Vivint Smart Home, Inc. - Quarter Report: 2022 September (Form 10-Q)

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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 September 30, 2022


¨			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

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 November 7, 2022, there were 213,382,168 shares of Class A common stock outstanding.

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Vivint Smart Home, Inc.

FORM 10-Q

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PART I — Financial Information		6
Item 1.	Unaudited Condensed Consolidated Financial Statements	6
	Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2022 and December 31, 2021	6
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2022 and 2021	7
	Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2022 and 2021	8
	Condensed Consolidated Statements of Changes in Equity (Deficit) (unaudited) for the three and nine months ended September 30, 2022 and 2021	9
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2022 and 2021	11
	Notes to Condensed Consolidated Financial Statements (unaudited)	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	66

PART II — Other Information		67
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
SIGNATURES		71

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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; 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022 (the “Form 10-K”), 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 evolving COVID-19 pandemic;

•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;

•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, geopolitical tensions, weather, and demographic trends;

•the impact of changes to prevailing economic conditions, including increasing interest rates, rising inflation and the expiration of federal, state and local economic stimulus programs;

•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 including disruptions in our supply chains;

•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);

•risks related to our exposure to variable rates of interest with respect to our revolving credit facility and term loan facility;

•our inability to maintain effective internal control over financial reporting; and

•our inability to attract and retain employees due to labor shortages.

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In addition, the origination and installation 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, 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 in the “Risk Factors” section referenced above are not exhaustive. Certain 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.

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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)


	September 30, 2022		December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents	$	303,741	$	208,509

Accounts and notes receivable, net	53,441		63,671
Inventories	76,921		51,251
Prepaid expenses and other current assets	27,658		19,385
Total current assets	461,761		342,816

Property, plant and equipment, net	60,683		55,448
Capitalized contract costs, net	1,530,257		1,405,442

Deferred financing costs, net	1,746		2,088
Intangible assets, net	10,603		51,928
Goodwill	817,502		837,153
Operating lease right-of-use assets	39,493		46,000
Long-term notes receivables and other non-current assets, net	36,937		44,753
Total assets	$	2,958,982	$	2,785,628
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	121,133	$	96,317
Accrued payroll and commissions	144,813		83,347
Accrued expenses and other current liabilities	194,692		236,250
Deferred revenue	500,609		429,900
Current portion of notes payable, net	13,500		13,500
Current portion of operating lease liabilities	12,822		12,033
Current portion of finance lease liabilities	2,550		2,854
Total current liabilities	990,119		874,201

Notes payable, net	2,247,556		2,347,765
Notes payable, net - related party	445,053		351,080

Finance lease liabilities, net of current portion	5,281		1,416
Deferred revenue, net of current portion	884,002		778,214
Operating lease liabilities, net of current portion	33,463		41,713
Warrant derivative liabilities	14,121		24,564
Other long-term obligations	78,783		106,135
Deferred income tax liabilities	792		640
Total liabilities	4,699,170		4,525,728
Commitments and contingencies (See Note 11)
Stockholders’ deficit:
Class A Common stock, $0.0001 par value, 3,000,000,000 shares authorized; 213,382,168 and 208,734,193 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	21		21
Preferred stock, $0.0001 par value, 300,000,000 shares authorized; none issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	—		—
Additional paid-in capital	1,748,752		1,703,815
Accumulated deficit	(3,488,961)		(3,417,038)
Accumulated other comprehensive loss	—		(26,898)
Total stockholders’ deficit	(1,740,188)		(1,740,100)
Total liabilities and stockholders’ deficit	$	2,958,982	$	2,785,628

See accompanying notes to unaudited condensed consolidated financial statements

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Vivint Smart Home, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Recurring and other revenue	$	439,370	$	386,710	$	1,239,400	$	1,083,174



Costs and expenses:
Operating expenses (exclusive of depreciation and amortization shown separately below)	102,318		99,082		298,571		286,353
Selling expenses (exclusive of amortization of deferred commissions of $56,572; $53,792; $165,079; $158,796, respectively, which are included in depreciation and amortization shown separately below)	98,389		96,072		268,073		300,480
General and administrative expenses	61,091		64,972		171,575		189,267
Depreciation and amortization	156,426		151,332		468,445		447,863

Total costs and expenses	418,224		411,458		1,206,664		1,223,963
Income (Loss) from operations	21,146		(24,748)		32,736		(140,789)
Other expenses (income):
Interest expense	43,510		47,120		119,904		146,981
Interest income	(175)		(126)		(455)		(280)
Change in fair value of warrant derivative liabilities	7,891		(15,313)		(10,443)		(50,638)
Other expense (income), net	9,375		37,329		(5,134)		14,736
Loss before income taxes	(39,455)		(93,758)		(71,136)		(251,588)
Income tax expense (benefit)	1,551		(1,014)		787		500
Net loss	$	(41,006)	$	(92,744)	$	(71,923)	$	(252,088)
Net loss attributable per share to common stockholders:
Basic	$	(0.19)	$	(0.44)	$	(0.34)	$	(1.21)
Diluted	$	(0.19)	$	(0.52)	$	(0.34)	$	(1.45)
Weighted-average shares used in computing net loss attributable per share to common stockholders:
Basic	213,042,292		208,759,485		212,173,966		208,090,903
Diluted	213,042,292		208,988,137		212,173,966		209,174,284

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net loss	$	(41,006)	$	(92,744)	$	(71,923)	$	(252,088)
Other comprehensive income, net of tax effects:
Foreign currency translation adjustment	—		(1,062)		879		(138)

Total other comprehensive income	—		(1,062)		879		(138)
Comprehensive loss	$	(41,006)	$	(93,806)	$	(71,044)	$	(252,226)

See accompanying notes to unaudited condensed consolidated financial statements

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Vivint Smart Home, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (Deficit) (unaudited)

(In thousands, except shares)


		Three Months Ended September 30, 2022
	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
		Shares			Amount


Balance, beginning of period		212,764,752	$	21		$	1,732,287	$	(3,447,955)	$	—	$	(1,715,647)


Tax withholdings related to net share settlement of equity awards		(266,867)	—			(1,760)		—		—		(1,760)


Issuance of common stock upon exercise or vesting of equity awards		884,283	—			—		—		—		—

Net Loss		—	—			—		(41,006)		—		(41,006)


Stock-based compensation		—	—			18,225		—		—		18,225




Balance, end of period		213,382,168	$	21		$	1,748,752	$	(3,488,961)	$	—	$	(1,740,188)


		Three Months Ended September 30, 2021
	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
		Shares			Amount



Balance, beginning of period		208,707,992	$	21		$	1,651,951	$	(3,270,830)	$	(25,885)	$	(1,644,743)

Issuance of earnout shares		20,458	—			—		—		—		—






Net Loss		—	—			—		(92,744)		—		(92,744)
Foreign currency translation adjustment		—	—			—		—		(1,062)		(1,062)
Stock-based compensation		—	—			29,050		—		—		29,050




Balance, end of period		208,728,450	$	21		$	1,681,001	$	(3,363,574)	$	(26,947)	$	(1,709,499)

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		Nine Months Ended September 30, 2022
	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
		Shares			Amount



Balance, beginning of period		208,734,193	$	21		$	1,703,815	$	(3,417,038)	$	(26,898)	$	(1,740,100)


Tax withholdings related to net share settlement of equity awards		(1,939,446)	—			(13,916)		—		—		(13,916)


Issuance of common stock upon exercise or vesting of equity awards		6,587,421	—			—		—		—		—


Net Loss		—	—			—		(71,923)		—		(71,923)
Foreign currency translation adjustment		—	—			—		—		879		879
Reclassification out of Other Comprehensive Income, Canada Business Sale		—	—			—		—		26,019		26,019
Stock-based compensation		—	—			58,853		—		—		58,853




Balance, end of period		213,382,168	$	21		$	1,748,752	$	(3,488,961)	$	—	$	(1,740,188)


		Nine Months Ended September 30, 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	$	(3,111,486)	$	(26,809)	$	(1,589,489)

Issuance of earnout shares		1,239,818	—			—		—		—		—
Tax withholdings related to net share settlement of equity awards		(1,675,319)	—			(29,367)		—		—		(29,367)
Forfeited shares		(17,198)	—			—		—		—		—
Warrants exercised		825,016	—			19,743		—		—		19,743
Issuance of common stock upon exercise or vesting of equity awards		6,139,792	1			—		—		—		1


Net Loss		—	—			—		(252,088)		—		(252,088)
Foreign currency translation adjustment		—	—			—		—		(138)		(138)
Stock-based compensation		—	—			141,839		—		—		141,839




Balance, end of period		208,728,450	$	21		$	1,681,001	$	(3,363,574)	$	(26,947)	$	(1,709,499)

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Vivint Smart Home, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(71,923)	$	(252,088)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of capitalized contract costs	415,102		390,533

Amortization of customer relationships	38,483		43,607
Depreciation and amortization of property, plant and equipment and other intangible assets	14,860		13,723
Amortization of deferred financing costs and bond premiums and discounts	4,230		3,218
Gain on sale of Canada Business	(25,051)		—




(Gain) loss on sale or disposal of assets	(1,716)		309
Gain on changes in fair value of warrant derivative liabilities	(10,443)		(50,638)
Loss on early extinguishment of debt	—		30,210


Stock-based compensation	58,853		141,839
Provision for doubtful accounts	26,727		21,589

Deferred income taxes	(3,275)		(4,528)

Changes in operating assets and liabilities:
Accounts and notes receivable, net	(30,472)		(28,542)
Inventories	(26,566)		(6,851)
Prepaid expenses and other current assets	(8,290)		(12,341)
Capitalized contract costs, net	(564,210)		(504,885)

Long-term notes receivables and other non-current assets, net	11,283		14,488
Right-of-use assets	6,486		7,680
Accounts payable	26,401		40,061
Accrued payroll and commissions, accrued expenses, and other current and long-term liabilities	4,894		43,109

Current and long-term operating lease liabilities	(7,441)		(8,548)
Deferred revenue	191,646		260,185
Net cash provided by operating activities	49,578		142,130
Cash flows from investing activities:

Capital expenditures	(15,317)		(10,199)
Proceeds from the sale of intangible assets	—		162
Proceeds associated with sales and disposal of other assets	2,250		—
Proceeds from the sale of Canada Business, net of cash sold	86,052		—

Acquisition of intangible assets	(317)		—







Net cash provided by (used in) investing activities	72,668		(10,037)
Cash flows from financing activities:
Proceeds from notes payable	—		1,758,000
Proceeds from notes payable - related party	—		392,000
Repayment of notes payable	(10,125)		(1,893,575)
Repayment of notes payable - related party	—		(351,300)

Taxes paid related to net share settlements of stock-based compensation awards	(13,863)		(29,372)


Proceeds from Mosaic recapitalization	—		10,819

Repayments of finance lease obligations	(2,795)		(2,549)

Financing costs	—		(26,260)
Deferred financing costs	—		(23,474)


Net cash used in financing activities	(26,783)		(165,711)
Effect of exchange rate changes on cash and cash equivalents	(231)		(29)
Net increase (decrease) in cash and cash equivalents	95,232		(33,647)
Cash and cash equivalents:
Beginning of period	208,509		313,799
End of period	$	303,741	$	280,152
Supplemental non-cash investing and financing activities:
Finance lease additions	$	7,601	$	1,394

Reclassification of warrant derivative liability for exercised warrants	$	—	$	8,942
Capital expenditures included within accounts payable	$	2,246	$	4,130

See accompanying notes to unaudited condensed consolidated financial statements

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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 condensed 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, 2021 included in the unaudited condensed consolidated balance sheets was derived from the Company’s audited consolidated financial statements at that date but does not include all information and footnotes required by GAAP for complete 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 and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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 for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on March 1, 2022, which is available on the SEC’s website at www.sec.gov.

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company are presented for Vivint Smart Home, Inc. and its wholly-owned subsidiaries. The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to GAAP. 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. In June 2022, the Company sold Vivint Canada, Inc. (its "Canada Business"). The Company’s financial position and results of operations include its Canada Business through June 8, 2022. See Note 15 Segment Reporting and Business Concentrations, for additional information.

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 generally 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 or by obtaining short-term financing (generally, no more than six-month installment terms) through the Company.

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

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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 the Loans are issued on either an installment or revolving basis 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.

•The Company incurs fees at the time of the loan origination and receives proceeds that are net of these fees.

•The Company also shares liability for credit losses, with the Company being responsible for between 2.6% and 100% of lost principal balances.

•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 8 “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.

Retail Installment Contract Receivables

For subscribers that enter into a RIC to finance the purchase of Products, 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. (See Note 4).

Accounts Receivable

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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, are non-interest bearing and are included within accounts and notes receivable, net on the unaudited condensed consolidated balance sheets. Accounts receivable totaled $30.1 million and $26.4 million at September 30, 2022 and December 31, 2021, respectively, net of the allowance for doubtful accounts of $14.8 million and $13.3 million at September 30, 2022 and December 31, 2021, 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.

The changes in the Company’s allowance for accounts receivable were as follows for the periods ended (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	13,293	$	9,621	$	13,271	$	9,911
Provision for doubtful accounts	11,786		8,605		26,727		21,589
Write-offs and adjustments	(10,232)		(6,028)		(25,151)		(19,302)
Balance at end of period	$	14,847	$	12,198	$	14,847	$	12,198

Revenue Recognition

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 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 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 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 three to five years.

Capitalized Contract Costs

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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 some contract terms 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. No such changes were made for the nine months ended September 30, 2022 and 2021. 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 begins by analyzing for impairment indicators. If impairment indicators exist, 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. During the three and nine months ended September 30, 2022 and 2021, no impairment losses were recorded.

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, advertising, 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.

The Company’s depreciation and amortization included in the unaudited condensed consolidated statements of operations consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Amortization of capitalized contract costs	$	139,971	$	132,453	$	415,102	$	390,533
Amortization of definite-lived intangibles	12,525		14,984		39,391		45,038
Depreciation and amortization of property, plant and equipment	3,930		3,895		13,952		12,292
Total depreciation and amortization	$	156,426	$	151,332	$	468,445	$	447,863

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.

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 September 30, 2022 and

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December 31, 2021 were $1.7 million and $2.1 million, net of accumulated amortization of $11.8 million and $11.5 million, respectively. Deferred financing costs included in the accompanying unaudited condensed consolidated balance sheets within notes payable, net at September 30, 2022 and December 31, 2021 were $30.4 million and $34.3 million, net of accumulated amortization of $81.3 million and $77.4 million, respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying unaudited condensed consolidated statements of operations, totaled $1.4 million and $1.6 million for the three months ended September 30, 2022 and 2021, respectively and $4.2 million and $5.4 million for the nine months ended September 30, 2022 and 2021, 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 had a residual sales compensation plan (the “Residual Plan”) during 2018 and 2019 under which the Company's sales personnel (each, a “Plan Participant”) receive compensation based on the performance of certain underlying contracts they created in those 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 $4.4 million and $4.3 million at September 30, 2022 and December 31, 2021, respectively, and the noncurrent portion included in other long-term obligations was $22.1 million and $23.2 million at September 30, 2022 and December 31, 2021, 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 10 “Stock-Based Compensation and Equity” for additional details).

Advertising Expense

Advertising costs are expensed as incurred. Advertising costs were $19.9 million and $25.7 million for the three months ended September 30, 2022 and 2021, respectively and $54.6 million and $69.1 million for the nine months ended September 30, 2022 and 2021, respectively.

Research and Development

Research and development costs consist primarily of employee compensation and related expenses, product development expenses, third-party development support costs, facility costs as well as allocated overhead costs and are included in general and administrative expense. The Company incurred $16.5 million and $13.2 million for the three months ended September 30, 2022 and 2021, respectively and $47.5 million and $39.0 million during the nine months ended September 30, 2022 and 2021, respectively.

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.

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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 September 30, 2022, approximately 96% of the Company’s installed panels were the Company's proprietary SkyControl or Smart Hub panels and 4% 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 nine months ended September 30, 2022 and 2021.

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 tests goodwill at the reporting unit level for impairment annually as of October 1 and on an interim basis when events occur or circumstances exist that indicate the carrying value may no longer be recoverable. If impairment indicators exist, the Company compares the fair value of our reporting units with the carrying amount, including goodwill. The Company recognizes an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. The Company’s reporting units are determined based on its current reporting structure, which as of September 30, 2022 consisted of one reporting unit. As of September 30, 2022, there were no changes in facts and circumstances since the most recent annual impairment analysis to indicate impairment existed.

Letters of Credit

As of both September 30, 2022 and December 31, 2021, the Company had $11.1 million and $14.0 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.

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The Company accounts for its 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.

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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. As of September 30, 2022 and December 31, 2021, the Company had warranty service reserves of $6.7 million and $6.0 million, respectively, which are included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

During the nine months ended September 30, 2022 and 2021, the Company recognized revenues of $340.5 million and $254.7 million, respectively, that were included in the deferred revenue balance as of December 31, 2021 and 2020, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2022, approximately $3.8 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 three 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 September 30, 2022 and December 31, 2021 consisted of the following (in thousands):


	September 30, 2022
	Outstanding Principal		Unamortized Deferred Financing Costs (1)		Net Carrying Amount
Long-Term Debt:







6.750% Senior Secured Notes Due 2027	$	600,000	$	(4,133)	$	595,867
5.750% Senior Notes Due 2029	800,000		(10,051)		789,949
Senior Secured Term Loan - noncurrent	1,323,000		(16,207)		1,306,793
Total Long-Term Debt	2,723,000		(30,391)		2,692,609
Senior Secured Term Loan - current	13,500		—		13,500
Total Debt	$	2,736,500	$	(30,391)	$	2,706,109


	December 31, 2021
	Outstanding Principal		Unamortized Deferred Financing Costs (1)		Net Carrying Amount
Long-Term Debt:


6.750% Senior Secured Notes Due 2027	$	600,000	$	(4,835)	$	595,165
5.750% Senior Notes Due 2029	800,000		(11,154)		788,846
Senior Secured Term Loan - noncurrent	1,333,125		(18,291)		1,314,834
Total Long-Term Debt	2,733,125		(34,280)		2,698,845

Senior Secured Term Loan - current	13,500		—		13,500


Total Debt	$	2,746,625	$	(34,280)	$	2,712,345

(1)Unamortized deferred financing costs related to the revolving credit facilities included in deferred financing costs, net on the condensed consolidated balance sheets at September 30, 2022 and December 31, 2021 were $1.7 million and $2.1 million, respectively.

2027 Notes

As of September 30, 2022, the Company's wholly-owned subsidiary, APX, had $600.0 million outstanding aggregate principal amount of 6.75% senior secured notes due 2027 (the “2027 notes”). 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 Facility (as defined below), in each case, subject to certain exceptions and permitted liens. Interest accrues at the rate of 6.75% per annum for the 2027 notes. 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.

2029 Notes

As of September 30, 2022, APX had $800.0 million outstanding aggregate principal amount of 5.75% senior notes due 2029 (the “2029 notes” and, together with the 2027 notes the “Notes”). The 2029 notes will mature on July 15, 2029. Interest accrues at the rate of 5.75% per annum for the 2029 notes. Interest on the 2029 notes is payable semiannually in arrears on January 15 and July 15 each year. APX may redeem the Notes at the prices and on the terms specified in the applicable indenture.

Senior Secured Credit Facilities

The Company's senior secured credit facilities provides for (i) a term loan facility (the "Term Loan Facility", and the loans thereunder, the "Term Loans") and (ii) a revolving credit facility with commitments in an aggregate principal amount of $370.0 million (the "Revolving Credit Facility", and the loans thereunder, the "Revolving Loans").

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As of September 30, 2022, APX had outstanding term loans under the Term Loan Facility in an aggregate principal amount of $1,336.5 million. APX is required to make quarterly amortization payments under the Term Loan Facility in an amount equal to 0.25% of the aggregate principal amount of the Term Loans outstanding on the closing date thereof. The remaining outstanding principal amount of the Term Loans will be due and payable in full on July 9, 2028. APX may prepay the Term Loans on the terms specified in the Credit Agreement. No amortization payments are required under the Revolving Credit Facility

In addition to paying interest on outstanding principal under the Revolving Credit Facility, APX is required to pay a quarterly commitment fee of 50 basis points (which will be subject to two interest rate step-downs of 12.5 basis points, based on APX meeting consolidated first lien net leverage ratio tests) 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. The revolving credit commitments outstanding under the Revolving Credit Facility will be due and payable in full on July 9, 2026.

Borrowings under the amended and restated Term Loan Facility and Revolving Credit Facility bear interest, at APX’s option, at a rate per annum equal to either (a)(i) a base rate determined by reference to the highest of (1) the “Prime Rate” in the United States as published in The Wall Street Journal, (2) the federal funds effective rate plus 0.50% and (3) the LIBO rate for a one month interest period plus 1.00%, plus (ii) between 2.50% and 2.00%, depending on the first lien net leverage ratio of the applicable fiscal quarter or (b)(i) a LIBO rate determined by reference to the applicable page for the LIBO rate for the interest period relevant to such borrowing plus (ii) between 3.50% and 3.00%, depending on the first lien net leverage ratio of the applicable fiscal quarter, subject in each case to an agreed interest rate floor.

There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2022 and December 31, 2021. As of September 30, 2022, the Company had $358.9 million of availability under the Revolving Credit Facility (after giving effect to $11.1 million of letters of credit outstanding and no borrowings).

Deferred Financing Costs

Deferred financing costs are amortized to interest expense over the life of the issued debt. The following table presents deferred financing activity for the nine months ended September 30, 2022 and 2021 (in thousands):


	Unamortized Deferred Financing Costs
	Balance December 31, 2021		Additions		Early Extinguishment		Amortized		Balance September 30, 2022
Revolving Credit Facility	$	2,088	$	—	$	—	$	(342)	$	1,746






2027 Notes	4,835		—		—		(702)		4,133
2029 Notes	11,154		—		—		(1,103)		10,051
Term Loan	18,291		—		—		(2,084)		16,207
Total Deferred Financing Costs	$	36,368	$	—	$	—	$	(4,231)	$	32,137


	Unamortized Deferred Financing Costs
	Balance December 31, 2020		Additions		Early Extinguishment		Amortized		Balance September 30, 2021
Revolving Credit Facility	$	1,667	$	843	$	—	$	(309)	$	2,201



2022 Notes	4,697		—		(3,314)		(1,383)		—
2023 Notes	2,241		—		(1,681)		(560)		—
2024 Notes	3,530		—		(3,021)		(509)		—
2027 Notes	5,771		—		—		(702)		5,069
2029 Notes	—		11,767		—		(246)		11,521
Term Loan	10,921		11,302		(1,499)		(1,738)		18,986
Total Deferred Financing Costs	$	28,827	$	23,912	$	(9,515)	$	(5,447)	$	37,777

Guarantees

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All of the obligations under the Credit Agreement and the debt agreements governing the Notes are guaranteed by APX Group Holdings, Inc., each of APX Group's existing and future material wholly-owned U.S. restricted subsidiaries (subject to customary exclusions and qualifications) and solely in the case of the Notes, Vivint Smart Home, Inc. 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 Term Loan Facility 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):


	September 30, 2022		December 31, 2021
RIC receivables, gross	$	51,611	$	90,204
RIC allowance	(7,732)		(12,384)
Imputed interest	(3,774)		(7,469)
RIC receivables, net	$	40,105	$	70,351

Classified on the unaudited condensed consolidated balance sheets as:
Accounts and notes receivable, net	$	23,309	$	37,270
Long-term notes receivables and other assets, net	16,796		33,081
RIC receivables, net	$	40,105	$	70,351

The changes in the Company’s RIC allowance were as follows (in thousands):


	Nine months ended September 30, 2022		Nine months ended September 30, 2021
RIC allowance, beginning of period	$	12,384	$	27,061

Write-offs	(5,986)		(10,230)
Recoveries	1,817		2,584
Additions from RICs originated during the period	2,567		4,248
Change in expected credit losses	(1,517)		(10,129)
Other adjustments (1)	(1,533)		(337)
RIC allowance, end of period	$	7,732	$	13,197

(1) Other adjustments primarily reflect changes in foreign currency exchange rates related to Canadian RICs and adjustments related to sale of the Canadian business.

The amount of RIC imputed interest income recognized in recurring and other revenue was $0.8 million and $1.8 million during the three months ended September 30, 2022 and 2021, respectively and $3.4 million and $6.0 million during the nine months ended September 30, 2022 and 2021, respectively.

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5. Balance Sheet Components

The following table presents material balance sheet component balances (in thousands):


	September 30, 2022		December 31, 2021
Prepaid expenses and other current assets
Prepaid expenses	$	14,244	$	12,791
Deposits	1,611		627
Other	11,803		5,967
Total prepaid expenses and other current assets	$	27,658	$	19,385
Capitalized contract costs
Capitalized contract costs	$	4,465,632	$	4,103,683
Accumulated amortization	(2,935,375)		(2,698,241)
Capitalized contract costs, net	$	1,530,257	$	1,405,442
Long-term notes receivables and other assets
RIC receivables, gross	$	28,302	$	52,934
RIC allowance	(7,732)		(12,384)
RIC imputed interest	(3,774)		(7,469)

Deferred income tax assets	—		2,022
Other	20,141		9,650
Total long-term notes receivables and other assets, net	$	36,937	$	44,753
Accrued payroll and commissions
Accrued commissions	$	117,694	$	47,879
Accrued payroll	27,119		35,468
Total accrued payroll and commissions	$	144,813	$	83,347
Accrued expenses and other current liabilities
Accrued interest payable	$	17,981	$	40,333
Current portion of derivative liability	124,381		140,394
Service warranty accrual	6,686		5,992

Accrued taxes	9,172		10,758

Accrued payroll taxes and withholdings	13,667		14,392
Loss contingencies	11,500		8,150

Other	11,305		16,231
Total accrued expenses and other current liabilities	$	194,692	$	236,250

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6. Property Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):


	September 30, 2022		December 31, 2021		Estimated Useful Lives
Vehicles	$	41,754	$	40,103	3 - 5 years
Computer equipment and software	72,736		83,479		3 - 5 years
Leasehold improvements	25,357		30,087		2 - 15 years
Office furniture, fixtures and equipment	12,348		22,327		2 - 7 years

Construction in process	17,122		11,089
Property, plant and equipment, gross	169,317		187,085
Accumulated depreciation and amortization	(108,634)		(131,637)
Property, plant and equipment, net	$	60,683	$	55,448

Property, plant and equipment, net includes approximately $19.5 million and $16.5 million of assets under finance lease obligations at September 30, 2022 and December 31, 2021, respectively, net of accumulated amortization of $23.1 million and $24.5 million, respectively.

Depreciation and amortization expense on all property, plant and equipment was $3.9 million and $3.9 million during the three months ended September 30, 2022 and 2021, respectively and $14.0 million and $12.3 million during the nine months ended September 30, 2022 and 2021, respectively. The Company recorded an impairment expense on its internal-use software of $1.8 million during the nine months ended September 30, 2022 and was included in depreciation and amortization expense. Amortization expense related to assets under finance leases is included in depreciation and amortization expense.

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7. Goodwill and Intangible Assets

Goodwill

As of September 30, 2022 and December 31, 2021, the Company had a goodwill balance of $817.5 million and $837.2 million, respectively. The change in the carrying amount of goodwill during the nine months ended September 30, 2022 was the result of the sale of the Canada business.

Intangible assets, net

The following table presents intangible asset balances (in thousands):


	September 30, 2022						December 31, 2021
	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	$	892,091	$	(883,933)	$	8,158	$	969,376	$	(920,617)	$	48,759	10 years
2GIG 2.0 technology	—		—		—		17,000		(17,000)		—		8 years
Other technology	2,917		(2,917)		—		4,725		(4,725)		—		2 - 7 years
Space Monkey technology	—		—		—		7,100		(7,100)		—		6 years
Patents	11,294		(8,914)		2,380		11,180		(8,076)		3,104		5 years
Total definite-lived intangible assets:	906,302		(895,764)		10,538		1,009,381		(957,518)		51,863

Indefinite-lived intangible assets:


Domain names	65		—		65		65		—		65

Total intangible assets, net	$	906,367	$	(895,764)	$	10,603	$	1,009,446	$	(957,518)	$	51,928

Amortization expense related to intangible assets was approximately $12.5 million and $15.0 million for the three months ended September 30, 2022 and 2021, respectively and $39.4 million and $45.0 million during the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, the remaining weighted-average amortization period for definite-lived intangible assets was 0.5 years. Estimated future amortization expense of intangible assets, excluding approximately $0.2 million in patents currently in process, is as follows as of September 30, 2022 (in thousands):



2022 - Remaining Period	$	8,414
2023	822
2024	628
2025	519
2026	5
Thereafter	—
Total estimated amortization expense	$	10,388

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8. Financial Instruments

Cash and Cash Equivalents

Cash and cash equivalents are classified as level 1 assets, as they have readily available market prices in an active market. The Company’s cash and cash equivalents totaled $303.7 million and $208.5 million as of September 30, 2022 and December 31, 2021, respectively.

Debt

Components of the Company's debt including the associated interest rates and related fair values are as follows (in thousands, except interest rates):


	September 30, 2022				December 31, 2021				Stated Interest Rate
Issuance	Face Value		Estimated Fair Value		Face Value		Estimated Fair Value






2027 Notes	$	600,000	$	564,720	$	600,000	$	633,660	6.750	%
2029 Notes	800,000		634,640		800,000		795,680		5.750	%
Term Loan	1,336,500		1,336,500		1,346,625		1,346,625		N/A
Total	$	2,736,500	$	2,535,860	$	2,746,625	$	2,775,965

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 Facility 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 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 condensed consolidated statements 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 September 30, 2022 and December 31, 2021 (in thousands):

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	September 30, 2022		December 31, 2021
Consumer Financing Program Contractual Obligations:
Fair value	$	170,766	$	216,795
Notional amount	954,144		1,160,278

Classified on the condensed consolidated unaudited balance sheets as:
Accrued expenses and other current liabilities	124,381		140,394
Other long-term obligations	46,385		76,401
Total Consumer Financing Program Contractual Obligation	$	170,766	$	216,795

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 nine months ended September 30, 2022 and 2021 (in thousands):


	Nine months ended September 30, 2022		Nine months ended September 30, 2021
Balance, beginning of period	$	216,796	$	227,896
Additions	12,084		83,689
Settlements	(78,641)		(67,136)
Net losses (gains) included in earnings	20,527		(15,221)
Balance, end of period	$	170,766	$	229,228

Warrant Liabilities

The Company holds a derivative warrant liability related to previously issued stock warrants consisting of both private placement warrants and public warrants. As of January 7, 2021, all public warrants were exercised or redeemed and none were outstanding as of September 30, 2022 and December 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 private placement warrants are measured at each reporting period, with changes in fair value recognized in the statement of operations. (See Note 10 for further details on outstanding private placement warrants)

The change in the fair value of the derivative warrant liabilities for the nine months ended September 30, 2022 and 2021 is summarized as follows (in thousands):


	Nine months ended September 30, 2022
	Private Placement Warrants
Balance, beginning of period	$	24,564
Change in fair value of warrant liability	(10,443)


Balance, end of period	$	14,121


	Nine months ended September 30, 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		(51,498)		(50,148)
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	$	—	$	24,033	$	24,033

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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 September 30, 2022			As of September 30, 2021
Number of private placement warrants	5,933,334			5,933,334
Exercise price	$	11.50		$	11.50
Stock price	$	6.58		$	9.45
Expiration term (in years)	2.3			3.3
Volatility	85		%	70		%
Risk-free Rate	4.23		%	0.60		%
Dividend yield	—		%	—		%

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9. 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 September 30, 2022 and 2021 was approximately negative 3.93% and 1.08%, respectively. The effective income tax rate for the nine months ended September 30, 2022 and 2021 was approximately negative 1.11% and negative 0.20%, respectively. The effective tax rates for the three and nine months ended September 30, 2022 and 2021 differ from the statutory rate primarily due to not benefiting from expected US losses, US state income taxes and Canadian taxes.

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.

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10. Stock-Based Compensation and Equity

The Vivint Smart Home, Inc. 2020 Omnibus Incentive Plan (the “Plan”) provides for the issuance of 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. The Company utilizes a combination of time-based and performance-based restricted stock units.

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. During the nine months ended September 30, 2022, the Company approved the acceleration of the unvested Tracking Units to immediately vest. At September 30, 2022, no Tracking Units were unvested, and there was no unrecognized compensation expense related to Tracking Units.

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 September 30, 2022, there were no remaining long-term incentive awards outstanding and no unrecognized compensation expense related to Rollover LTIPs.

Restricted Stock Units

During the three and nine months ended September 30, 2022, 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 generally 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. As of September 30, 2022, 10,554,387 RSUs were outstanding and there was $87.7 million unrecognized compensation expense related to RSUs.

Performance Stock Units

During the three and nine months ended September 30, 2022, 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 are deemed probable. As of September 30, 2022, 9,227,290 PSUs were outstanding and $62.7 million unrecognized compensation expense related to PSUs.

Stock-based compensation expense in connection with all stock-based awards is presented as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating expenses	$	1,925	$	2,463	$	6,004	$	13,738
Selling expenses	8,984		16,108		29,660		94,479
General and administrative expenses	7,027		10,444		23,928		35,390
Total stock-based compensation	$	17,936	$	29,015	$	59,592	$	143,607

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

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each matter on which they are entitled to vote. At September 30, 2022, there were 213,382,168 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 September 30, 2022, there are no preferred stock issued or outstanding.

Warrants—As of September 30, 2022, 5,933,334 private placement warrants were outstanding. Each whole private placement warrant entitles the holder to purchase one Class A common stock at an exercise price of $11.50 per share, subject to adjustment. Warrants can only be exercised for a whole number of shares. 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 Company's merger, pursuant to the agreement and plan of merger, dated as of September 15, 2019 (and as subsequently amended), by and among Legacy Vivint Smart Home, Inc., the Company and Maiden Merger Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub merged with and into Legacy Vivint Smart Home, Inc. with Legacy Vivint Smart Home, Inc. surviving the merger as a wholly owned subsidiary of the Company or earlier upon redemption or liquidation (the "Merger").

During the nine months ended September 30, 2022, no warrants were exercised. During the nine months ended September 30, 2021, 825,016 public warrants were exercised, for which the Company received $10.8 million of cash.

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11. 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. Actions filed against the Company include commercial, intellectual property, customer, common-law negligence, and labor and employment related claims, including complaints of alleged wrongful termination, potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws and other types of lawsuits. 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. The Company is currently in the process of administering the terms of this settlement, which include multiple undertakings by the Company. The Company has been endeavoring to comply with these undertakings and the demands on management and costs incurred in connection with these undertakings may be substantial. The Company has been engaged in ongoing discussions with the staff of the FTC regarding the Company’s compliance with the terms of the settlement. In addition, in accordance with the settlement, the Company is required to undergo biennial assessments by an independent third-party assessor who will review the Company’s compliance programs and provide a report to the FTC staff on the Company’s ongoing compliance with the settlement (“Stipulated Order”). During the three months ended March 31, 2022, the Company completed its first biennial assessment required by the Stipulated Order and received a report with no findings of non-compliance by the assessor. Further, although Vivint is only required by the Order to conduct biennial assessments, Vivint has voluntarily and proactively elected to conduct quarterly audits utilizing the same appointed Assessor. These quarterly audits will each focus on roughly 25% of the Order's requirements. The first quarterly audit was completed in August 2022, and resulted in a report with no findings of non-compliance by the assessor. 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 $11.5 million and $8.2 million for the period ended September 30, 2022 and December 31, 2021, 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

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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 materially exceed the accruals that the Company has recorded.

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12. Leases

The Company has operating leases for corporate offices, warehouse facilities, research and development and other operating facilities, and other operating assets. The Company has finance leases for vehicles, office equipment and other warehouse equipment. The leases have remaining terms of 1 year to 6 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 September 30,				Nine Month Ended September 30,
	2022		2021		2022		2021
Operating lease cost	$	3,685	$	3,965	$	11,308	$	11,838

Finance lease cost:
Amortization of right-of-use assets	$	641	$	560	$	1,826	$	1,777
Interest on lease liabilities	200		30		379		211
Total finance lease cost	$	841	$	590	$	2,205	$	1,988

Supplemental cash flow information related to leases was as follows (in thousands):


	Nine Months Ended September 30,
	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(12,265)	$	(12,730)
Operating cash flows from finance leases	(379)		(211)
Financing cash flows from finance leases	(2,795)		(2,549)

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,030	$	2,603
Finance leases	7,601		1,394

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Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):


	September 30, 2022			December 31, 2021
Operating Leases
Operating lease right-of-use assets	$	39,493		$	46,000

Current operating lease liabilities	12,822			12,033
Operating lease liabilities	33,463			41,713
Total operating lease liabilities	$	46,285		$	53,746

Finance Leases
Property, plant and equipment, gross	$	42,596		$	40,939
Accumulated depreciation	(23,122)			(24,465)
Property, plant and equipment, net	$	19,474		$	16,474

Current finance lease liabilities	$	2,550		$	2,854
Finance lease liabilities	5,281			1,416
Total finance lease liabilities	$	7,831		$	4,270

Weighted Average Remaining Lease Term
Operating leases	4 years			5 years
Finance leases	3 years			3 years
Weighted Average Discount Rate
Operating leases	7		%	7		%
Finance leases	5		%	4		%

Maturities of lease liabilities were as follows (in thousands):


	Operating Leases		Finance Leases
Year Ending December 31,
2022 (excluding the nine months ended September 30, 2022)	$	4,034	$	863
2023	15,908		2,817
2024	14,915		2,505
2025	9,262		2,198
2026	5,073		68
Thereafter	4,509		—
Total lease payments	53,701		8,451
Less imputed interest	(7,416)		(620)
Total	$	46,285	$	7,831

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13. Related Party Transactions

Other Related-party Transactions

The Company incurred $0.1 million and $0.2 million expenses during the three months ended September 30, 2022 and 2021, respectively and $0.5 million and $0.3 million during the nine months ended September 30, 2022 and 2021, respectively 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 were $0.2 million and $0.1 million at September 30, 2022 and December 31, 2021.

Transactions with Affiliates of Blackstone Inc. (“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 no expenses for such services during the nine months ended September 30, 2022, and approximately $4.2 million of expenses during the nine months ended September 30, 2021. Accrued expenses and other current liabilities and accounts payable at each period end September 30, 2022 and December 31, 2021 included liabilities of $0.7 million to BMP related to prior period monitoring fees.

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 nine months ended September 30, 2022 and 2021, the Company incurred no costs associated with such services.

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. Subsequent to the year ended December 31, 2021, the annual Monitoring Fee payment to BMP otherwise payable in connection with the agreement ceased and no other milestone payments or other similar payment are 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

Affiliates of Blackstone participated as initial purchasers, arrangers, or creditors of the 2027 notes in February 2020 and term loan facility amendment and restatement in July 2021 and received approximately $1.3 million and $3.0 million, respectively, of fees associated with these transactions. As of September 30, 2022, affiliates of Blackstone held $274.3 million in the Term Loan Facility. As of December 31, 2021, affiliates of Blackstone held $201.2 million and $18.5 million in the Term Loan Facility and 2029 Notes, respectively.

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Fortress Investment Group LLC (“Fortress”) is considered a related party because it beneficially owns more than 5% of the Company's Class A common stock. In July 2021, an affiliate of Fortress participated as a lender in the amended and restated term loan facility and received approximately $0.9 million and $0.8 million in lender fees, respectively. As of September 30, 2022, Fortress held $11.7 million, $23.0 million, and $136.1 million in the 2027 Notes, 2029 Notes, and Term Loan Facility, respectively. As of December 31, 2021, Fortress held $11.7 million and $119.7 million in the 2027 Notes and Term Loan Facility, respectively.

Transactions involving related parties cannot be presumed to be carried out at an arm’s-length basis.

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14. Employee Benefit Plan

The Company offers eligible employees the opportunity to contribute a percentage of their earned income into company-sponsored 401(k) plans.

Participants in the 401(k) plan are eligible for the Company’s matching program. Under this 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.

The Company made $1.9 million and $3.3 million in matching contributions to the plans during the three months ended September 30, 2022 and 2021, respectively and $6.1 million and $7.8 million during the nine months ended September 30, 2022 and 2021, respectively.

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15. Segment Reporting and Business Concentrations

Revenues by Geographic Region

For the three and nine months ended September 30, 2022 and 2021, 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 September 30, 2022	$	439,370	$	—	$	439,370
Three months ended September 30, 2021	372,076		14,634		386,710
Nine months ended September 30, 2022	1,216,527		22,873		1,239,400
Nine months ended September 30, 2021	1,036,894		46,280		1,083,174

Divestiture of Subsidiary

On June 8, 2022, the Company completed the sale of its Canada business to TELUS Communications Inc. (“TELUS”) (“Canada Sale”). The sale was effected through TELUS’ purchase of the common shares of two wholly-owned subsidiaries of Vivint, Inc. for a transaction price of approximately $104.2 million. The Company received cash proceeds of $94.2 million and entered into an escrow agreement for approximately $10.0 million, included in long-term notes receivables and other assets, net on the unaudited condensed consolidated balance sheet, to be delivered 18 months from the date of the sale. In connection with the Canada Sale, the Company entered into a service agreement whereby the Company will provide certain transition services to TELUS, with an initial period of 24 months. As a result of the aforementioned sale, the Company will cease conducting operations in Canada, except for certain obligations pursuant to a transition services agreement entered into with TELUS. The Company’s financial position and results of operations include Vivint Canada, Inc. through June 8, 2022.

The following table summarizes the net gain recognized in connection with this divestiture (in thousands):


Sales price	$	104,236
Vivint Canada net assets (including cash of $2,548 and net intercompany balances)	(23,639)
Accumulated other comprehensive income	(26,019)
Vivint Inc. net intercompany balances	(23,814)
Other	(5,713)
Net gain on divestiture	$	25,051

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16. 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.

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 nine months ended September 30, 2022 and 2021 (in thousands, except share and per-share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net loss attributable to common stockholders	$	(41,006)	$	(92,744)	$	(71,923)	$	(252,088)
Gain on change in fair value of warrants, diluted	—		(15,313)		—		(51,498)
Net loss attributable to common stockholders, diluted	$	(41,006)	$	(108,057)	$	(71,923)	$	(303,586)
Denominator:
Shares used in computing net loss attributable per share to common stockholders, basic	213,042,292		208,759,485		212,173,966		208,090,903
Weighted-average effect of potentially dilutive shares to purchase common stock	—		228,652		—		1,083,381
Shares used in computing net loss attributable per share to common stockholders, diluted	213,042,292		208,988,137		212,173,966		209,174,284
Net loss attributable per share to common stockholders:
Basic	$	(0.19)	$	(0.44)	$	(0.34)	$	(1.21)
Diluted	$	(0.19)	$	(0.52)	$	(0.34)	$	(1.45)

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 September 30,
	2022	2021
Stock Appreciation Rights (SARs)	1,492,450	2,074,432


RSUs	10,554,387	9,606,233
PSUs	9,227,290	9,747,295

Private placement warrants	5,933,334	—
Earnout shares reserved for future issuance	2,553	24,060

See Note 10 for additional information regarding the terms of the RSUs, PSUs and private placement warrants.

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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, 2021 contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Form 10-K”) and this Quarterly Report on Form 10-Q. 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. 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 and nine months ended September 30, 2022 and 2021, 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 1.9 million subscribers as of September 30, 2022. Our brand name, Vivint, means to “to live intelligently” and our mission is to help our customers do exactly that by providing them with technology and services to create a smarter, greener, safer home that saves them money every month.

Although a number of companies offer single devices such as a doorbell camera, smart speaker or thermostat, single offerings do not make a home smart. Rather, a smart home has multiple devices, properly located and installed, all integrated into a single expandable platform that incorporates artificial intelligence (“AI”) and machine-learning in its operating system.

We make creating this smart home easy and affordable with an integrated platform, exceptional products, hassle-free professional installation and zero percent annual percentage rate (“APR”) 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 September 30, 2022, 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 that 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 nine years, as of September 30, 2022. This model also facilitates our ability to offer adjacent products and services that leverage our existing platform and infrastructure, which we believe can extend the Average Subscriber Lifetime and increase the lifetime value we derive from our subscribers.

Our cloud-based home platform currently manages more than 26 million security and smart home devices as of September 30, 2022. 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. The average subscriber on our cloud-based home platform engages with our smart home app approximately 12 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.

We believe that our unique business model and platform gives us a distinct advantage in the market through:

•a proprietary cloud-based platform,

•a differentiated end-to-end distribution model,

•strong growth with compelling unit economics, and

•multiple levers for sustained profitable growth.

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As a result, we believe we can integrate new customer offerings from large adjacent markets that logically link back to our smart home platform, compounding the value that we already deliver to our approximately 1.9 million customers. With the large number of devices we have installed per home, we own a rich first-party data environment that helps us not only protect our customers, but also improve the efficiency of their homes and increase their peace of mind. We believe our unique focus on the importance of owning the entire technology stack, coupled with an end-to-end distribution model, leads to an exceptional customer experience. By continuously enhancing our platform, we can improve our customers’ experience wherever they interact with it. We believe that as our customers’ satisfaction increases, it creates multiple potential opportunities for sustained profitable growth for years to come.

Our integrated Smart Home business model generates subscription-based, high-margin recurring revenue from subscribers who sign up for our smart home services. More than 94% 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 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 Recurring Revenue

Total monthly recurring revenue, or Total MRR, is the average smart home and security total monthly recurring revenue recognized during the period. These revenues exclude non-recurring revenues that are recognized at the time of sale.

Average Monthly Recurring Revenue per User

Average monthly revenue per user, or AMRRU, is Total MRR 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 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, and equipment and associated financing fees (estimated), 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.

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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 subscribers during a given 12-month period, divided by New Subscribers for that period. These costs include commissions, equipment and associated financing fees (estimated), installation, marketing, sales support, and other allocations (general and administrative); less upfront payments received from the sale of equipment associated with the initial installation, and installation fees. These costs exclude capitalized contract costs and upfront proceeds associated with contract modifications.

Adjusted EBITDA

Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation, amortization, stock-based compensation (or non-cash compensation), changes in the fair value of the derivative liability associated with our public and private warrants and certain other non-recurring expenses or gains.

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 expenses 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 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.

Net Loss Margin

Net Loss Margin is net loss as a percentage of total revenues for the period.

Adjusted EBITDA Margin

Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of total revenues for the period.

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. During 2020, we 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. These

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changes included transitioning our customer care professionals and corporate employees to work-from-home environments while maintaining our geographically dispersed central monitoring stations to provide 24/7 professional monitoring services for all emergencies, performing operating and safety procedures based on the latest CDC guidelines, providing paid time off for any employee who has contracted COVID-19 or is required to be quarantined by a public health authority and encouraging our employees to receive COVID-19 vaccinations by offering incentives to customer facing employees and by providing vaccines at our onsite clinic located at our Provo, Utah headquarters. We are also developing a plan for employees to return to the office in 2022, utilizing a hybrid model in which employees split their time between working from the office and from home.

The United States has experienced multiple spikes in new COVID-19 cases since the beginning of the pandemic, primarily driven by new variants of the COVID-19 virus. 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 the current and any future resurgences in COVID-19 cases. While, to date, we have not experienced a significant adverse financial impact from the COVID-19 pandemic, 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 roll back plans for reopening their economies.

Financial update. Although the COVID-19 pandemic has not had a material impact on our 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 occurrence of future outbreaks or new variants of the virus, 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.

•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 increased inflation rates and the associated impact on 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 and would likely increase Product costs. Such shortages are requiring us to purchase components on the spot market at elevated prices and utilize expedited shipping methods to maintain adequate supply, which result in increased costs for the components and equipment.

•Limitations on our ability to enter our customer’s homes to perform installs or equipment repairs.

•Ability to attract and retain employees due to labor shortages, along with wage inflation resulting from these labor shortages.

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 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, Consumer Financing Program, retail installment contract receivables, capitalized contract costs, and loss contingencies have the greatest potential impact on our 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 the accompanying unaudited condensed consolidated financial statements.

Revenue Recognition

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We offer our customers smart home services combining Products, including our proprietary Vivint smart hub control panel, door and window sensors, door locks, cameras and smoke alarms; installation; and a proprietary backend 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.

Beginning in late 2020, we began operating as a third-party dealer for residential solar installers in several states throughout the U.S., whereby we earn a commission from the installer for selling their solar services. Because we have no further performance obligations once the installation is complete, we recognize the commissions we receive as revenue at that time.

To date, revenues from our Smart Insurance business have been immaterial to our overall financial results.

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 our consumer financing program (“CFP”), (2) we generally 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 RIC directly with Vivint, or (3) customers may purchase the Products at the outset of the service contract either by paying the full amount at that time via check, automated clearing house payments (“ACH”), credit or debit card or by obtaining short-term financing (generally no more than six month installment terms) through us.

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 or estimated credit losses 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 the Loans are issued on either an installment or revolving basis with repayment terms ranging from with a 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.

•We incur fees at the time of the Loan origination and receive proceeds that are net of these fees.

•We also share liability for credit losses, with us being responsible for between 2.6% and 100% of lost principal balances.

•We are responsible for reimbursing certain Financing Providers for merchant transaction fees and other fees

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associated with the Loans.

Because of the nature of these provisions, we record 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 when the Financing Provider originates Loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services.

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 we will be obligated to pay to the Financing Provider for each component of the derivative.

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 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.

See Note 8 to the accompanying unaudited condensed consolidated financial statements for further information on our CFP derivative arrangement

Retail Installment Contract Receivables

For subscribers that enter into a retail installment contract (“RIC”) to finance the purchase of Products, 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 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 condensed consolidated balance sheets. The billed amounts of notes receivables are included in accounts receivable within accounts and notes receivable, net on the 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 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.

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 some contract terms 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.

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Amortization of capitalized contract costs is included in “Depreciation and Amortization” on the condensed 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.

On the 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.

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.

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 Services 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 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 significantly improved our cash flows associated with originating 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,

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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:


	Nine Months Ended September 30,
	2022		2021
New Subscribers (U.S. only):
Financed through CFP	74	%	77	%
Paid in Full (ACH, credit or debit card) or Short-Term Financing	25	%	22	%
Purchased through RICs	1	%	1	%

The shift in financing from RICs to the CFP since the inception of Vivint Flex Pay has significantly reduced our Net Subscriber Acquisition Cost per New Subscriber, as well as the cash required to acquire New Subscribers. Going forward, we expect the percentage of subscriber contracts financed through RICs to remain a very small percentage of our financing mix. We will also continue to explore ways of growing our subscriber base in a cost-effective manner through our existing sales and marketing channels, the growth of our financing programs, and 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 new 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 AMRRU, 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 AMRRU 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 Doorbell Camera Pro, Vivint Indoor Camera, Vivint Outdoor Camera Pro, and Vivint Smart Thermostat has expanded our smart home platform. We believe that growing our AMRRU 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 106 months (or approximately 9 years) as of September 30, 2022. If our expected long-term annualized attrition rate increased by 1% to 12%, Average Subscriber Lifetime would decrease to approximately 98 months. Conversely, if our expected attrition decreased by 1% to 10%, our Average Subscriber Lifetime would increase to approximately 117 months. Our ability to increase overall revenue growth and extend our Average Subscriber Lifetime depends, in part, on our ability to successfully expand into new adjacent products and services, such as smart energy and smart insurance. This success is dependent on our ability to scale these adjacent businesses in a cost-effective manner and integrate them into our existing smart home platform, where appropriate.

The operating margins from smart energy and smart insurance are lower than for our smart home business. Therefore, while we expect total Adjusted EBITDA dollars to increase as a result of smart energy and smart insurance, they will reduce our overall Adjusted EBITDA Margin percentage.

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 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 $10.90 to $9.43 for the three months ended September 30, 2021 and 2022, respectively, while effectively managing subscriber attrition.

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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 September 30, 2022 and September 30, 2021:


	Twelve months ended September 30, 2022		Twelve months ended September 30, 2021
Beginning balance of subscribers	1,843,744		1,687,892
New subscribers	370,946		354,660
Sale of Canada business (1)	(85,786)		—
Attrition	(207,130)		(198,808)
Ending balance of subscribers	1,921,774		1,843,744
Monthly average subscribers	1,875,636		1,737,924
Attrition rate	11.0	%	11.4	%

____________________

(1) Subscriber accounts from the sale of our Canada business in June 2022.

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 September 30, 2022 includes the effect of the 2016 60-month and 2017 60-month contracts reaching the end of their initial contract term. Attrition in the twelve months ended September 30, 2021 includes the effect of the 2015 60-month and 2016 60-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. Our sales representatives generally become more productive as they gain more experience. As a result, the tenure mix among our sales teams, and our ability to retain experienced sales representatives, impacts our level of new subscriber acquisitions and overall operating success. The continued productivity of our sales teams is instrumental to our subscriber growth and vital to our future success.

Originating 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.

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 and expanding into adjacent products and services 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 through the addition of new smart home Products, experiences and use cases. As a result of our investments to date, we have approximately 1.9 million active customers on our smart home platform. We intend to continue developing this platform to include new automation capabilities, use case scenarios, and comprehensive device integrations. Our cloud-based home platform supports over 26 million connected devices, as of September 30, 2022.

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

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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 such as smart insurance and smart energy, 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 have historically operated in two geographic regions: The United States and Canada. In June 2022, the Company sold its Canada business. See Note 15 in the accompanying unaudited condensed consolidated financial statements for more information about our geographic regions.

Components of Results of Operations

Total Revenues

Recurring and other revenue. Our revenues are primarily 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. To a lesser extent, our revenues are generated through the sales of products and other one-time fees such as service or installation fees, which are invoiced to the customer at the time of sale.

The revenue related to our smart energy business is primarily from commissions received by operating as a sales dealer for third-party residential solar installers. We invoice the solar installer, and recognize the associated revenue, at the time the solar installation is complete.

Although we expect revenue from our smart insurance to continue to grow, to date, revenue from this business has been immaterial to our overall revenue.

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. 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

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capitalized contract costs. We generally expect our operating expenses to decrease in in the near to intermediate term in absolute dollars, and decrease as a percentage of our revenues, resulting from economies of scale as we grow our business.

Selling expenses. Selling expenses are primarily comprised of costs associated with housing for our Smart Home Pros sales representatives, advertising and lead generation, marketing and recruiting, sales commissions related to our smart energy and smart insurance businesses, certain portions of sales commissions associated with our direct-to-home sales channel (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.

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 increase in the near to intermediate term in absolute dollars, but decrease as a percentage of our revenues, resulting from economies of scale as we grow our business.

Depreciation and amortization. Depreciation and amortization consist 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.

Results of operations


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in thousands)				(in thousands)
Total revenues	$	439,370	$	386,710	$	1,239,400	$	1,083,174
Total costs and expenses	418,224		411,458		1,206,664		1,223,963
Income (loss) from operations	21,146		(24,748)		32,736		(140,789)
Other expenses	60,601		69,010		103,872		110,799
Loss before taxes	(39,455)		(93,758)		(71,136)		(251,588)
Income tax (benefit) expense	1,551		(1,014)		787		500
Net loss	$	(41,006)	$	(92,744)	$	(71,923)	$	(252,088)

Key performance measures


	As of September 30,
	2022		2021
Total Subscribers (in thousands)	1,921.8		1,843.7
Total MSR (in thousands)	$	89,956	$	86,430
AMSRU	$	46.81	$	46.88
Net subscriber acquisition costs per new subscriber	$	739	$	647
Average subscriber lifetime (months)	106		92


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021

Total MRR (in thousands)	$	133,167		$	121,478		$	129,427		$	115,986

AMRRU	$	69.76		$	66.39		$	68.56		$	65.88

Net service cost per subscriber	$	9.43		$	10.90		$	10.06		$	10.90
Net service margin	80		%	77		%	79		%	77		%

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Adjusted EBITDA

The following table sets forth a reconciliation of net loss to Adjusted EBITDA (in millions):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net loss	$	(41.0)		$	(92.7)		$	(71.9)		$	(252.0)
Interest expense, net	43.3			47.0			119.4			146.7
Income tax expense, net	1.6			(1.0)			0.8			0.5
Depreciation	3.9			3.9			13.9			12.3
Amortization (1)	152.5			147.4			454.5			435.5
Stock-based compensation (2)	17.9			29.0			59.5			143.6



CEO transition (3)	—			3.0			—			8.8
Change in fair value of warrant derivative liabilities (4)	7.9			(15.3)			(10.4)			(50.6)
Other expense (income), net (5)	9.4			37.3			(5.0)			14.6
Adjusted EBITDA	$	195.5		$	158.6		$	560.8		$	459.4
Net Loss Margin	(9)		%	(24)		%	(6)		%	(23)		%
Adjusted EBITDA Margin	44		%	41		%	45		%	42		%

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(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)Hiring and severance expenses associated with CEO transition in June 2021.

(4)Reflects the change in fair value of the derivative liability associated with our public and private warrants.

(5)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.

Beginning with the quarter ended September 30, 2022, we no longer eliminate the reduction to revenue related to the amortization of consumer financing fees incurred under the Vivint Flex Pay program from Adjusted EBITDA. For purposes of comparability, we have revised the reconciliation table above for the three and nine months ended September 30, 2021 to reflect this approach.

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Revenues

The following table provides our revenue for the three-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentage):


	Three Months Ended September 30,
	2022		2021		% Change
Recurring and other revenue	$	439,370	$	386,710	14	%

Recurring and other revenue for the three months ended September 30, 2022 increased $52.7 million, or 14%, as compared to the three months ended September 30, 2021. The increase was primarily a result of:

•$35.2 million resulting from the change in Total Subscribers;

•$17.6 million in non-recurring revenues primarily from our smart energy initiative; and

•$14.3 million from the change in AMRRU.

These increases were partially offset by a decrease of $14.4 million resulting from the change in Total Subscribers from the sale of our Canada business.

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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 September 30, 2022 and September 30, 2021 (in thousands, except for percentages):


	Three Months Ended September 30,
	2022		2021		% Change
Operating expenses	$	102,318	$	99,082	3	%
Selling expenses	98,389		96,072		2	%
General and administrative	61,091		64,972		(6)	%
Depreciation and amortization	156,426		151,332		3	%

Total costs and expenses	$	418,224	$	411,458	2	%

Operating expenses for the three months ended September 30, 2022 increased by $3.2 million, or 3%, as compared to the three months ended September 30, 2021. This increase was primarily due to increases of:

•$3.9 million in cost associated with products used in servicing customers;

•$2.3 million in personnel and related support cost; and

•$0.5 million in facility related costs.

These increases were partially offset by decreases of:

•$2.8 million in reduction of expenses due to the sale of our Canada business; and

•$0.5 million in stock-based compensation.

Selling expenses, excluding capitalized contract costs, increased by $2.3 million, or 2%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase was primarily due to increases of:

•$12.9 million in commissions, recruiting and other costs associated with scaling of our smart energy initiative and to a lesser extent our smart insurance and other pilot initiatives; and

•$1.6 million in marketing costs, primarily associated with lead generation.

These increases were partially offset by decreases of:

•$7.1 million in stock-based compensation;

•$4.4 million in costs associated with building brand awareness;

•$0.4 million in reduction of expenses due to the sale of our Canada business; and

•$0.3 million in equipment and contracted services.

General and administrative expenses decreased $3.9 million, or 6%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This decrease was primarily due to decreases of:

•$3.4 million in stock-based compensation;

•$2.2 million in consulting and legal professional services;

•$1.5 million in marketing costs primarily related to costs associated with building brand awareness;

•$0.9 million in facility related costs; and

•$0.3 million in reduction of expenses due to the sale of our Canada business.

These decreases were offset by increases of:

•$3.4 million in loss contingencies;

•$0.3 million in other personnel and related support costs; and

•$0.2 million in computer software and supplies.

Depreciation and amortization for the three months ended September 30, 2022 increased $5.1 million, or 3%, as compared to the three months ended September 30, 2021, primarily due to increased amortization of capitalized contract costs related to new subscribers, partially offset by a decrease in expense due to the sale of our Canada business.

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Other Expenses, net

The following table provides the significant components of our other expenses, net for the three-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentages):


	Three Months Ended September 30,
	2022		2021		% Change
Interest expense	$	43,510	$	47,120	(8)	%
Interest income	(175)		(126)		39	%
Change in fair value of warrant liabilities	7,891		(15,313)		(152)	%
Other loss, net	9,375		37,329		(75)	%
Total other expenses, net	$	60,601	$	69,010	(12)	%

Interest expense decreased $3.6 million, or 8%, for the three months ended September 30, 2022, as compared with the three months ended September 30, 2021, primarily due to lower outstanding debt principal and interest rates associated with the July 2021 debt refinance (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 September 30, 2022 and September 30, 2021 represents the change in fair value measurements of our outstanding stock warrants, primarily resulting from the change in stock price. See Note 8 to the accompanying unaudited condensed consolidated financial statements for further details on the underlying fair value measurements.

Other loss, net resulted in other loss of $9.4 million for the three months ended September 30, 2022 compared to other loss of $37.3 million for the three months ended September 30, 2021. The other loss during the three months ended September 30, 2022 was primarily due to a $7.8 million loss related to the CFP derivative liability.

The other loss, net during the three months ended September 30, 2021 was primarily due to:

•$30.2 million loss on debt modification and extinguishment;

•$5.9 million loss related to the CFP derivative liability; and

•$1.1 million foreign currency exchange loss.

Income Taxes

The following table provides the income tax expense for the three-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentages):


	Three Months Ended September 30,
	2022		2021		% Change
Income tax expense (benefit)	$	1,551	$	(1,014)	NM

Income tax provision resulted in a tax expense of $1.6 million for the three months ended September 30, 2022 and a tax benefit of $1.0 million for the three months ended September 30, 2021. The income tax expense for the three months ended September 30, 2022 resulted primarily from US state income taxes. The income tax benefit for the three months ended September 30, 2021 resulted primarily from US state income taxes, offset by losses in our Canadian subsidiary.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

Revenues

The following table provides the significant components of our revenue for the nine-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentages):


	Nine Months Ended September 30,
	2022		2021		% Change
Recurring and other revenue	$	1,239,400	$	1,083,174	14	%

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Recurring and other revenue increased $156.2 million, or 14% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase was primarily a result of:

•$106.9 million resulting from the change in Total Subscribers;

•$37.5 million from the change in AMRRU; and

•$35.3 million in non-recurring revenues primarily from our smart energy initiatives.

These increases were partially offset by a decrease of $23.6 million resulting from the change in Total Subscribers from the sale of our Canada business.

Costs and Expenses

The following table provides the significant components of our costs and expenses for the nine-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentages):


	Nine Months Ended September 30,
	2022		2021		% Change
Operating expenses	$	298,571	$	286,353	4	%
Selling expenses	268,073		300,480		(11)	%
General and administrative	171,575		189,267		(9)	%
Depreciation and amortization	468,445		447,863		5	%

Total costs and expenses	$	1,206,664	$	1,223,963	(1)	%

Operating expenses for the nine months ended September 30, 2022 increased $12.2 million, or 4%, as compared to the nine months ended September 30, 2021. The increase was primarily due to increases of:

•$12.2 million in personnel and related support costs;

•$4.5 million in cost of equipment;

•$2.4 million in facility rent and related costs;

•$1.6 million in information technology costs;

•$1.4 million in payment processing fees;

•$1.2 million cost of fuel; and

•$0.3 million in third-party contracted customer servicing costs.

These increases were offset by decreases of:

•$7.7 million in stock-based compensation; and

•$3.9 million in reduction of expenses due to the sale of our Canada business.

Selling expenses, excluding capitalized contract costs, decreased by $32.4 million, or 11%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This decrease was primarily due to decreases of:

•$64.8 million in stock-based compensation;

•$13.8 million in marketing costs primarily related to costs associated with building brand awareness; and

•$1.3 million in reduction of expenses due to the sale of our Canada business.

These decreases were offset by increases of:

•$33.7 million in commissions, recruiting and other costs associated with scaling of our smart energy and smart insurance initiatives;

•$7.1 million in other personnel and related support costs;

•$3.4 million in marketing costs, primarily associated with lead generation; and

•$3.2 million cost of legal and other contracted services.

General and administrative expenses decreased $17.7 million, or 9%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This decrease was primarily due to decreases of:

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•$11.5 million in stock-based compensation;

•$8.9 million in severance costs incurred from the departure of certain corporate executives;

•$4.9 million in third-party contracted service costs;

•$3.2 million in marketing costs primarily related to costs associated with building brand awareness; and

•$1.0 million in facility related costs.

These decreases were offset by increases of:

•$7.9 million in other personnel and related support costs;

•$2.2 million in increase of expenses due to the sale of our Canada business; and

•$1.4 million in costs associated with research and development.

Depreciation and amortization for the nine months ended September 30, 2022 increased $20.6 million, or 5%, as compared to the nine months ended September 30, 2021, primarily due to increased amortization of capitalized contract costs related to new subscribers, partially offset by a decrease in expense due to the sale of our Canada business.

Other Expenses, net

The following table provides the significant components of our other expenses, net for the nine-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentages):


	Nine Months Ended September 30,
	2022		2021		% Change
Interest expense	$	119,904	$	146,981	(18)	%
Interest income	(455)		(280)		63	%
Change in fair value of warrant liabilities	(10,443)		(50,638)		(79)	%
Other (income) loss, net	(5,134)		14,736		(135)	%
Total other expenses, net	$	103,872	$	110,799	(6)	%

Interest expense decreased $27.1 million, or 18%, for the nine months ended September 30, 2022, as compared with the nine months ended September 30, 2021, primarily due to lower outstanding debt principal and interest rates associated with the July 2021 debt refinance (See Note 3 to the accompanying unaudited condensed consolidated financial statements).

Change in fair value of warrant liabilities for each of the nine months ended September 30, 2022 and September 30, 2021 represents the change in fair value measurements of our outstanding public and private placement warrants, primary resulting from the decrease in our stock price. See Note 8 to the accompanying unaudited condensed consolidated financial statements for further details on the underlying fair value measurements.

Other loss, net resulted in other income of $5.1 million for the nine months ended September 30, 2022, as compared to other expense of $14.7 million for the nine months ended September 30, 2021.

The other income, net during the nine months ended September 30, 2022 was primarily due to:

•$25.1 million gain on sale of the Canada business in June 2022;

•$20.8 million loss related to the CFP derivative liability; and

•$1.9 million of consideration for sales of certain technologies.

The other income, net during the nine months ended September 30, 2021 was primarily due to:

•$30.2 million loss on debt modification and extinguishment in July 2021;

•$15.2 million gain related to the CFP derivative liability; and

•$0.3 million foreign currency exchange gain.

Income Taxes

The following table provides the significant components of our income tax expense for the nine-month periods ended September 30, 2022 and September 30, 2021 (in thousands, except for percentages):

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	Nine Months Ended September 30,
	2022		2021		% Change
Income tax expense	$	787	$	500	NM

Income tax expense was $0.8 million for the nine months ended September 30, 2022, as compared to an expense of $0.5 million for the nine months ended September 30, 2021. The income tax expense for the nine months ended September 30, 2022 resulted primarily from US state income taxes and income taxes from our former Canadian subsidiary. The income tax expense for the nine months ended September 30, 2021 resulted primarily from US state income taxes, offset by 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 our Annual Report on Form 10-K for the year ended December 31, 2021. 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 operating activities 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 operating activities, proceeds from issuances of debt securities, borrowings under our credit facilities and, to a lesser extent, capital contributions and issuances of equity. As of September 30, 2022, we had $303.7 million of cash and cash equivalents and $358.9 million of availability under our Revolving Credit Facility (after giving effect to $11.1 million of letters of credit outstanding and no borrowings).

As market conditions warrant, we and our equity holders, 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, commissions we receive related to our smart energy and smart insurance businesses 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, general and administrative costs and smart energy and smart insurance commissions paid to our sales staff. 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):

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	Nine Months Ended September 30,
	2022		2021		% Change
Net cash from operating activities	$	49,578	$	142,130	(65)	%
Net cash from investing activities	72,668		(10,037)		NM
Net cash from financing activities	(26,783)		(165,711)		(84)	%

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 products and services that are adjacent to our current offerings. 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 nine months ended September 30, 2022, net cash provided in operating activities was $49.6 million. This cash provided was primarily from a net loss of $71.9 million, adjusted for:

•$531.5 million in non-cash amortization, depreciation, and stock-based compensation;

•$25.1 million gain on sale of our Canada business;

•$10.4 million gain on change in warrant derivative fair value;

•$26.7 million in provisions for doubtful accounts and credit losses; and

•$3.3 million in deferred income taxes.

Cash provided by operating activities resulting from changes in operating assets and liabilities, including:

•a $191.6 million increase in deferred revenue primarily associated with the sale of Products under the Vivint Flex Pay plan and the increase in Total Subscribers;

•a $26.4 million increase in accounts payable;

•a $11.3 million decrease in long-term notes receivables and other assets, net primarily due to decreases in RIC receivables; and

•a $6.5 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 $564.2 million increase in capitalized contract costs;

•a $30.5 million increase in accounts and notes receivable;

•a $8.3 million increase in prepaid expenses and other current assets;

•a $7.4 million decrease in right of use liabilities; and

•a $26.6 million increase in inventories.

For the nine months ended September 30, 2021, net cash provided in operating activities was $142.1 million. This cash provided was primarily from a net loss of $252.1 million, adjusted for:

•$592.9 million in non-cash amortization, depreciation, and stock-based compensation;

•$50.6 million gain on warrant derivative change in fair value;

•$21.6 million in provisions for doubtful accounts and credit losses; and

•$4.5 million in deferred income taxes.

Cash provided by operating activities resulting from changes in operating assets and liabilities, including:

•a $260.2 million increase in deferred revenue primarily associated with the sale of Products under the Vivint Flex Pay plan and the increase in Total Subscribers;

•a $40.1 million increase in accounts payable;

•a $43.1 million increase in accrued payroll and commissions, accrued expenses, other current and long-term liabilities;

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•a $14.5 million decrease in long-term notes receivables and other assets, net primarily due to decreases in RIC receivables; and

•a $7.7 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 $504.9 million increase in capitalized contract costs;

•a $28.5 million increase in accounts and notes receivable;

•a $12.3 million increase in prepaid expenses and other current assets;

•a $8.5 million decrease in right of use liabilities; and

•a $6.9 million increase in inventories.

Net cash interest paid for the nine months ended September 30, 2022 and 2021 related to our indebtedness (excluding finance leases) totaled $136.1 million and $155.4 million, respectively. Our net cash flows from operating activities for the nine months ended September 30, 2022 and 2021, before these interest payments, were cash inflows of $185.7 million and $297.5 million, respectively. Accordingly, our net cash provided by operating activities were sufficient to cover interest payments for the nine months ended September 30, 2022 and 2021.

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 nine months ended September 30, 2022, net cash provided in investing activities was $72.7 million primarily associated with $86.1 million of net cash received on the sale of the Canada business and proceeds of $2.3 million from the sale of certain assets, offset by capital expenditures of $15.3 million.

For the nine months ended September 30, 2021, net cash used in investing activities was $10.0 million primarily associated with capital expenditures of $10.2 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 nine months ended September 30, 2022, net cash used in financing activities was $26.8 million, consisting of $13.9 million for taxes paid related to net share settlements of stock-based compensation awards and $10.1 million of repayments on existing notes and $2.8 million on repayments of finance lease obligations.

For the nine months ended September 30, 2021, net cash used in financing activities was $165.7 million. Repayments of outstanding debt consisted of $938.1 million, $677.0 million, $400.0 million and $225.0 million aggregate principal amounts of term loans, 2022 Notes, 2023 Notes and 2024 Notes, respectively. Additionally, we incurred $49.7 million in related debt financing costs, $29.4 million for taxes paid related to net share settlements of stock-based compensation awards and $2.5 million of repayments under our finance lease obligations. These cash uses were offset by proceeds from the issuance of $800.0 million aggregate principal amount of 2029 Notes, $1,350.0 million in borrowings under Term Loan Facility and $10.8 million from the exercise of warrants.

Long-Term Debt

We are a highly leveraged company with significant debt service requirements. As of September 30, 2022, we had $2.74 billion of total debt outstanding, consisting of $600.0 million of outstanding 6.75% senior secured notes due 2027 (the “2027 notes”), $800.0 million of outstanding 5.75% senior notes due 2029 (the “2029 notes” and together with the 2027 notes, the “Notes”), $1,336.5 million of borrowings outstanding under the Term Loan Facility and no borrowings outstanding under our Revolving Credit Facility (with $358.9 million of additional availability under the Revolving Credit Facility after giving effect to $11.1 million of letters of credit outstanding).

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2027 Notes

As of September 30, 2022, 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, 2023, 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. 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 Facility, in each case, subject to certain exceptions and permitted liens.

2029 Notes

As of September 30, 2022, APX had $800.0 million outstanding aggregate principal amount of its 2029 notes. Interest on the 2029 notes is payable semiannually in arrears on January 15 and July 15 each year.

We may, at our option, redeem at any time and from time to time prior to July 15, 2024, some or all of the 2029 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 July 15, 2024, we may, at our option, redeem at any time and from time to time some or all of the 2029 notes at 102.875%, declining to par from and after July 15, 2026, in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior to July 15, 2024, we may, at our option, redeem up to 40% of the aggregate principal amount of the 2029 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 July 15, 2024, we may redeem the 2029 notes, in whole or in part, at a redemption price equal to the sum of (A) 100.0% of the principal amount of the 2029 notes redeemed, plus (B) the applicable premium as of the redemption date, plus (C) accrued and unpaid interest, if any.

The 2029 notes will mature on July 15, 2029.

Senior Secured Credit Facilities

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period relevant to such borrowing plus (ii) between 3.50% and 3.00%, depending on the first lien net leverage ratio of the applicable fiscal quarter, subject in each case to an agreed interest rate floor.

There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2022 with $358.9 million of availability under our revolving credit facility (after giving effect to $11.1 million of letters of credit outstanding and no borrowings).

Guarantees and Security (Senior Secured Credit Facilities and Notes)

All of the obligations under the Credit Agreement and the debt agreements governing the Notes are guaranteed by APX Group Holdings, Inc., each of APX Group's existing and future material wholly owned U.S. restricted subsidiaries (subject to customary exclusions and qualifications) and solely in the case of the Notes, Vivint Smart Home, Inc. 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 Term Loan Facility or the Company's other indebtedness.

The obligations under the Senior Secured Credit Facilities and the 2027 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 subsidiary guarantors, including without limitation equipment, subscriber contracts and communication paths, intellectual property, material fee-owned real 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 subsidiary 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 subsidiary guarantors, and the proceeds thereof, subject to permitted liens and other customary exceptions, in each case held by APX Group, Inc. and the subsidiary 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.

Debt Covenants

The Credit Agreement 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 and the debt agreements governing the Notes contain change of control provisions and certain customary affirmative covenants and events of default. As of September 30, 2022, APX Group, Inc. was in compliance with all covenants related to its long-term obligations.

Subject to certain exceptions, the Credit Agreement 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.

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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 the Annual Report on Form 10-K for the year ended December 31, 2021. If those factors significantly change or other unexpected factors adversely affect us, our business may not 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 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 Agreement 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 first lien secured debt ratio of 4.25 to 1.0, a consolidated total debt ratio of 5.50 to 1.0, an incurrence-based minimum fixed charge coverage ratio of 2.00 to 1.0, and, solely in the case of the Revolving Credit Facility, a quarterly maintenance-based maximum consolidated first lien secured debt ratio of 4.99 to 1.0 (subject to certain conditions set forth in the Credit Agreement being satisfied), each as determined in accordance with the Credit Agreement 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 and the debt agreements governing the Notes.

“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 and the Credit Agreement.

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 Agreement governing the Revolving Credit Facility and the Term Loan Facility. 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 September 30, 2022
Net loss	$	(125,387)
Interest expense, net	157,209
Other expense, net	(5,381)

Income tax expense, net	2,758

Depreciation and amortization (1)	72,484
Amortization of capitalized contract costs	549,550
Non-capitalized contract costs (2)	382,035
Stock-based compensation (3)	82,422
Change in fair value of warrant derivative liabilities (4)	(9,912)
Other adjustments (5)	90,361
Covenant Adjusted EBITDA	$	1,196,139

____________________

(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 September 30, 2022
Consumer financing fees (a)	$	54,074
Product development (b)	19,115

Hiring, retention and termination payments (c)	6,477

Monitoring fee (d)	1,295
Certain legal and professional fees (e)	9,534








All other adjustments (f)	(134)
Total other adjustments	$	90,361

____________________

(a)Monthly financing fees incurred under the Consumer Financing Program.

(b)Costs related to the development of control panels, including associated software, and peripheral devices.

(c)Expenses associated with retention bonus, relocation and severance payments to management.

(d)BMP monitoring fee (See Note 13 to the accompanying unaudited condensed consolidated financial statements).

(e)Legal and professional fees associated with strategic initiatives and financing transactions.

(f)Other adjustments primarily reflect costs associated with various strategic, legal and financing activities.

Other Factors Affecting Liquidity and Capital Resources

Vivint Flex Pay. Vivint Flex Pay became our primary equipment financing model beginning in March 2017. Under Vivint Flex Pay, customers pay separately for Products through the CFP. Under the CFP, qualified customers are eligible for 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Vivint Flex Pay” for further details.

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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 September 30, 2022, our total finance lease obligations were $7.8 million, of which $2.6 million is due within the next 12 months.

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ITEM 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks, including the effects of changes in interest rates. We monitor and manage 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 LIBO 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 LIBO rate increases by 1% due to normal market conditions, our interest expense will increase by approximately $17.1 million per annum.

We had no borrowings under the Revolving Credit Facility as of September 30, 2022.


ITEM 4.			CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is 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 our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Internal Control Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022, the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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 September 30, 2022 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 11, 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 Annual Report on Form 10-K for our fiscal year 2021. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for our fiscal year 2021.

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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 settlement of vested and exercised 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
July 1 - 31, 2022	690	$	4.63	—	—
August 1 - 31, 2022	25,392	6.03		—	—
September 1 - 30, 2022	240,785	$	6.46	—	—

(1) Total number of shares delivered to us by employees to satisfy 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

Exhibit
No.

Filing Date

Provided
Herewith

2.1

Agreement and Plan of Merger dated as of September 15, 2019, by and among Mosaic Acquisition Corp., Maiden Merger Sub, Inc. and Vivint Smart Home, Inc.

8-K

2.1

9/16/2019

31.1

Certification of the Registrant’s Chief Executive Officer, David Bywater, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934

31.2

Certification of the Registrant’s Principal Financial Officer, Dana Russell, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934

32.1

Certification of the Registrant’s Chief Executive Officer, David Bywater, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of the Registrant’s Principal Financial Officer, Dana Russell, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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:

November 8, 2022

By:

/s/ David Bywater

David Bywater

Chief Executive Officer and Director
(Principal Executive Officer)

Date:

November 8, 2022

By:

/s/ Dana Russell

Dana Russell

Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)