompanying interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by the Company without audit. The accompanying consolidated financial statements include the accounts of Vivint Smart Home, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information as of December 31, 2020 included in the unaudited condensed consolidated balance sheets was derived from the Company’s audited consolidated financial statements. The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of a normal recurring nature) considered necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods and dates presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Preparing financial statements requires the Company to make estimates and assumptions that affect the amounts that are reported in the condensed consolidated financial statements and accompanying disclosures. Although these estimates are based on the Company’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the Company’s estimates. The results of operations presented herein are not necessarily indicative of the Company’s results for any future period.
These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes as set forth in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”) on May 12, 2021, which is available on the SEC’s website at www.sec.gov.
Certain prior period balances were conformed to the restated financial statements, as previously disclosed in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2020, due to the accounting for warrant liabilities.
Basis of Presentation
On January 17, 2020 (the “Closing Date”), the Company consummated the previously announced merger pursuant to that certain Agreement and Plan of Merger, dated September 15, 2019, by and among the Company, Merger Sub, and Legacy Vivint Smart Home, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 18, 2019, by and among the Company, Merger Sub and Legacy Vivint Smart Home. (See Note 5 “Business Combination” for further discussion).
Pursuant to the terms of the Merger Agreement, a business combination between the Company and Legacy Vivint Smart Home was effected through the merger of Merger Sub with and into Legacy Vivint Smart Home, with Legacy Vivint Smart Home surviving as the surviving company (the “Business Combination”). Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Vivint Smart Home, Inc. is treated as the acquired company and Legacy Vivint Smart Home is treated as the acquirer for financial statement reporting and accounting purposes. Legacy Vivint Smart Home has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
•Legacy Vivint Smart Home’s shareholders prior to the Business Combination have the greatest voting interest in the combined entity;
•the largest individual shareholder of the combined entity was an existing shareholder of Legacy Vivint Smart Home;
•Legacy Vivint Smart Home’s directors represent the majority of the Vivint Smart Home board of directors;
•Legacy Vivint Smart Home’s senior management is the senior management of Vivint Smart Home; and
•Legacy Vivint Smart Home is the larger entity based on historical total assets and revenues.
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As a result of Legacy Vivint Smart Home being the accounting acquirer, the financial reports filed with the SEC by the Company subsequent to the Business Combination are prepared “as if” Legacy Vivint Smart Home is the predecessor and legal successor to the Company. The historical operations of Legacy Vivint Smart Home are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Legacy Vivint Smart Home prior to the Business Combination; (ii) the combined results of the Company and Legacy Vivint Smart Home following the Business Combination on January 17, 2020; (iii) the assets and liabilities of Legacy Vivint Smart Home at their historical cost; and (iv) the Company’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of Legacy Vivint Smart Home in connection with the Business Combination is reflected retroactively to the earliest period presented and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction as a reverse recapitalization of Legacy Vivint Smart Home.
In connection with the Business Combination, Mosaic Acquisition Corp. changed its name to Vivint Smart Home, Inc. The Company’s Common Stock is now listed on the NYSE under the symbol “VVNT” and warrants to purchase the Common Stock at an exercise price of $11.50 per share are listed on the NYSE under the symbol “VVNT WS”. Prior to the Business Combination, the Company neither engaged in any operations nor generated any revenue. Until the Business Combination, based on the Company’s business activities, it was a “shell company” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Vivint Flex Pay
The Vivint Flex Pay plan (“Vivint Flex Pay”) became the Company’s 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) the Company offers to a limited number of customers not eligible for the CFP, but who qualify under the Company's 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, the Company has 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 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, the Company pays a monthly fee based on either the average daily outstanding balance of the installment loans, or the number of outstanding Loans. For certain Loans, the Company incurs fees at the time of the loan origination and receives proceeds that are net of these fees. For certain Loans, the Company also shares liability for credit losses, with the Company being responsible for between 2.6% and 100% of lost principal balances. Additionally, the Company is responsible for reimbursing certain Financing Providers for merchant transaction fees and other fees associated with the Loans. Because of the nature of these provisions, the Company records 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 the Company 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. (see Note 9 “Financial Instruments” for additional information).
For certain other Loans, the Company receives net proceeds (net of fees and expected losses) for which the Company has no further obligation to the Financing Provider. The Company records these net proceeds to deferred revenue.
For other third-party loans, the Company receives net proceeds (net of fees and expected losses) for which the Company has no further obligation to the third-party. The Company records these net proceeds to deferred revenue.
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Retail Installment Contract Receivables
For subscribers that enter into a RIC to finance the purchase of Products and related installation, the Company records 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 the Company 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, the Company records 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.
The Company imputes the interest on the RIC receivable using a risk adjusted market interest rate and records 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 the Company determines that there are RIC receivables that have become uncollectible, it records an adjustment to the allowance and reduces the related note receivable balance. On a regular basis, the Company also assesses the expected remaining cash flows based on historical RIC write-off trends, current market conditions and both Company and third-party forecast data. If the Company determines 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. Accounts receivable totaled $22.1 million and $19.8 million at March 31, 2021 and December 31, 2020, respectively, net of the allowance for doubtful accounts of $8.1 million and $9.9 million at March 31, 2021 and December 31, 2020, respectively. The Company estimates this allowance based on historical collection experience, subscriber attrition rates, current market conditions and both Company and third-party forecast data. When the Company determines 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 and totaled $4.7 million and $8.1 million for the three months ended March 31, 2021 and 2020, respectively.
The changes in the Company’s allowance for accounts receivable were as follows for the periods ended (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Beginning balance | $ | 9,911 | $ | 8,118 | |||||||
| Provision for doubtful accounts | 4,712 | 8,083 | |||||||||
| Write-offs and adjustments | (6,498) | (7,730) | |||||||||
| Balance at end of period | $ | 8,125 | $ | 8,471 | |||||||
Revenue Recognition
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The Company offers its customers smart home services combining Products, including a proprietary control panel, 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 the Company’s customers to monitor, control and protect their home (“Smart Home Services”). The Company’s 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, the Company has 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. The Company has 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 the Company’s subscription contracts are between 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. Revenues for the wireless internet service that were provided by the Company's former wireless internet business (“Wireless”) and 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.
Deferred Revenue
The Company's 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 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. The Company calculates amortization by accumulating all deferred contract costs into separate portfolios based on the initial month of service and amortizes those deferred contract costs on a straight-line basis over the expected period of benefit that the Company has determined to be five years, consistent with the pattern in which the Company provides services to its customers. The Company believes 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. The Company applies this period of benefit to its entire portfolio of contracts. The Company updates its 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, the Company considers whether the carrying amount of the capitalized contract costs will be recovered. In estimating the amount of consideration the Company expects to receive in the future related to capitalized contract costs, the Company considers 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
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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.
Cash and Cash Equivalents
Cash and cash equivalents consists of highly liquid investments with remaining maturities when purchased of three months or less.
Inventories
Inventories, which are comprised of smart home and security system equipment and parts are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out (“FIFO”) method. Inventories sold to customers as part of a smart home and security system are generally capitalized as contract costs. The Company adjusts the inventory balance based on anticipated obsolescence, usage and historical write-offs.
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 2 to 10 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.
The Company reviews 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. The Company considers whether or not indicators of impairment exist on a regular basis and as part of each quarterly and annual financial statement close process. Factors the Company considers in determining whether or not indicators of impairment exist include market factors and patterns of customer attrition. If indicators of impairment are identified, the Company estimates the fair value of the assets. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company conducts 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 the Company’s indefinite-lived intangibles may be less than the carrying amount. When indicators of impairment do not exist and certain accounting criteria are met, the Company is able to evaluate indefinite-lived intangible impairment using a qualitative approach. When necessary, the Company’s quantitative impairment test consists of two steps. The first step requires that the Company compare the estimated fair value of its 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.
During the three months ended March 31, 2021 and 2020, no impairments to long-lived assets or intangibles were recorded.
The Company’s depreciation and amortization included in the consolidated statements of operations consisted of the following (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Amortization of capitalized contract costs | $ | 127,769 | $ | 116,141 | |||||||
| Amortization of definite-lived intangibles | 15,018 | 17,441 | |||||||||
| Depreciation of property, plant and equipment | 4,125 | 5,667 | |||||||||
| Total depreciation and amortization | $ | 146,912 | $ | 139,249 | |||||||
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Leases
The Company determines if an arrangement is a lease at inception. Lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit rate when available. When implicit rates are not available, the Company uses an incremental borrowing rate based on the information available at commencement date. The lease ROU asset also includes any lease payments made and is reduced by lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not record lease ROU assets and liabilities for leases with terms of 12 months or less.
Leases are classified as either operating or finance at lease inception. Operating lease assets and liabilities and finance lease liabilities are stated separately on the unaudited condensed consolidated balance sheets. Finance lease assets are included in property, plant and equipment, net on the unaudited condensed consolidated balance sheets.
The Company has lease agreements with lease and non-lease components. For facility type leases, the Company separates the lease and non-lease components. Generally, the Company accounts for the lease and non-lease components as a single lease component for all other class of leases.
Deferred Financing Costs
Certain costs incurred in connection with obtaining debt financing are deferred and amortized utilizing the straight-line method, which approximates the effective-interest method, over the life of the related financing. Deferred financing costs associated with obtaining APX Group, Inc.’s (“APX”) revolving credit facility are amortized over the amended maturity dates discussed in Note 3 “Long-Term Debt.” Deferred financing costs associated with the revolving credit facility reported in the accompanying unaudited condensed consolidated balance sheets within deferred financing costs, net at March 31, 2021 and December 31, 2020 were $1.6 million and $1.7 million, net of accumulated amortization of $11.1 million and $11.0 million, respectively. Deferred financing costs included in the accompanying unaudited condensed consolidated balance sheets within notes payable, net at March 31, 2021 and December 31, 2020 were $25.3 million and $27.2 million, net of accumulated amortization of $72.7 million and $70.9 million, respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying unaudited condensed consolidated statements of operations, totaled $1.9 million and $2.1 million for the three months ended March 31, 2021 and 2020, respectively (See Note 3 “Long-Term Debt” for additional detail).
Residual Income Plans
The Company has a program that allows certain third-party sales channel partners to receive additional compensation based on the performance of the underlying contracts they create (the “Channel Partner Plan”). The Company also has a residual sales compensation plan (the “Residual Plan”) under which the Company's sales personnel (each, a “Plan Participant”) receive compensation based on the performance of certain underlying contracts they created in prior years.
For both the Channel Partner Plan and Residual Plan, the Company calculates the present value of the expected future residual payments and records a liability for this amount in the period the subscriber account is originated. These costs are recorded to capitalized contract costs. The Company monitors actual payments and customer attrition on a periodic basis and, when necessary, makes adjustments to the liability. The current portion of the liability included in accrued payroll and commissions was $4.2 million and $4.1 million at March 31, 2021 and December 31, 2020, respectively, and the noncurrent portion included in other long-term obligations was $23.8 million and $23.8 million at March 31, 2021 and December 31, 2020, respectively.
Stock-Based Compensation
The Company measures compensation cost based on the grant-date fair value of the award and recognizes that cost over the requisite service period of the awards (See Note 11 “Stock-Based Compensation and Equity” for additional details).
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs were $16.8 million and $12.8 million for the three months ended March 31, 2021 and 2020, respectively.
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Income Taxes
The Company accounts 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.
The Company recognizes 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. The Company’s 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. The Company records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s results of operations, financial condition, or cash flows.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of receivables and cash. At times during the year, the Company maintains cash balances in excess of insured limits. The Company is not dependent on any single customer or geographic location. The loss of a customer would not adversely impact the Company’s operating results or financial position.
Concentrations of Supply Risk
As of March 31, 2021, approximately 93% of the Company’s installed panels were the Company's proprietary SkyControl or Smart Hub panels and 7% were 2GIG Go!Control panels. The loss of the Company's SkyControl or Smart Hub panel suppliers could potentially impact its operating results or financial position.
Fair Value Measurement
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities subject to on-going fair value measurement are categorized and disclosed into one of three categories depending on observable or unobservable inputs employed in the measurement. These two types of inputs have created the following fair value hierarchy:
Level 1: Quoted prices in active markets that are accessible at the measurement date for assets and liabilities.
Level 2: Observable prices that are based on inputs not quoted in active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The Company recognizes transfers between levels of the hierarchy based on the fair values of the respective financial measurements at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2021 and 2020.
The carrying amounts of the Company’s accounts receivable, accounts payable and accrued and other liabilities approximate their fair values due to their short maturities.
Goodwill
The Company conducts 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 the Company’s reporting units may be less than their carrying amounts. When indicators of impairment do not exist and certain accounting criteria are met, the Company is able to evaluate goodwill impairment using a qualitative approach. When necessary, the Company’s quantitative goodwill impairment test consists of two steps. The first step requires that the Company compare the estimated fair value of its 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
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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, the Company 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. The Company’s reporting units are determined based on its 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.
Foreign Currency Translation and Other Comprehensive Income
The functional currency of Vivint Canada, Inc. is the Canadian dollar. Accordingly, Vivint Canada, Inc. assets and liabilities are translated from their respective functional currencies into U.S. dollars at period-end rates and Vivint Canada, Inc. revenue and expenses are translated at the weighted-average exchange rates for the period. Adjustments resulting from this translation process are classified as other comprehensive income (loss) and shown as a separate component of equity.
When intercompany foreign currency transactions between entities included in the unaudited consolidated financial statements are of a long term investment nature (i.e., those for which settlement is not planned or anticipated in the foreseeable future) foreign currency translation adjustments resulting from those transactions are included in stockholders’ deficit as accumulated other comprehensive loss or income. When intercompany transactions are deemed to be of a short term nature, translation adjustments are required to be included in the condensed consolidated statement of operations. The Company has determined that settlement of Vivint Canada, Inc. intercompany balances are anticipated and therefore such balances are deemed to be of a short term nature. Translation activity included in the statement of operations in other (income) expenses, net related to intercompany balances was as follows: (in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Translation (gain) loss | $ | (572) | $ | 6,283 | |||||||
Letters of Credit
As of both March 31, 2021 and December 31, 2020, the Company had $15.3 million of letters of credit issued in the ordinary course of business, all of which are undrawn.
Derivative warrant liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its 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.
The Company accounts for its public warrants and private placement warrants as derivative warrant liabilities in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are re-measured at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations.
Restructuring and Asset Impairment Charges
Restructuring and asset impairment charges represent expenses incurred in relation to activities to exit or dispose of portions of the Company's business that do not qualify as discontinued operations. Liabilities associated with restructuring are measured at their fair value when the liability is incurred. Expenses for related termination benefits are recognized at the date the Company notifies 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. The Company expenses all other costs related to an exit or disposal activity as incurred (See Note 16).
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2. Revenue and Capitalized Contract Costs
Customers are typically invoiced for Smart Home Services in advance or at the time the Company delivers the related Smart Home Services. The majority of customers pay at the time of invoice via credit card, debit card or ACH. Deferred revenue relates to the advance consideration received from customers, which precedes the Company’s satisfaction of the associated performance obligation. The Company’s deferred revenues primarily result from customer payments received in advance for recurring monthly monitoring and other Smart Home Services, or other one-time fees, because these performance obligations are satisfied over time.
The Company also provides its customers with service warranties associated with product replacement and related services for the first 30 days after the generation and installation of new or modified customer contracts. These are considered a separate performance obligation and are determined to be satisfied upon completion of the warranty period. As of March 31, 2021 and December 31, 2020, the Company had warranty service reserves of $5.6 million and $5.7 million, respectively, which are included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.
During the three months ended March 31, 2021 and 2020, the Company recognized revenues of $116.2 million and $133.5 million, respectively, that were included in the deferred revenue balance as of December 31, 2020 and 2019, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
As of March 31, 2021, approximately $3.0 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. The Company expects to recognize approximately 62% of the revenue related to these remaining performance obligations over the next 24 months, with the remaining balance recognized over an additional 36 months.
Timing of Revenue Recognition
The Company considers Products, related installation, and its proprietary back-end cloud platform software and services an integrated system that allows the Company’s customers to monitor, control and protect their homes. These Smart Home Services are accounted for as a single performance obligation that is recognized over the customer’s contract term, which is generally to five years.
Capitalized Contract Costs
Capitalized contract costs generally include commissions, other compensation and related costs paid directly for the generation and installation of new or modified customer contracts, as well as the cost of Products installed in the customer home at the commencement or modification of the contract. The Company defers and amortizes these costs for new or modified subscriber contracts on a straight-line basis over the expected period of benefit of five years.
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3. Long-Term Debt
The Company’s debt at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):
| March 31, 2021 | |||||||||||||||||||||||
| Outstanding Principal | Unamortized Premium (Discount) | Unamortized Deferred Financing Costs (1) | Net Carrying Amount | ||||||||||||||||||||
| Long-Term Debt: | |||||||||||||||||||||||
7.875% Senior Secured Notes Due 2022 | $ | 677,000 | $ | 6,905 | $ | (4,084) | $ | 679,821 | |||||||||||||||
7.625% Senior Notes Due 2023 | 400,000 | — | (2,031) | 397,969 | |||||||||||||||||||
8.500% Senior Secured Notes Due 2024 | 225,000 | — | (3,304) | 221,696 | |||||||||||||||||||
6.750% Senior Secured Notes Due 2027 | 600,000 | — | (5,537) | 594,463 | |||||||||||||||||||
| Senior Secured Term Loan - noncurrent | 931,000 | — | (10,375) | 920,625 | |||||||||||||||||||
| Total Long-Term Debt | 2,833,000 | 6,905 | (25,331) | 2,814,574 | |||||||||||||||||||
| Senior Secured Term Loan - current | 9,500 | — | — | 9,500 | |||||||||||||||||||
| Total Debt | $ | 2,842,500 | $ | 6,905 | $ | (25,331) | $ | 2,824,074 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Outstanding Principal | Unamortized Premium (Discount) | Unamortized Deferred Financing Costs (1) | Net Carrying Amount | ||||||||||||||||||||
| Long-Term Debt: | |||||||||||||||||||||||
7.875% Senior Secured Notes due 2022 | $ | 677,000 | $ | 7,885 | $ | (4,697) | $ | 680,188 | |||||||||||||||
7.625% Senior Notes Due 2023 | 400,000 | — | (2,241) | 397,759 | |||||||||||||||||||
8.500% Senior Secured Notes Due 2024 | 225,000 | — | (3,530) | 221,470 | |||||||||||||||||||
6.750% Senior Secured Notes Due 2027 | 600,000 | — | (5,771) | 594,229 | |||||||||||||||||||
| Senior Secured Term Loan - noncurrent | 933,375 | — | (10,921) | 922,454 | |||||||||||||||||||
| Total Long-Term Debt | 2,835,375 | 7,885 | (27,160) | 2,816,100 | |||||||||||||||||||
| Current Debt: | |||||||||||||||||||||||
| Senior Secured Term Loan - current | 9,500 | — | — | 9,500 | |||||||||||||||||||
| Total Debt | $ | 2,844,875 | $ | 7,885 | $ | (27,160) | $ | 2,825,600 | |||||||||||||||
(1)Unamortized deferred financing costs related to the revolving credit facilities included in deferred financing costs, net on the condensed consolidated balance sheets at March 31, 2021 and December 31, 2020 were $1.6 million and $1.7 million, respectively.
2022 Notes
As of March 31, 2021, APX Group, Inc., a wholly owned subsidiary of the Company (“APX”) had $677.0 million outstanding aggregate principal amount of 7.875% senior secured notes due 2022 (the “2022 notes”). The 2022 notes will 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” provision set forth in the agreements governing such pari passu lien indebtedness. The 2022 notes are secured, on a pari passu basis, by the collateral securing obligations under the 2024 notes (as defined below), the revolving credit facilities and the Term Loan, in all cases, subject to certain exceptions and permitted liens.
2023 Notes
As of March 31, 2021, APX had $400.0 million outstanding aggregate principal amount of the 7.625% senior notes due 2023 (the “2023 notes”) with a maturity date of September 1, 2023.
2024 Notes
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As of March 31, 2021, APX had $225.0 million outstanding aggregate principal amount of 8.50% senior secured notes due 2024 (the “2024 notes” and, together with the 2022 notes and the 2027 notes, the “existing senior secured notes”). The 2024 notes will 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 for the 2023 notes, in which case the 2024 Notes will mature on June 1, 2023. The 2024 notes are secured, on a pari passu basis, by the collateral securing obligations under the existing senior secured notes, the revolving credit facilities and the Term Loan, in all each case, subject to certain exceptions and permitted liens.
2027 Notes
As of March 31, 2021, APX had $600.0 million outstanding aggregate principal amount of 6.75% senior secured notes due 2027 (the “2027 notes” and, together with the 2022 notes, the 2023 notes and the 2024 notes the “Notes”). 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.
Interest accrues at the rate of 7.875% per annum for the 2022 notes, 7.625% per annum for the 2023 notes, 8.50% per annum for the 2024 notes and 6.75% per annum for the 2027 notes. Interest on the 2022 notes is payable semiannually in arrears on June 1 and December 1 of each year. Interest on the 2023 notes is payable semiannually in arrears on March 1 and September 1 of each year. Interest on the 2024 notes is payable semiannually in arrears on May 1 and November 1 each year. Interest on the 2027 notes is payable semiannually in arrears on February 15 and August 15 each year. APX may redeem the Notes at the prices and on the terms specified in the applicable indenture.
Term Loan
As of March 31, 2021, APX had outstanding term loans in an aggregate principal amount of $940.5 million (the “Term Loan”) under its amended and restated credit agreement. APX is required to make quarterly amortization payments under the Term Loan in an amount equal to 0.25% of the aggregate principal amount of the Term Loan outstanding on the closing date thereof. The remaining outstanding principal amount of the Term Loan will be due and payable in full on December 31, 2025, unless, pursuant to a “Springing Maturity” provision 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 repaid or redeemed, in which case the Term Loan will mature on June 1, 2023.
The Term Loan bears interest at a rate per annum equal to an applicable margin plus, at APX's 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 is 4.0% per annum and the applicable margin for LIBOR rate-based borrowings is 5.0% per annum. APX may prepay the Term Loan on the terms specified in the credit agreement covering the Term Loan.
Revolving Credit Facility
In February 2020, APX amended and restated the credit agreement governing its existing senior secured revolving credit facility to provide for, among other things, (1) an increase in the aggregate commitments previously available to it to $350.0 million and (2) the extension of the maturity date with respect to certain of the previously available commitments.
Borrowings under the amended and restated revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at APX’s 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 under the Series C Revolving Commitments of approximately $330.8 million is 2.0% per annum. The applicable margin for LIBOR rate-based borrowings under the Series C Revolving Commitments is currently 3.0% per annum. The applicable margin for borrowings under the revolving credit facility is subject to one step-down of 25 basis points based on APX meeting a consolidated first lien net leverage ratio test at the end of each fiscal quarter.
In addition to paying interest on outstanding principal under the revolving credit facility, APX is required to pay a quarterly commitment fee (which will be subject to one interest rate step-down of 12.5 basis points, based on APX meeting a
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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 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, unless “Springing Maturity” provisions apply. Under the “Springing Maturity” provisions, principal amounts outstanding will be due:
•the 91st day prior to the maturity of the 2022 notes, if, on that date, more than an aggregate principal amount of $350.0 million of such 2022 notes remain outstanding or have not been repaid or redeemed with certain qualifying proceeds specified in the revolving credit facility,
•the 91st day prior to the maturity of the 2023 notes, if, on that date, more than an aggregate principal amount of $125.0 million of such 2023 notes remain outstanding or have not been repaid or redeemed with certain qualifying proceeds specified in the revolving credit facility,
•the 91st day prior to the maturity of the 2024 notes, if, on that date, more than an aggregate principal amount of $125.0 million of such 2024 notes remain outstanding or have not been repaid or redeemed with certain qualifying proceeds specified in the revolving credit facility.
There were no outstanding borrowings under the revolving credit facility as of March 31, 2021 and December 31, 2020. As of March 31, 2021 the Company had $315.5 million of availability under the revolving credit facility (after giving effect to $15.3 million of letters of credit outstanding and no borrowings).
Debt Modifications and Extinguishments
The Company performs analyses on a creditor-by-creditor basis for debt modifications and extinguishments to determine if repurchased debt was substantially different than debt issued to determine the appropriate accounting treatment of associated issuance costs. As a result of these analyses, the following amounts of other expense and loss on extinguishment and deferred financing costs were recorded (in thousands):
| Original premium extinguished | Previously deferred financing costs extinguished | New financing costs | Total other expense and loss on extinguishment | Previously deferred financing costs rolled over | New deferred financing costs | Total deferred financing costs remaining after issuance | |||||||||||||||||||||||||||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| 2027 Notes issuance - February 2020 | $ | (2,749) | $ | 4,033 | $ | 6,146 | $ | 7,430 | $ | 205 | $ | 6,346 | $ | 6,551 | |||||||||||||||||||||||||||
| Term Loan issuance - February 2020 | — | 235 | 5,045 | 5,280 | 6,973 | 5,461 | 12,434 | ||||||||||||||||||||||||||||||||||
| Total | $ | (2,749) | $ | 4,268 | $ | 11,191 | $ | 12,710 | $ | 7,178 | $ | 11,807 | $ | 18,985 | |||||||||||||||||||||||||||
Deferred financing costs are amortized to interest expense over the life of the issued debt. The Company had no debt issuances or related modification or extinguishment costs during the three months ended March 31, 2021.
The following table presents deferred financing activity for the three months ended March 31, 2021 and 2020 (in thousands):
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| Unamortized Deferred Financing Costs | |||||||||||||||||||||||||||||
| Balance December 31, 2020 | Additions | Early Extinguishment | Amortized | Balance March 31, 2021 | |||||||||||||||||||||||||
| Revolving Credit Facility | $ | 1,667 | $ | — | $ | — | $ | (100) | $ | 1,567 | |||||||||||||||||||
| 2020 Notes | — | — | — | — | — | ||||||||||||||||||||||||
| 2022 Private Placement Notes | — | — | — | — | — | ||||||||||||||||||||||||
| 2022 Notes | 4,697 | — | — | (613) | 4,084 | ||||||||||||||||||||||||
| 2023 Notes | 2,241 | — | — | (210) | 2,031 | ||||||||||||||||||||||||
| 2024 Notes | 3,530 | — | — | (226) | 3,304 | ||||||||||||||||||||||||
| 2027 Notes | 5,771 | — | — | (234) | 5,537 | ||||||||||||||||||||||||
| Term Loan | 10,921 | — | — | (546) | 10,375 | ||||||||||||||||||||||||
| Total Deferred Financing Costs | $ | 28,827 | $ | — | $ | — | $ | (1,929) | $ | 26,898 | |||||||||||||||||||
| Unamortized Deferred Financing Costs | |||||||||||||||||||||||||||||
| Balance December 31, 2019 | Additions | Early Extinguishment | Amortized | Balance March 31, 2020 | |||||||||||||||||||||||||
| Revolving Credit Facility | $ | 1,123 | $ | 1,027 | $ | — | $ | (183) | $ | 1,967 | |||||||||||||||||||
| 2020 Notes | 1,721 | — | (1,565) | (156) | — | ||||||||||||||||||||||||
| 2022 Private Placement Notes | 451 | (205) | (221) | (25) | — | ||||||||||||||||||||||||
| 2022 Notes | 9,532 | — | (2,247) | (749) | 6,536 | ||||||||||||||||||||||||
| 2023 Notes | 3,081 | — | — | (210) | 2,871 | ||||||||||||||||||||||||
| 2024 Notes | 4,431 | — | — | (226) | 4,205 | ||||||||||||||||||||||||
| 2027 Notes | — | 6,551 | — | (78) | 6,473 | ||||||||||||||||||||||||
| Term Loan | 7,822 | 5,461 | (235) | (428) | 12,620 | ||||||||||||||||||||||||
| Total Deferred Financing Costs | $ | 28,161 | $ | 12,834 | $ | (4,268) | $ | (2,055) | $ | 34,672 | |||||||||||||||||||
Guarantees
All of the obligations under the credit agreement governing the revolving credit facility, the credit agreement governing the Term Loan and the debt agreements governing the Notes are guaranteed by Vivint Smart Home, Inc., APX Group Holdings, Inc., APX Group and each of APX Group'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 Term Loan or the Company's other indebtedness.
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4. Retail Installment Contract Receivables
Certain subscribers have the option to purchase Products under a RIC, payable over either 42 or 60 months. Short-term RIC receivables are recorded in accounts and notes receivable, net and long-term RIC receivables are recorded in long-term notes receivables and other assets, net in the unaudited condensed consolidated unaudited balance sheets.
The following table summarizes the RIC receivables (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| RIC receivables, gross | $ | 130,762 | $ | 145,000 | |||||||
| RIC allowance | (28,322) | (28,848) | |||||||||
| Imputed interest | (10,333) | (13,275) | |||||||||
| RIC receivables, net | $ | 92,107 | $ | 102,877 | |||||||
| Classified on the unaudited condensed consolidated unaudited balance sheets as: | |||||||||||
| Accounts and notes receivable, net | $ | 44,918 | $ | 44,931 | |||||||
| Long-term notes receivables and other assets, net | 47,189 | 57,946 | |||||||||
| RIC receivables, net | $ | 92,107 | $ | 102,877 | |||||||
The changes in the Company’s RIC allowance were as follows (in thousands):
| Three months ended March 31, 2021 | Three months ended March 31, 2020 | ||||||||||
| RIC allowance, beginning of period | $ | 28,848 | $ | 39,218 | |||||||
| Write-offs | (3,877) | (7,222) | |||||||||
| Recoveries | 1,134 | 1,705 | |||||||||
| Additions from RICs originated during the period | 1,148 | 3,189 | |||||||||
| Change in expected credit losses | — | 1,515 | |||||||||
| Other adjustments (1) | 1,069 | (951) | |||||||||
| RIC allowance, end of period | $ | 28,322 | $ | 37,454 | |||||||
(1) Other adjustments primarily reflect changes in foreign currency exchange rates related to Canadian RICs.
The amount of RIC imputed interest income recognized in recurring and other revenue was $2.2 million and $2.9 million during the three months ended March 31, 2021 and 2020, respectively.
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5. Business Combination
On January 17, 2020, the Company consummated the previously announced merger pursuant to that certain Agreement and Plan of Merger, dated September 15, 2019, by and among the Company, Merger Sub, and Legacy Vivint Smart Home, as amended by the Merger Agreement, dated as of December 18, 2019, by and among the Company, Maiden Sub and Legacy Vivint Smart Home.
Pursuant to the terms of the Merger Agreement, a business combination between the Company and Legacy Vivint Smart Home was effected through the merger of Merger Sub with and into Legacy Vivint Smart Home, with Legacy Vivint Smart Home as the surviving company. At the effective time of the Business Combination (the “Effective Time”), each stockholder of Legacy Vivint Smart Home received 84.5320916792 shares of the Company’s Class A common stock, par value $0.0001 per share (the “Common Stock”), for each share of Legacy Vivint Smart Home common stock, par value $0.01 per share, that such stockholder owned.
Pursuant in each case to a Subscription Agreement entered into in connection with the Merger Agreement, certain investment funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and certain investment funds affiliated with The Blackstone Group Inc. (“Blackstone”) purchased, respectively, 12,500,000 and 10,000,000 newly-issued shares of Common Stock (such purchases, the “Fortress PIPE” and the “Blackstone PIPE,” respectively, and together, the “PIPE”) concurrently with the completion of the Business Combination (the “Closing”) on the Closing Date for an aggregate purchase price of $125.0 million and $100.0 million, respectively. In connection with the Merger, each of the issued and outstanding Founder Shares was converted into approximately 1.20 shares of Common Stock of the Company. The private placement warrants will expire five years after the Closing or earlier upon redemption or liquidation.
In connection with the execution of the Amendment, the Company entered into a Subscription and Backstop Agreement (the “Fortress Subscription and Backstop Agreement”). On the Closing Date, pursuant to the Fortress Subscription and Backstop Agreement, Fortress purchased 2,698,753 shares of Common Stock for an aggregate of $27.8 million. In addition, the Company entered into an additional subscription agreement (the “Additional Forward Purchaser Subscription Agreement”) with one of the forward purchasers (the “Forward Purchaser”). Pursuant to the Additional Forward Purchaser Subscription Agreement, immediately prior to the Effective Time, the Forward Purchaser purchased from us 5,000,000 shares of Common Stock at a purchase price of $10.00 per share. As consideration for the additional investment, concurrently with the Closing, 25% of Mosaic Sponsor LLC’s founder shares (“Forward Shares”) and private placement warrants were forfeited to the Company and the Company issued to the Forward Purchaser a number of shares of Common Stock equal to approximately 1.20 times the number of Founder Shares forfeited and a number of warrants equal to the number of private placement warrants forfeited.
At the Closing, certain investors (including an affiliate of Fortress) received an aggregate of 15,789,474 shares of Common Stock at a purchase price of $9.50 per share (the “IPO Forward Purchaser Investment”) pursuant to the terms of the forward purchase agreements the Company entered into in connection with the Company’s initial public offering.
In connection with the Closing, 31,074,592 shares of Common Stock were redeemed at a price per share of approximately $10.29. In addition, in connection with the Closing, each Founder Share issued and outstanding immediately prior to the Closing (other than the Founder Shares forfeited in connection with the Additional Forward Purchaser Subscription Agreement) converted into approximately 1.20 shares of Common Stock of the Company. Immediately prior to the Effective Time, each issued and outstanding share of Legacy Vivint Smart Home preferred stock (other than shares owned by Legacy Vivint Smart Home as treasury stock) converted into approximately 1.43 shares of Legacy Vivint Smart Home common stock in accordance with the certificate of designations of the Legacy Vivint Smart Home preferred stock.
The following table reconciles the elements of the Business Combination to the consolidated statement of cash flows and the consolidated statement of changes in equity for the three months ended March 31, 2020:
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| Recapitalization | |||||
| (in thousands) | |||||
| Cash - Mosaic (net of redemptions) | $ | 35,344 | |||
| Cash - Subscribers and Forward Purchasers | 453,221 | ||||
| Less fees to underwriters and other transaction costs | (23,478) | ||||
| Net cash received from recapitalization | 465,087 | ||||
| Less: Warrant derivative liabilities assumed | (40,094) | ||||
| Less: non-cash net liabilities assumed from Mosaic | (5) | ||||
| Less: deferred and accrued transaction costs | (2,740) | ||||
| Net contributions from recapitalization | $ | 422,248 | |||
The number of shares of Common Stock of Vivint Smart Home Inc. issued immediately following the consummation of the Business Combination is summarized as follows:
| Number of Shares | |||||
| Common Stock outstanding prior to Business Combination | 34,500,000 | ||||
| Less redemption of Mosaic Shares | (31,074,592) | ||||
| Common Stock of Mosaic | 3,425,408 | ||||
| Shares issued from Fortress PIPE | 12,500,000 | ||||
| Shares from Blackstone PIPE | 10,000,000 | ||||
| Shares from Additional Forward Purchaser Subscription Agreement | 5,000,000 | ||||
| Shares from IPO Forward Purchaser Investment | 15,789,474 | ||||
| Shares from Fortress Subscription and Backstop Agreement | 2,698,753 | ||||
| Shares from Mosaic Founder Shares | 10,379,386 | ||||
| Recapitalization shares | 59,793,021 | ||||
| Legacy Vivint Smart Home equity holders | 94,937,597 | ||||
| Total shares | 154,730,618 | ||||
Earnout consideration
Following the closing of the Merger, holders of Vivint common stock and holders of rollover restricted stock units (“Rollover RSUs”), the rollover stock appreciation rights (“Rollover SARs”), the shares of rollover restricted stock (“Rollover Restricted Stock”) and any awards granted under the Company rollover long-term incentive program (“Rollover LTIP Plans”) (together, “Rollover Equity Awards”) had the contingent right to receive, in the aggregate, up to 37,500,000 shares of Common Stock if, from the closing of the Merger until the fifth anniversary thereof, the dollar volume-weighted average price of Common Stock exceeded certain thresholds. The first issuance of 12,500,000 earnout shares occurred when the volume-weighted average price of Common Stock exceeded $12.50 for any 20-trading days within any 30-trading day period (the “First Earnout”). The second issuance of 12,500,000 earnout shares occurred when the volume weighted average price of Common Stock exceeded $15.00 for any 20-trading days within any 30-trading day period (the “Second Earnout”). The third issuance of 12,500,000 earnout shares occurred when the volume weighted average price of Common Stock exceeded $17.50 for any 20-trading days within any 30-trading day period (the “Third Earnout”) (as further described in the Merger Agreement).
Subsequent to the closing of the Merger, the cumulative issuance of 37,321,352 shares of Common Stock occurred after attainment of the First Earnout, Second Earnout and Third Earnout in February, March and September 2020, respectively. The difference in the shares issued in the earnouts and the aggregate amounts defined in the Merger Agreement above are primarily attributable to unissued shares reserved for future issuance to holders of Rollover Equity Awards, which are subject to the same vesting terms and conditions as the underlying Rollover Equity Awards. Additionally, shares were withheld from employees to satisfy the mandatory tax withholding requirements. The Company has determined that the earnout shares issued to non-employee shareholders and to holders of Vivint common stock and vested Rollover Equity Awards qualify for the scope exception in ASC 815-10-15-74(a) and meet the criteria for equity classification under ASC 815-40. These earnout shares were initially measured at fair value at Closing. Upon the attainment of the share price targets, the earnout shares delivered to the equity holders are recorded in equity as shares issued, with the appropriate allocation to common stock at par and additional paid-in capital. Since all earnout shares have determined to be equity-classified, there is no remeasurement unless
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reclassification is required. For the earnout shares associated with unvested Rollover Equity Awards, the Company has determined that they qualify for equity classification and are subject to stock-based compensation expense under ASC 718.
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6. Balance Sheet Components
The following table presents material balance sheet component balances (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Prepaid expenses | $ | 22,480 | $ | 11,286 | |||||||
| Deposits | 1,561 | 1,308 | |||||||||
| Other | 2,134 | 1,744 | |||||||||
| Total prepaid expenses and other current assets | $ | 26,175 | $ | 14,338 | |||||||
| Capitalized contract costs | |||||||||||
| Capitalized contract costs | $ | 3,592,821 | $ | 3,491,629 | |||||||
| Accumulated amortization | (2,302,645) | (2,173,131) | |||||||||
| Capitalized contract costs, net | $ | 1,290,176 | $ | 1,318,498 | |||||||
| Long-term notes receivables and other assets | |||||||||||
| RIC receivables, gross | $ | 85,844 | $ | 100,069 | |||||||
| RIC allowance | (28,322) | (28,848) | |||||||||
| RIC imputed interest | (10,333) | (13,275) | |||||||||
| Security deposits | 1,055 | 835 | |||||||||
| Other | 9,290 | 3,729 | |||||||||
| Total long-term notes receivables and other assets, net | $ | 57,534 | $ | 62,510 | |||||||
| Accrued payroll and commissions | |||||||||||
| Accrued commissions | $ | 21,677 | $ | 46,353 | |||||||
| Accrued payroll | 25,386 | 41,590 | |||||||||
| Total accrued payroll and commissions | $ | 47,063 | $ | 87,943 | |||||||
| Accrued expenses and other current liabilities | |||||||||||
| Accrued interest payable | $ | 33,479 | $ | 33,340 | |||||||
| Current portion of derivative liability | 129,959 | 142,755 | |||||||||
| Service warranty accrual | 5,575 | 5,711 | |||||||||
| Current portion of Term Loan | — | 8,063 | |||||||||
| Accrued taxes | 13,909 | 8,700 | |||||||||
| Accrued payroll taxes and withholdings | 12,434 | 14,391 | |||||||||
| Loss contingencies | 28,600 | 26,200 | |||||||||
| Other | 9,064 | 8,164 | |||||||||
| Total accrued expenses and other current liabilities | $ | 233,020 | $ | 247,324 | |||||||
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7. Property Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
| March 31, 2021 | December 31, 2020 | Estimated Useful Lives | |||||||||||||||
| Vehicles | $ | 39,583 | $ | 39,735 | 3 - 5 years | ||||||||||||
| Computer equipment and software | 74,905 | 72,616 | 3 - 5 years | ||||||||||||||
| Leasehold improvements | 30,327 | 29,126 | 2 - 15 years | ||||||||||||||
| Office furniture, fixtures and equipment | 21,767 | 21,394 | 2 - 7 years | ||||||||||||||
| Construction in process | 5,762 | 6,180 | |||||||||||||||
| Property, plant and equipment, gross | 172,344 | 169,051 | |||||||||||||||
| Accumulated depreciation and amortization | (120,700) | (116,672) | |||||||||||||||
| Property, plant and equipment, net | $ | 51,644 | $ | 52,379 | |||||||||||||
Property, plant and equipment, net includes approximately $16.9 million and $17.6 million of assets under finance lease obligations at March 31, 2021 and December 31, 2020, respectively, net of accumulated amortization of $23.5 million and $23.0 million, respectively. Depreciation and amortization expense on all property, plant and equipment was $4.1 million and $5.7 million during the three months ended March 31, 2021 and 2020, respectively. Amortization expense related to assets under finance leases is included in depreciation and amortization expense.
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8. Goodwill and Intangible Assets
Goodwill
As of March 31, 2021 and December 31, 2020, the Company had a goodwill balance of $837.4 million and $837.1 million, respectively. The change in the carrying amount of goodwill during the three months ended March 31, 2021 was the result of foreign currency translation adjustments.
Intangible assets, net
The following table presents intangible asset balances (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Estimated Useful Lives | |||||||||||||||||||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Customer contracts | $ | 970,044 | $ | (877,668) | $ | 92,376 | $ | 969,158 | $ | (862,352) | $ | 106,806 | 10 years | ||||||||||||||||||||||||||||
| Other technology | 2,917 | (2,604) | 313 | 4,725 | (4,309) | 416 | 2 - 7 years | ||||||||||||||||||||||||||||||||||
| Patents | 10,907 | (6,995) | 3,912 | 10,843 | (6,656) | 4,187 | 5 years | ||||||||||||||||||||||||||||||||||
| Total definite-lived intangible assets: | $ | 983,868 | $ | (887,267) | $ | 96,601 | $ | 1,008,826 | $ | (897,417) | $ | 111,409 | |||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||
| Domain names | 65 | — | 65 | 65 | — | 65 | |||||||||||||||||||||||||||||||||||
| Total intangible assets, net | $ | 983,933 | $ | (887,267) | $ | 96,666 | $ | 1,008,891 | $ | (897,417) | $ | 111,474 | |||||||||||||||||||||||||||||
Amortization expense related to intangible assets was approximately $15.0 million and $17.4 million for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021, the remaining weighted-average amortization period for definite-lived intangible assets was 1.7 years. Estimated future amortization expense of intangible assets, excluding approximately $0.1 million in patents currently in process, is as follows as of March 31, 2021 (in thousands):
| 2021 - Remaining Period | $ | 44,905 | |||
| 2022 | 49,826 | ||||
| 2023 | 720 | ||||
| 2024 | 566 | ||||
| 2025 | 502 | ||||
| Thereafter | — | ||||
| Total estimated amortization expense | $ | 96,519 | |||
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9. Financial Instruments
Cash and Cash Equivalents
Cash equivalents are classified as level 1 assets, as they have readily available market prices in an active market.
The following tables set forth the Company’s cash and cash equivalents' adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or long-term notes receivables and other assets, net as of March 31, 2021 and December 31, 2020 (in thousands):
| March 31, 2021 | |||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash | $ | 244,280 | $ | — | $ | — | $ | 244,280 | |||||||||||||||
| Money market funds | 30,064 | — | — | 30,064 | |||||||||||||||||||
| Total cash and cash equivalents | $ | 274,344 | $ | — | $ | — | $ | 274,344 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Cash | $ | 283,750 | $ | — | $ | — | $ | 283,750 | |||||||||||||||
| Money market funds | 30,049 | — | — | 30,049 | |||||||||||||||||||
| Total cash and cash equivalents | $ | 313,799 | $ | — | $ | — | $ | 313,799 | |||||||||||||||
The carrying amounts of the Company’s accounts and notes receivable, accounts payable and accrued and other liabilities approximate their fair values.
Debt
Components of the Company's debt including the associated interest rates and related fair values are as follows (in thousands, except interest rates):
| March 31, 2021 | December 31, 2020 | Stated Interest Rate | ||||||||||||||||||||||||||||||
| Issuance | Face Value | Estimated Fair Value | Face Value | Estimated Fair Value | ||||||||||||||||||||||||||||
| 2022 Notes | 677,000 | 682,822 | 677,000 | 677,203 | 7.875 | % | ||||||||||||||||||||||||||
| 2023 Notes | 400,000 | 414,080 | 400,000 | 415,200 | 7.625 | % | ||||||||||||||||||||||||||
| 2024 Notes | 225,000 | 234,113 | 225,000 | 238,545 | 8.500 | % | ||||||||||||||||||||||||||
| 2027 Notes | 600,000 | 644,700 | 600,000 | 645,300 | 6.750 | % | ||||||||||||||||||||||||||
| Term Loan | 940,500 | 940,500 | 942,875 | 942,875 | N/A | |||||||||||||||||||||||||||
| Total | $ | 2,842,500 | $ | 2,916,215 | $ | 2,844,875 | $ | 2,919,123 | ||||||||||||||||||||||||
The Notes are fixed-rate debt considered Level 2 fair value measurements as the values were determined using observable market inputs, such as current interest rates, prices observable from less active markets, as well as prices observable from comparable securities. The Term Loan is floating-rate debt and approximates the carrying value as interest accrues at floating rates based on market rates.
Derivative Financial Instruments
Consumer Financing Program
Under the Consumer Financing Program, the Company pays a monthly fee to Financing Providers based on either the average daily outstanding balance of the Loans or the number of outstanding Loans. For certain Loans, the Company incurs fees at the time of the loan origination and receives proceeds that are net of these fees. The Company also shares the liability for credit losses, depending on the credit quality of the customer. Because of the nature of certain provisions under the Consumer
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Financing Program, the Company records a derivative liability that is not designated as a hedging instrument and is adjusted to fair value, measured using the present value of the estimated future payments. Changes to the fair value are recorded through other income, net in the Consolidated Statement of Operations. The following represent the contractual future payment obligations with the Financing Providers under the Consumer Financing Program that are components of the derivative:
•The Company pays either a monthly fee based on the average daily outstanding balance of the Loans, or the number of outstanding Loans, depending on the Financing Provider
•The Company shares the liability for credit losses depending on the credit quality of the customer
•The Company pays transactional fees associated with customer payment processing
The derivative is classified as a Level 3 instrument. The derivative positions are valued using a discounted cash flow model, with inputs consisting of available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral default rates and loss severity rates. These derivatives are priced quarterly using a credit valuation adjustment methodology. In summary, the fair value represents an estimate of the present value of the cash flows the Company will be obligated to pay to the Financing Provider for each component of the derivative.
The following table summarizes the fair value and the notional amount of the Company’s outstanding consumer financing program derivative instrument as of March 31, 2021 and December 31, 2020 (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Consumer Financing Program Contractual Obligations: | |||||||||||
| Fair value | $ | 217,096 | $ | 227,896 | |||||||
| Notional amount | 927,860 | 912,626 | |||||||||
| Classified on the condensed consolidated unaudited balance sheets as: | |||||||||||
| Accrued expenses and other current liabilities | 129,959 | 142,755 | |||||||||
| Other long-term obligations | 87,137 | 85,141 | |||||||||
| Total Consumer Financing Program Contractual Obligation | $ | 217,096 | $ | 227,896 | |||||||
Changes in Level 3 Fair Value Measurements
The following table summarizes the change in the fair value of the Level 3 outstanding derivative instrument for the three months ended March 31, 2021 and 2020 (in thousands):
| Three months ended March 31, 2021 | Three months ended March 31, 2020 | ||||||||||
| Balance, beginning of period | $ | 227,896 | $ | 136,863 | |||||||
| Additions | 26,713 | 18,717 | |||||||||
| Settlements | (23,685) | (16,362) | |||||||||
| Net (gains) losses included in earnings | (13,828) | 2,221 | |||||||||
| Balance, end of period | $ | 217,096 | $ | 141,439 | |||||||
Warrant Liabilities
As a result of the Business Combination, the Company assumed a derivative warrant liability related to previously issued private placement warrants and public warrants in connection with Mosaic’s initial public offering. The fair value of the Company’s public warrants were measured based on the market price of such warrants and were considered a Level 1 fair value measurement. As of January 7, 2021, all public warrants were exercised or redeemed and none were outstanding as of March 31, 2021. The Company utilizes a Black-Scholes option pricing model to estimate the fair value of the private placement warrants and are considered a Level 3 fair value measurement. The warrants are measured at each reporting period, with changes in fair value recognized in the statement of operations.
The change in the fair value of the derivative warrant liabilities for the three months ended March 31, 2021 and 2020 is summarized as follows (in thousands):
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| Three months ended March 31, 2021 | |||||||||||||||||
| Public Warrants | Private Placement Warrants | Total Derivative Warrant liability | |||||||||||||||
| Balance, beginning of period | $ | 8,063 | $ | 75,531 | $ | 83,594 | |||||||||||
| Change in fair value of warrant liability | 1,350 | (29,963) | (28,613) | ||||||||||||||
| Write-off fair value of unexercised expired warrants | (490) | — | (490) | ||||||||||||||
| Reclassification of derivative liabilities for exercised warrants | (8,923) | — | (8,923) | ||||||||||||||
| Balance, end of period | $ | — | $ | 45,568 | $ | 45,568 | |||||||||||
| Three months ended March 31, 2020 | |||||||||||||||||
| Public Warrants | Private Placement Warrants | Total Derivative Warrant liability | |||||||||||||||
| Warrant liability assumed from the Business Combination | $ | 9,775 | $ | 30,319 | $ | 40,094 | |||||||||||
| Change in fair value of warrant liability | 6,274 | 10,443 | 16,717 | ||||||||||||||
| Balance, end of period | $ | 16,049 | $ | 40,762 | $ | 56,811 | |||||||||||
The estimated fair value of the private placement warrant derivative liabilities is determined using Level 3 inputs. Inherent in a Black-Scholes valuation model are assumptions related to expected stock-price volatility, expiration, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical volatility of select peer companies that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expiration of the warrants. The dividend yield is based on the historical rate, which the Company anticipates remaining at zero.
The following table provides quantitative information regarding Level 3 fair value measurements inputs as their measurement dates:
| As of March 31, 2021 | As of March 31, 2020 | ||||||||||
| Number of private placement warrants | 5,933,334 | 5,933,334 | |||||||||
| Exercise price | $ | 11.5 | $ | 11.5 | |||||||
| Stock price | $ | 14.32 | $ | 12.54 | |||||||
| Expiration term (in years) | 3.80 | 4.80 | |||||||||
| Volatility | 65 | % | 65 | % | |||||||
| Risk-free Rate | 0.58 | % | 0.36 | % | |||||||
| Dividend yield | — | % | — | % | |||||||
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10. Income Taxes
In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The Company’s effective income tax rate for the three months ended March 31, 2021 and 2020 was approximately a negative 0.28% and 0.54%, respectively. The effective tax rates for the three months ended March 31, 2021 and 2020 differ from the statutory rate primarily due to not benefiting from expected US losses, US state minimum taxes and Canadian tax expense (benefits).
Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets, and evaluating the Company’s uncertain tax positions. In evaluating the ability to realize its deferred tax assets, in full or in part, the Company considers all available positive and negative evidence, including past operating results, forecasted future earnings, and prudent and feasible tax planning strategies. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, the Company has maintained a domestic valuation allowance against the deferred tax assets that remain after offset by domestic deferred tax liabilities, and the company currently does not anticipate recording a valuation allowance against net foreign deferred tax assets by the end of the current year.
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11. Stock-Based Compensation and Equity
The Company grants stock-based incentive awards to attract, motivate and retain qualified employees and non-employee directors, and to align their financial interests with those of company stockholders. In addition to the rollover awards converted as part of the Business Combination, the Company utilizes a combination of time-based and performance-based restricted stock units.
Rollover Restricted Stock
Compensation expense associated with unvested Rollover Restricted Stock is recognized on a straight-line basis over the remaining vesting period. At March 31, 2021, there was no unrecognized compensation expense related to Rollover Restricted Stock.
Tracking Units
Compensation expense associated with unvested Company tracking units (“Tracking Units”) is recognized on a ratable straight-line basis over the remaining vesting period. At March 31, 2021, 1,682,522 Tracking Units were unvested, and there was $1.4 million unrecognized compensation expense related to Tracking Units.
Rollover SARs
Compensation expense associated with unvested Rollover SARs is recognized on a straight-line basis over the remaining vesting period. At March 31, 2021, there was no unrecognized compensation expense related to Rollover SARs.
Rollover LTIPs
Long-term incentive awards were set aside for funding incentive compensation pools pursuant to long-term sales and installation employee incentive plans established by the Company Rollover LTIPs. In January 2021, the Company made a distribution of Rollover LTIPs to plan participants resulting in the grant of awards and the issuance of 1,609,627 shares of common stock and 847,141 shares of earnouts associated with the LTIPs. At March 31, 2021, there were no remaining long-term incentive awards outstanding and no unrecognized compensation expense related to Rollover LTIPs.
Rollover Restricted Stock Units
Compensation expense associated with unvested Rollover RSUs is recognized on a straight-line basis over the remaining vesting period. At March 31, 2021, there was no unrecognized compensation expense related to Rollover RSUs.
Restricted Stock Units
During the three months ended March 31, 2021, the Company approved grants under the Vivint Smart Home, Inc. 2020 Omnibus Incentive Plan (the “Plan”) of time-vesting restricted stock unit (the “RSUs”) awards (each representing the right to receive one share of Class A common stock of the Company upon the settlement of each restricted stock unit) to various levels of key employees. The RSUs are subject to a four year vesting schedule, and 25% of the units will vest on each of the first four anniversaries of the grant date. All vesting shall be subject to the recipient’s continued employment with Vivint Smart Home, Inc. or its subsidiaries through the applicable vesting dates, and certain other vesting criteria as applicable. During the three months ended March 31, 2021, the Company granted 2,682,916 RSUs. As of March 31, 2021, 8,965,010 RSUs were outstanding and $160.0 million unrecognized compensation expense related to RSUs.
Performance Stock Units
During the three months ended March 31, 2021, the Company approved grants under the Plan of performance-vesting restricted stock units (the “PSUs”) (each representing the right to receive one share of Class A common stock of the Company upon the settlement of each restricted stock unit). The PSUs predominantly vest based upon the achievement of specified performance goals and the passage of time (1-4 years), in each case, subject to continued employment on the applicable vesting date. Compensation expense is not recognized until achievement of the performance goals is deemed probable. During the three months ended March 31, 2021, the Company granted 2,550,916 PSUs. As of March 31, 2021, 4,949,956 PSUs were outstanding and $73.7 million unrecognized compensation expense related to PSUs
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Stock-based compensation expense in connection with all stock-based awards is presented as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating expenses | $ | 9,633 | $ | 1,320 | |||||||
| Selling expenses | 62,796 | 3,987 | |||||||||
| General and administrative expenses | 14,608 | 5,484 | |||||||||
| Total stock-based compensation | $ | 87,037 | $ | 10,791 | |||||||
Equity
Class A Common Stock—The Company is authorized to issue 3,000,000,000 shares of Class A common stock with a par value of $0.0001 per share. Holders of the Company’s Class A common stock are entitled to one vote for each share on each matter on which they are entitled to vote. At March 31, 2021, there were 208,670,866 shares of Class A common stock issued and outstanding.
Preferred stock—The Company is authorized to issue 300,000,000 shares of preferred stock with a par value of $0.0001 per share. At March 31, 2021, there are no preferred stock issued or outstanding.
Warrants—As of March 31, 2021, no public warrants were outstanding. Each whole warrant entitled the holder to purchase one Class A common stock at an exercise price of $11.50 per share, subject to adjustment. Warrants could only be exercised for a whole number of shares. No fractional warrants were issued upon separation of the units and only whole warrants were traded. The warrants became exercisable 30 days after the completion of the Business Combination.
As of March 31, 2021, 5,933,334 private placement warrants were outstanding. The private placement warrants are identical to the public warrants, except that the private placement warrants and the Class A common stock issuable upon exercise of the private placement warrants were not transferable, assignable or salable until 30 days after the completion of the Business Combination, subject to certain limited exceptions. Additionally, the private placement warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers’ permitted transferees. If the private placement warrants are held by someone other than the initial stockholders or their permitted transferees, the private placement warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants. The private placement warrants will expire five years after the completion of the Business Combination or earlier upon redemption or liquidation.
The Company may call the warrants for redemption:
1.For cash:
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon a minimum of 30 days’ prior written notice of redemption; and
•if, and only if, the last reported closing price of the common stock equals or exceeds $18.00 per share (as adjusted for share splits, share dividends, reorganizations, reclassifications, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
2.For Class A common stock:
•in whole and not in part;
•at a price equal to a number of Class A common stock to be determined by reference to a table included in the warrant agreement, based on the redemption date and the fair market value of the Class A common stock;
•upon a minimum of 30 days’ prior written notice of redemption; and
•if, and only if, the last reported closing price of the common stock equals or exceeds $10.00 per share (as adjusted for share splits, share dividends, reorganizations, reclassifications, recapitalizations and the like) on the trading day prior to the date on which the Company sends notice of redemption to the warrant holders.
In December 2020, after meeting the above requirements for redemption, the Company delivered a notice of redemption to redeem all of its outstanding public warrants (“Public Warrants”) for cash, with a redemption date of January 7, 2021 (the
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“Redemption Date”) for a redemption price of $0.01 per Public Warrant (the “Redemption Price”). Warrants to purchase Common Stock that were issued under the Warrant Agreement in a private placement and still held by the initial holders thereof or their permitted transferees are not subject to this redemption. The Public Warrants could have been exercised by the holders thereof prior to or on the Redemption Date to purchase fully paid and non-assessable shares of Common Stock underlying such warrants, at the exercise price of $11.50 per share. All Public Warrants that remained unexercised at 5:00 p.m., New York City time, on the Redemption Date were void and were no longer exercisable, and the holders of those Public Warrants were entitled to receive only the redemption price of $0.01 per warrant.
The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of Class A common stock at a price below its exercise price.
During the three months ended March 31, 2021, 825,016 warrants were exercised for shares of Class A common stock, for which the Company received $10.8 million of cash. During the three months ended March 31, 2020 no warrants were exercised.
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12. Commitments and Contingencies
Indemnification
Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to the Company. These obligations arise under the terms of its certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse these individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.
Legal
The Company is named from time to time as a party to lawsuits arising in the ordinary course of business related to its sales, marketing, and the provision of its services and equipment claims. Actions filed against the Company include commercial, intellectual property, customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In addition, from time to time the Company is subject to examinations, investigations and/or enforcement actions by federal and state licensing and regulatory agencies and may face the risk of penalties for violation of financial services, consumer protections and other applicable laws and regulations. For example, in 2019, the Company received a subpoena in connection with an investigation by the U.S. Department of Justice (“DOJ”) concerning potential violations of the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). In January 2021, the Company entered into a settlement agreement with the DOJ that resolved this investigation. As part of this settlement, the Company paid $3.2 million to the United States. The Company also received a civil investigative demand from the staff of the Federal Trade Commission (“FTC”) concerning potential violations of the Fair Credit Reporting Act (“FCRA”) and the “Red Flags Rule” thereunder, and the Federal Trade Commission Act (“FTC Act”). In April 2021, the Company entered into a settlement with the FTC that resolved this investigation. As part of this settlement, which was approved by a federal court on May 3, 2021, the Company paid a total of $20 million to the United States and agreed to implement various additional compliance-related measures. U.S. Customs and Border Protection is investigating the Company’s historical compliance with regulations relating to duties and tariffs in connection with its import of certain products from outside the United States. The Department of Justice is also investigating potential violations of the False Claims Act relating to similar issues. The Company is cooperating with these investigations. The company also receives inquiries, including civil investigative demands (“CIDs”), from various State Attorneys General, typically from their respective consumer protection or consumer affairs divisions. In general, litigation and enforcements by regulatory agencies can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings and enforcement actions are difficult to predict and the costs incurred can be substantial. The Company believes the amounts accrued in its financial statements to cover these matters, as disclosed in the following paragraph, are adequate in light of the probable and estimated liabilities. Factors that the Company considers in the determination of the likelihood of a loss and the estimate of the range of that loss in respect of legal and enforcement matters include the merits of a particular matter, the nature of the matter, the length of time the matter has been pending, the procedural posture of the matter, how the Company intends to defend the matter, the likelihood of settling the matter and the anticipated range of a possible settlement. Because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in the Company’s financial statements or that the matters will not have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
The Company regularly reviews outstanding legal claims, actions, and enforcement matters to determine if accruals for expected negative outcomes of such matters are probable and can be reasonably estimated. The Company had accruals for all such matters of approximately $28.6 million and $26.2 million as of March 31, 2021 and December 31, 2020, respectively. The Company evaluates its outstanding legal and regulatory proceedings and other matters each quarter to assess its loss contingency accruals, and makes adjustments in such accruals, upward or downward, as appropriate, based on management’s best judgment after consultation with counsel. There is no assurance that the Company’s 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 the Company has recorded.
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13. Leases
The Company has operating leases for corporate offices, warehouse facilities, research and development and other operating facilities, and other operating assets. Prior to its disposal in December 2020, the Company's operating leases also included a corporate aircraft. The Company has finance leases for vehicles, office equipment and other warehouse equipment. The leases have remaining terms of 1 year to 7 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease cost | $ | 3,940 | $ | 4,174 | |||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | $ | 661 | $ | 1,407 | |||||||
| Interest on lease liabilities | 39 | 158 | |||||||||
| Total finance lease cost | $ | 700 | $ | 1,565 | |||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | (4,230) | $ | (4,373) | |||||||
| Operating cash flows from finance leases | (39) | (158) | |||||||||
| Financing cash flows from finance leases | (500) | (2,243) | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 405 | $ | 1,255 | |||||||
| Finance leases | 413 | 592 | |||||||||
Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
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| March 31, 2021 | December 31, 2020 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets | $ | 50,486 | $ | 52,880 | |||||||
| Current operating lease liabilities | 12,062 | 12,135 | |||||||||
| Operating lease liabilities | 47,081 | 49,692 | |||||||||
| Total operating lease liabilities | $ | 59,143 | $ | 61,827 | |||||||
| Finance Leases | |||||||||||
| Property, plant and equipment, gross | $ | 40,419 | $ | 40,571 | |||||||
| Accumulated depreciation | (23,499) | (22,976) | |||||||||
| $ | 16,920 | $ | 17,595 | ||||||||
| Current finance lease liabilities | $ | 3,208 | $ | 3,356 | |||||||
| Finance lease liabilities | 1,701 | 2,460 | |||||||||
| Total finance lease liabilities | $ | 4,909 | $ | 5,816 | |||||||
| Weighted Average Remaining Lease Term | |||||||||||
| Operating leases | 5 years | 5 years | |||||||||
| Finance leases | 1.4 years | 1.6 years | |||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | 7 | % | 7 | % | |||||||
| Finance leases | 4 | % | 4 | % | |||||||
Maturities of lease liabilities were as follows (in thousands):
| Operating Leases | Finance Leases | ||||||||||
| Year Ending December 31, | |||||||||||
| 2021 (excluding the three months ended March 31, 2021) | $ | 12,325 | $ | 2,503 | |||||||
| 2022 | 14,471 | 2,404 | |||||||||
| 2023 | 13,943 | 152 | |||||||||
| 2024 | 13,492 | 20 | |||||||||
| 2025 | 8,079 | — | |||||||||
| Thereafter | 8,747 | — | |||||||||
| Total lease payments | 71,057 | 5,079 | |||||||||
| Less imputed interest | (11,914) | (170) | |||||||||
| Total | $ | 59,143 | $ | 4,909 | |||||||
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14. Related Party Transactions
Transactions with Vivint Solar
Vivint Solar, Inc. (“Solar”) has historically been considered a related party of the Company due to the Company and Solar being under the common control of of our former parent 313 Acquisition LLC. In October 2020 Solar was acquired by SunRun, Inc. in an all-stock transaction (“SunRun Acquisition”). Upon completion of the SunRun Acquisition, the Company and Solar were no longer under the common control of 313 and therefore the Company and Solar are no longer related parties.
The Company was a party to a number of agreements with Solar. In August 2017, the Company entered into a sales dealer agreement with Solar, pursuant to which each company agreed to act as a non-exclusive dealer for the other party to market, promote and sell each other’s products. Prior to the SunRun Acquisition, net expenses charged to Solar in connection with these agreements was $1.0 million during the three months ended March 31, 2020. The balance due from Solar in connection with these agreements and other expenses paid on Solar’s behalf was immaterial at March 31, 2021 and December 31, 2020.
On March 3, 2020, the Company and Solar amended and restated the sales dealer agreement to, among other things, add exclusivity obligations for both companies in certain territories and jurisdictions, expand the types of services each company is permitted to render thereunder, and to permit use of the services offered by Amigo, a wholly-owned subsidiary of the Company, in connection with the submission and processing of leads generated pursuant to the agreement. The amended and restated agreement has a one-year term, which automatically renews for successive one-year terms unless terminated earlier by either party upon 90 days’ prior written notice.
On March 3, 2020, the Company and Solar entered into a recruiting services agreement pursuant to which each company has agreed to assist the other in recruiting sales representatives to its direct-to-home sales force. The parties will pay each other certain fees for these services which will be calculated in accordance with the terms of the agreement. The Company and Vivint Solar have also agreed under the terms of the agreement not to solicit for employment any member of the other’s executive or senior management team, any dealer, or any of the other’s employees who primarily manage sales, installation or services of the other’s products and services. Such obligations will continue throughout the term of the agreement.
On March 3, 2020, Amigo entered into a Subscriber Generation Agreements with Solar and the Company to facilitate the use of the Amigo application for the submission and processing of leads generated pursuant to the amended and restated sales dealer agreement.
In connection with the amendment and restatement of the sales dealer agreement and the execution of the recruiting services agreement, the Company and Solar terminated the Marketing and Customer Relations Agreement, dated September 30, 2014 (as amended from time to time) and the Non-Competition Agreement, dated September 30, 2014 (as amended from time to time), in each case effective as of March 3, 2020.
Other Related-party Transactions
The Company incurred $0.1 million expenses during each of the three months ended March 31, 2021 and 2020, for other related-party transactions including contributions to the charitable organization Vivint Gives Back and other services. Accrued expenses and other current liabilities included on the Company's balance sheets associated with these related-party transactions was immaterial at March 31, 2021 and $0.1 million at December 31, 2020.
Transactions with Blackstone
On November 16, 2012, the Company was acquired by an investor group comprised of certain investment funds affiliated with Blackstone Capital Partners VI L.P., and certain co-investors and management investors through certain mergers and related reorganization transactions (collectively, the “Reorganization”). In connection with the Reorganization, the Company engaged Blackstone Management Partners L.L.C. (“BMP”) to provide monitoring, advisory and consulting services on an ongoing basis. In consideration for these services, the Company agreed to pay an annual monitoring fee equal to the greater of (i) a minimum base fee of $2.7 million, subject to adjustments if the Company engages in a business combination or disposition that is deemed significant and (ii) the amount of the monitoring fee paid in respect of the immediately preceding fiscal year, without regard to any post-fiscal year “true-up” adjustments as determined by the agreement. The Company incurred expenses for such services of approximately $1.4 million and $1.7 million during the three months ended March 31, 2021 and 2020, respectively. Accrued expenses and other current liabilities and accounts payable at March 31, 2021, included liabilities to BMP in regards to the monitoring fee for $9.5 million.
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Under the support and services agreement, the Company also engaged BMP to arrange for Blackstone’s portfolio operations group to provide support services customarily provided by Blackstone’s portfolio operations group to Blackstone’s private equity portfolio companies of a type and amount determined by such portfolio services group to be warranted and appropriate. BMP will invoice the Company for such services based on the time spent by the relevant personnel providing such services during the applicable period but in no event shall the Company be obligated to pay more than $1.5 million during any calendar year. During the three months ended March 31, 2021 and 2020 the Company incurred no costs associated with such services.
In connection with the execution of the Merger Agreement, the Company and the parties to the support and services agreement entered into an amended and restated support and services agreement with BMP. The amended and restated support and services agreement became effective upon the consummation of the Merger and amended and restated the existing support and services agreement to, upon the consummation of the merger, (a) eliminate the requirement to pay a milestone payment to BMP upon the occurrence of an IPO, (b) for any fiscal year beginning after the consummation of the merger, (i) eliminate the Minimum Annual Fee and (ii) decrease the “true-up” of the annual Monitoring Fee payment to BMP to 1% of consolidated EBITDA and (c) upon the earlier of (1) the completion of Legacy Vivint Smart Home’s fiscal year ending December 31, 2021 or (2) the date upon which Blackstone owns less than 5% of the voting power of all of the shares of capital stock entitled to vote generally in the election of directors of Vivint Smart Home’s or its direct or indirect controlling parent, and such stake has a fair market value (as determined by Blackstone) of less than $25 million (the “Exit Date”), the annual Monitoring Fee payment to BMP otherwise payable in connection with the agreement will cease and no other milestone payment or other similar payment will be owed by the Company to BMP.
Under the amended and restated support and services agreement, the Company and Legacy Vivint Smart Home have, through the Exit Date (or an earlier date determined by BMP), engaged BMP to arrange for Blackstone’s portfolio operations group to provide support services customarily provided by Blackstone’s portfolio operations group to Blackstone’s private equity portfolio companies of a type and amount determined by such portfolio services group to be warranted and appropriate. BMP may, at any time, choose not to provide any such services. Such services are provided without charge, other than for the reimbursement of out-of-pocket expenses as set forth in the amended and restated support and services agreement.
From time to time, the Company does business with a number of other companies affiliated with Blackstone.
Related Party Debt
An affiliate of Blackstone participated as one of the initial purchasers of the 2024 notes and the 2027 notes and received an aggregate of $1.0 million of fees in connection with these transactions.
An affiliate of Blackstone participated as one of the arrangers in the original Term Loan in September 2018 and again in the Term Loan amendment and restatement in February 2020 and received approximately $1.5 million of total fees associated with these transactions.
As of March 31, 2021 and December 31, 2020, affiliates of Blackstone held $187.0 million and $166.1 million, respectively, of outstanding aggregate principal of the Term Loan.
In February 2020, an affiliate of Fortress participated as a lender in the amended and restated Term Loan and received $0.9 million in lender fees. As of March 31, 2021, Fortress held $72.5 million, $19.8 million, $11.7 million and $173.3 million in the 2023 Notes, 2024 Notes, 2027 Notes and Term Loan, respectively. As of December 31, 2020, Fortress held $72.5 million, $19.9 million, $11.7 million and $173.7 million in the 2023 Notes, 2024 Notes, 2027 Notes and Term Loan, respectively
Transactions involving related parties cannot be presumed to be carried out at an arm’s-length basis.
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15. Employee Benefit Plan
The Company offers eligible employees the opportunity to contribute a percentage of their earned income into company-sponsored 401(k) plans.
From January 1, 2018 through May 2, 2020, participants in the 401(k) plans were eligible for the Company’s matching program. This matching program was suspended, effective May 2, 2020 and reinstated, effective January 1, 2021. Additionally, at the end of 2020, the Company made a one-time contribution to the matching program. Under this reinstated program, the Company matches an employee’s contributions to the 401(k) savings plan dollar-for-dollar up to 3% of such employee’s eligible earnings and $0.50 for every $1.00 for the next 2% of such employee’s eligible earnings. The maximum match available under the 401(k) plan is 4% of the employee’s eligible earnings. All contributions under the reinstated program vest immediately.
During the three months ended March 31, 2021 and 2020, $2.7 million and $2.0 million in matching contributions were made to the plans, respectively.
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16. Restructuring and Asset Impairment Charges
In March 2020, the Company announced a number of cost reduction initiatives that are expected to reduce certain of the Company’s General and Administrative, Customer Service, and Sales Support fixed costs. The Company completed the majority of these cost reduction initiatives in the first quarter of 2020. In addition to resulting in meaningful cost reductions, the Company’s initiatives are expected to streamline operations, focus engineering and innovation and provide a better focus on driving customer satisfaction. These actions resulted in one-time cash employee severance and termination benefits expenses of $20.9 million during three months ended March 31, 2020. These costs included $11.1 million in stock-based compensation expense associated with the accelerated vesting of stock-based awards to certain executives related to separation agreements.
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17. Segment Reporting and Business Concentrations
For the three months ended March 31, 2021 and 2020, the Company conducted business through one operating segment, Vivint. The Company primarily operated in two geographic regions: United States and Canada. Revenues by geographic region were as follows (in thousands):
| United States | Canada | Total | ||||||||||||||||||
| Revenue from external customers | ||||||||||||||||||||
| Three months ended March 31, 2021 | $ | 327,345 | $ | 15,948 | $ | 343,293 | ||||||||||||||
| Three months ended March 31, 2020 | 285,422 | 17,810 | 303,232 | |||||||||||||||||
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18. Basic and Diluted Net Loss Per Share
The Company computes basic loss per share by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net earnings available to common stockholders by the weighted-average number of common shares outstanding plus the effect of potentially dilutive shares to purchase common stock. The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants, and the presumed exercise of such securities are dilutive to net loss per share for the period, an adjustment to net loss available to common stockholders used in the calculation is required to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method. As a result of the Business Combination, the Company has retrospectively adjusted the weighted average number of common shares outstanding prior to January 17, 2020 by multiplying them by the exchange ratio used to determine the number of common shares into which they converted.
The following table sets forth the computation of the Company’s basic and diluted net loss attributable per share to common stockholders for the three and three months ended March 31, 2021 and 2020 (in thousands, except share and per-share amounts):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Numerator: | |||||||||||
| Net loss attributable to common stockholders | $ | (87,380) | $ | (145,096) | |||||||
| Gain on change in fair value of warrants, diluted | (29,963) | — | |||||||||
| Net loss attributable to common stockholders, diluted | $ | (117,343) | $ | (145,096) | |||||||
| Denominator: | |||||||||||
| Shares used in computing net loss attributable per share to common stockholders, basic and diluted | 206,791,625 | 151,010,847 | |||||||||
| Weighted-average effect of potentially dilutive shares to purchase common stock | 2,197,455 | — | |||||||||
| Shares used in computing net loss attributable per share to common stockholders, diluted | 208,989,080 | 151,010,847 | |||||||||
| Net loss attributable per share to common stockholders: | |||||||||||
| Basic | $ | (0.42) | $ | (0.96) | |||||||
| Diluted | $ | (0.56) | $ | (0.96) | |||||||
The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutive for all periods presented:
| As of March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Rollover SARs | 2,452,311 | 3,402,188 | |||||||||
| Rollover LTIPs | — | 4,633,738 | |||||||||
| Rollover RSUs | 51,929 | 51,929 | |||||||||
| RSUs | 9,272,573 | 9,369,305 | |||||||||
| PSUs | 4,692,084 | 5,193,238 | |||||||||
| Public warrants | — | 11,500,000 | |||||||||
| Private placement warrants | — | 5,933,334 | |||||||||
| Earnout shares reserved for future issuance | 26,613 | 14,303,786 | |||||||||
See Note 11 for additional information regarding the terms of the Rollover SARs, Rollover LTIPs, Rollover RSUs, RSUs, PSUs, and public and private placement warrants, and see Note 5 for additional information regarding the earnout shares.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||||
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 March 31, 2021 | Twelve months ended 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.
| Three months ended March 31, 2021 | Twelve months ended December 31, 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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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||
Our operations include activities in the United States and Canada. These operations expose us to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. We monitor and manage these financial exposures as an integral part of our overall risk management program.
Interest Rate Risk
Our revolving credit facility and term loan facility bear interest at a floating rate. As a result, we may be exposed to fluctuations in interest rates to the extent of our borrowings under these credit facilities. To help manage borrowing costs, we may from time to time enter into interest rate swap transactions with financial institutions acting as principal counterparties. We consider changes in the 30-day LIBOR rate to be most indicative of our interest rate exposure as it is a function of the base rate for our credit facilities and is reasonably correlated to changes in our earnings rate on our cash investments. Assuming the borrowing of all amounts available under our revolving credit facility, if the 30-day LIBOR rate increases by 1% due to normal market conditions, our interest expense will increase by approximately $12.7 million per annum.
We had no borrowings under the revolving credit facility as of March 31, 2021.
Foreign Currency Risk
We have exposure to the effects of foreign currency exchange rate fluctuations on the results of our Canadian operations. Our Canadian operations use the Canadian dollar to conduct business but our results are reported in U.S. dollars. We are exposed periodically to the foreign currency rate fluctuations that affect transactions not denominated in the functional currency of our U.S. and Canadian operations. Based on results of our Canadian operations for the three months ended March 31, 2021, if foreign currency exchange rates had decreased 10% throughout the period, our revenues would have decreased by approximately $1.6 million, our total assets would have decreased by $32.3 million and our total liabilities would have decreased by $29.0 million. We do not currently use derivative financial instruments to hedge investments in foreign subsidiaries. For the three months ended March 31, 2021, before intercompany eliminations, approximately $15.9 million of our revenues, $322.5 million of our total assets and $289.8 million of our total liabilities were denominated in Canadian Dollars.
| ITEM 4. | CONTROLS AND PROCEDURES | ||||
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as March 31, 2021, due to the existence of the material weakness in our internal controls over financial reporting described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act as recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Material Weakness in Internal Control Over Financial Reporting
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As previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2020, we identified a material weakness in our internal controls over financial reporting related to the Company’s control to review the evaluation of the accounting for complex financial instruments, such as for warrants issued by Mosaic Acquisition Corp. (“Mosaic”), which did not operate effectively to appropriately apply the provisions of Financial Accounting Standards Board Accounting Standards Codification 815-40. Notwithstanding this material weakness, management has concluded that our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented therein.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our internal control over financial reporting did not detect the proper accounting and reporting for the warrants assumed from Mosaic in the Business Combination. Management identified this error when the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) dated April 12, 2021 (the “SEC Staff Statement”). This control deficiency resulted in the Company having to restate its audited consolidated financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2020 and if not remediated, could result in a material misstatement to future annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
Plan of Remediation of Material Weakness
To remediate the material weakness in the Company’s internal control over financial reporting, the Company has a remediation plan that includes: additional review procedures, additional training and enhancements to the accounting policy related to the accounting for equity and liability instruments (including those with warrants) to determine proper accounting in accordance with GAAP.
The Company’s remediation plan has begun to be implemented. The material weakness cannot be considered remediated until the controls operate for a sufficient period and management has concluded, through testing, that our internal controls are operating effectively. While management believes that the remediation efforts will resolve the identified material weakness, there is no assurance that management’s efforts conducted to date will be sufficient or that additional remediation actions will not be necessary.
Changes in Internal Control Over Financial Reporting
Other than the changes made to as part of the remediation plan described above, there has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS | ||||
The information required with respect to this item can be found under “Legal” in Note 12, Commitments and Contingencies, of the notes to our unaudited condensed consolidated financial statements contained in this quarterly report, and such information is incorporated by reference into this Item 1.
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| ITEM 1A. | RISK FACTORS | ||||
For a discussion of the Company’s potential risks or uncertainties, please see “Risk Factors” in our Amendment No. 1 to our Annual Report on Form 10-K/A for our Fiscal year 2020. There have been no material changes to the risk factors disclosed in Amendment No. 1 to our Annual Report on Form 10-K/A for our fiscal year 2020.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | ||||
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about purchases of shares of our Class A Common Stock during the periods indicated, which related to shares withheld upon issuance of equity awards to satisfy tax withholding obligations:
| Date | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| January 1 - 31, 2021 | 472 | $ | 20.75 | — | — | |||||||||||||||||||||
| February 1 - 28, 2021 | 959,622 | 17.37 | — | — | ||||||||||||||||||||||
| March 1 - 31, 2021 | 703,108 | 16.95 | — | — | ||||||||||||||||||||||
(1) Total number of shares delivered to us by employees to satisfy the mandatory tax withholding requirements.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | ||||
None.
| ITEM 4. | MINE SAFETY DISCLOSURES | ||||
Not applicable.
| ITEM 5. | OTHER INFORMATION | ||||
None.
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| ITEM 6. | EXHIBITS | ||||
Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit Title | Form | File No. | Exhibit No. | Filing Date | Provided Herewith | ||||||||||||||||||||||||||||||||
| 2.1 | 8-K | 001-38246 | 2.1 | 9/16/2019 | ||||||||||||||||||||||||||||||||||
| 10.1 | X | |||||||||||||||||||||||||||||||||||||
| 10.2 | X | |||||||||||||||||||||||||||||||||||||
| 10.3 | X | |||||||||||||||||||||||||||||||||||||
| 10.4* | X | |||||||||||||||||||||||||||||||||||||
| 10.5* | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
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| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||||||||||||||
* Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The omitted information (i) is not material and (ii) would likely cause competitive harm to Vivint Smart Home, Inc. if publicly disclosed.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them other than for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Vivint Smart Home, Inc. | |||||||||||||||||||||||
| Date: | May 14, 2021 | By: | /s/ Todd Pedersen | ||||||||||||||||||||
| Todd Pedersen | |||||||||||||||||||||||
| Chief Executive Officer and Director (Principal Executive Officer) | |||||||||||||||||||||||
| Date: | May 14, 2021 | By: | /s/ Dale R. Gerard | ||||||||||||||||||||
| Dale R. Gerard | |||||||||||||||||||||||
| Chief Financial Officer (Principal Financial Officer) | |||||||||||||||||||||||
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