0001584423-18-000023.txt : 20180801 0001584423-18-000023.hdr.sgml : 20180801 20180801171018 ACCESSION NUMBER: 0001584423-18-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 85 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180801 DATE AS OF CHANGE: 20180801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APX Group Holdings, Inc. CENTRAL INDEX KEY: 0001584423 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 461304852 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-191132-02 FILM NUMBER: 18985662 BUSINESS ADDRESS: STREET 1: 4931 NORTH 300 WEST CITY: PROVO STATE: UT ZIP: 84604 BUSINESS PHONE: (801) 377-9111 MAIL ADDRESS: STREET 1: 4931 NORTH 300 WEST CITY: PROVO STATE: UT ZIP: 84604 10-Q 1 a2018q2document.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________________________________
FORM 10-Q
 _______________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 333-191132-02
__________________________________________________________ 
APX Group Holdings, Inc.
(Exact name of Registrant as specified in its charter)
__________________________________________________________ 
Delaware
 
46-1304852
(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)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (801) 377-9111
__________________________________________________________ 
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  ¨    No  ý
(Note: From January 1, 2018, the registrant has been a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act; as a voluntary filer the registrant filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant would have been required to file such reports) as if it were subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
x  (Do not check if a smaller reporting company)
  
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 August 1, 2018, there were 100 shares of the issuer’s common stock, par value $0.01 per share, issued and outstanding.
 




APX Group Holdings Inc.
FORM 10-Q
TABLE OF CONTENTS
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


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 APX Group Holdings, Inc. and its consolidated subsidiaries;
references to “our Sponsor” are to certain investment funds affiliated with The Blackstone Group L.P.;
references to the “Merger” are to the acquisition of APX Group and two of its affiliates, Vivint Solar, Inc. and 2GIG Technologies, Inc., on November 16, 2012, by an investor group comprised of certain investment funds affiliated with our Sponsor, and certain co-investors and management investors; 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 contained in this Quarterly Report include, but are not limited to, statements about our ability to:
accelerate adoption of our smart home solution;
establish and grow through new customer acquisition channels;
increase brand awareness;
meet customer expectations and address key friction points for smart home adoption and use;
expand our ecosystem with third-party and proprietary devices;
reduce customer attrition;
lower net customer acquisition costs;
improve unit economics and grow subscription revenues per customer over time;
increase new customer originations, customer usage, and customer satisfaction;
develop, design, and sell our own Smart Home Services that are differentiated from those of our competitors;
attract, train and retain an effective sales force and other key personnel;
upgrade and maintain our information technology systems;
acquire and protect intellectual property;
meet future liquidity requirements and comply with restrictive covenants related to our long-term indebtedness;
enhance our future operating and financial results;
comply with laws and regulations applicable to our business; and
successfully defend litigation brought against us.
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 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:
 

3


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 or adverse publicity;
the impact of changes in consumer spending patterns, consumer preferences, local, regional, and national economic conditions, crime, weather, demographic trends and employee availability;
adverse publicity and product liability claims;
increases and/or decreases in utility and other energy costs, increased costs related to utility or governmental requirements;
cost increases or shortages in smart home and security technology products or components;
the introduction of unsuccessful new Smart Home Services;
privacy and data protection laws, privacy or data breaches, or the loss of data; and
the impact to our business, results of operations, financial condition, regulatory compliance and customer experience of the Vivint Flex Pay plan (as defined in Note 1 - Basis of Presentation in the unaudited condensed consolidated financial statements) and our ability to successfully compete in retail sales channels.
In addition, the origination and retention of new subscribers will depend on various factors, including, but not limited to, market availability, subscriber interest, the availability of suitable components, the negotiation of acceptable contract terms with subscribers, local permitting, licensing and regulatory compliance, and our ability to manage anticipated expansion and to hire, train and retain personnel, the financial viability of subscribers and general economic conditions.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report are more fully described in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission (the “SEC”) (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 herein or in the “Risk Factors” section of the 10-K are not exhaustive. Other sections of this Quarterly Report describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.


4


WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website (www.vivint.com), our company blog (blog.vivint.com), corporate Twitter and Instagram accounts (@VivintHome), and our corporate Facebook account (VivintHome) 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.

5


PART I. FINANCIAL INFORMATION
 
ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

APX Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per-share amounts)
 
June 30, 2018
 
December 31, 2017
ASSETS

 

Current Assets:
 
 
 
Cash and cash equivalents
$
4,520

 
$
3,872

Accounts and notes receivable, net
50,640

 
40,721

Inventories
103,407

 
115,222

Prepaid expenses and other current assets
17,894

 
16,150

Total current assets
176,461

 
175,965

 
 
 
 
Property, plant and equipment, net
81,250

 
78,081

Capitalized contract costs, net
1,090,249

 

Subscriber acquisition costs, net

 
1,308,558

Deferred financing costs, net
2,578

 
3,099

Intangible assets, net
300,561

 
377,451

Goodwill
835,816

 
836,970

Long-term notes receivables and other assets, net
111,965

 
88,723

Total assets
$
2,598,880

 
$
2,868,847

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
105,359

 
$
107,347

Accrued payroll and commissions
73,623

 
57,752

Accrued expenses and other current liabilities
104,976

 
74,321

Deferred revenue
152,948

 
88,337

Current portion of capital lease obligations
9,530

 
10,614

Total current liabilities
446,436

 
338,371

 
 
 
 
Notes payable, net
2,762,447

 
2,760,297

Revolving credit facility
160,000

 
60,000

Capital lease obligations, net of current portion
9,056

 
11,089

Deferred revenue, net of current portion
300,045

 
264,555

Other long-term obligations
80,020

 
79,020

Deferred income tax liabilities
8,659

 
9,041

Total liabilities
3,766,663

 
3,522,373

Commitments and contingencies (See Note 11)

 

Stockholders’ deficit:
 
 
 
Common stock, $0.01 par value, 100 shares authorized; 100 shares issued and outstanding

 

Additional paid-in capital
730,839

 
732,346

Accumulated deficit
(1,870,925
)
 
(1,358,571
)
Accumulated other comprehensive loss
(27,697
)
 
(27,301
)
Total stockholders’ deficit
(1,167,783
)
 
(653,526
)
Total liabilities and stockholders’ deficit
$
2,598,880

 
$
2,868,847

See accompanying notes to unaudited condensed consolidated financial statements

6


APX Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Recurring and other revenue
$
254,967

 
$
202,783

 
$
501,564

 
$
399,641

Service and other sales revenue

 
6,358

 

 
11,749

Activation fees

 
2,985

 

 
6,089

Total revenues
254,967

 
212,126

 
501,564

 
417,479

Costs and expenses:
 
 
 
 
 
 
 
Operating expenses (exclusive of depreciation and amortization shown separately below)
89,321

 
77,316

 
173,081

 
148,668

Selling expenses (exclusive of amortization of deferred commissions of $40,167; $20,189; $78,470; and $39,425, respectively, which are included in depreciation and amortization shown separately below)
65,659

 
46,275

 
124,902

 
81,073

General and administrative expenses
49,206

 
38,902

 
100,173

 
77,763

Depreciation and amortization
126,873

 
80,096

 
251,131

 
156,965

Restructuring expenses
4,141

 

 
4,141

 

Total costs and expenses
335,200

 
242,589

 
653,428

 
464,469

Loss from operations
(80,233
)
 
(30,463
)
 
(151,864
)
 
(46,990
)
Other expenses (income):
 
 
 
 
 
 
 
Interest expense
60,327

 
54,958

 
119,117

 
108,639

Interest income

 
(47
)
 
(31
)
 
(104
)
Other loss (income), net
4,731

 
(1,869
)
 
(40,509
)
 
10,197

Loss before income taxes
(145,291
)
 
(83,505
)
 
(230,441
)
 
(165,722
)
Income tax (benefit) expense
(906
)
 
732

 
(1,339
)
 
1,151

Net loss
$
(144,385
)
 
$
(84,237
)
 
$
(229,102
)
 
$
(166,873
)
See accompanying notes to unaudited condensed consolidated financial statements


7


APX Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(144,385
)
 
$
(84,237
)
 
$
(229,102
)
 
$
(166,873
)
Other comprehensive (loss) income, net of tax effects:
 
 
 
 

 

Foreign currency translation adjustment
(417
)
 
1,164

 
(1,076
)
 
1,576

Unrealized gain on marketable securities

 
(401
)
 

 
(258
)
Total other comprehensive (loss) income
(417
)
 
763

 
(1,076
)
 
1,318

Comprehensive loss
$
(144,802
)
 
$
(83,474
)
 
$
(230,178
)
 
$
(165,555
)
See accompanying notes to unaudited condensed consolidated financial statements


8

APX Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)

 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net loss
$
(229,102
)
 
$
(166,873
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Amortization of capitalized contract costs
193,302

 

Amortization of subscriber acquisition costs

 
96,383

Amortization of customer relationships
42,134

 
47,328

Depreciation and amortization of property, plant and equipment and other intangible assets
15,695

 
13,254

Amortization of deferred financing costs and bond premiums and discounts
2,671

 
3,644

Gain on fair value changes of equity securities
(740
)
 

(Gain) loss on sale or disposal of assets
(50,193
)
 
230

Loss on early extinguishment of debt

 
12,751

Stock-based compensation
542

 
886

Provision for doubtful accounts
8,409

 
9,726

Deferred income taxes

 
(450
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(21,069
)
 
(22,640
)
Inventories
11,641

 
(72,914
)
Prepaid expenses and other current assets
(1,753
)
 
(4,604
)
Capitalized contract costs – deferred contract costs
(266,251
)
 

Subscriber acquisition costs – deferred contract costs

 
(212,420
)
Other assets
(20,359
)
 
(46,938
)
Accounts payable
4,214

 
59,335

Accrued expenses and other current liabilities
65,525

 
33,998

Deferred revenue
114,345

 
116,043

Net cash used in operating activities
(130,989
)
 
(133,261
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(12,193
)
 
(11,435
)
Proceeds from the sale of intangible assets
53,693

 

Proceeds from the sale of capital assets
225

 
319

Acquisition of intangible assets
(1,022
)
 
(743
)
Acquisition of other assets

 
(143
)
Net cash provided by (used in) investing activities
40,703

 
(12,002
)
Cash flows from financing activities:
 
 
 
Proceeds from notes payable

 
324,750

Repayment of notes payable

 
(300,000
)
Borrowings from revolving credit facility
179,000

 
113,000

Repayments on revolving credit facility
(79,000
)
 
(13,000
)
Repayments of capital lease obligations
(6,955
)
 
(4,712
)
Payments of other long-term obligations

 
(1,164
)
Financing costs

 
(9,460
)
Deferred financing costs

 
(6,191
)
Return of capital
(2,049
)
 

Net cash provided by financing activities
90,996

 
103,223

Effect of exchange rate changes on cash
(62
)
 
(10
)
Net increase (decrease) in cash and cash equivalents
648

 
(42,050
)
Cash and cash equivalents:
 
 
 
Beginning of period
3,872

 
43,520

End of period
$
4,520

 
$
1,470

Supplemental non-cash investing and financing activities:
 
 
 
Capital lease additions
$
4,137

 
$
1,155

Capital expenditures included within accounts payable and accrued expenses and other current liabilities
$
2,482

 
$
282

Change in fair value of marketable securities
$

 
$
193

See accompanying notes to unaudited condensed consolidated financial statements

9


APX Group Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 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 APX Group Holdings, Inc. and subsidiaries (the “Company”) without audit. The accompanying consolidated financial statements include the accounts of APX Group Holdings, 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, 2017 included in the unaudited condensed consolidated balance sheets was derived from the Company’s audited consolidated financial statements. The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (all of which are considered of a normal recurring nature) considered necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods and dates presented. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
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, 2017, as filed with the Securities and Exchange Commission (“SEC”) on March 6, 2018, 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 APX Group Holdings, Inc. (“Holdings") 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 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.
Vivint Flex Pay—In January 2017, the Company announced the introduction of the Vivint Flex Pay plan (“Vivint Flex Pay”), which became the Company's primary sales 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 options to pay for the Products: (1) qualified customers in the United States may finance the purchase of Products through a third-party financing provider (“Consumer Financing Program”) (2) customers not eligible for the Consumer Financing Program, but who qualify under the Company's underwriting criteria, may enter into a retail installment contract (“RIC”) directly with Vivint, or (3) customers may purchase the Products at the outset of the service contract with check, automatic clearing house payments (“ACH”), credit or debit card.
Although customers pay separately for Products and Services under the Vivint Flex Pay plan, the Company has determined that the shift in model does not change the Company's conclusion 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. Gross deferred revenues are reduced by imputed interest on the RICs and the present value of expected payments due to the third-party financing provider under the Consumer Financing Program.
Under the Consumer Financing Program, qualified customers are eligible for installment loans provided by a third-party financing provider of up to $4,000 for either 42 or 60 months. The Company pays a monthly fee to the third-party financing provider based on the average daily outstanding balance of the installment loans. Additionally, the Company shares liability for credit losses depending on the credit quality of the customer. Because of the nature of these provisions under the Consumer Financing Program, the Company records a derivative liability at its fair value when the third-party financing provider originates installment 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 from the Company to the third-party financing provider. Subsequent changes to the fair value of the derivative liability are realized through other loss/(income), net in the Condensed Consolidated Statement of Operations. (See Note 8).

10


Retail Installment Contract ReceivablesFor customers that enter into a RIC under the Vivint Flex Pay plan, the Company records a receivable for the amount financed. The RIC receivables are recorded at their present value, net of the imputed interest. At the time of installation, the Company records 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.
The Company imputes the interest on the RIC receivable using a risk adjusted market interest rate and records it as an adjustment to deferred revenue and as an adjustment to the face amount of the related receivable. The imputed interest discount considers a number of factors, including collection experience, aging of the remaining RIC receivable portfolios, credit quality of the subscriber base and other qualitative considerations, including macro-economic factors. The imputed interest income is recognized over the term of the RIC contract as recurring and other revenue on the condensed consolidated statement of operations.
When the Company determines that there are RIC receivables that have become uncollectible, the Company records an adjustment to the imputed interest discount and reduce the related note receivable balance. Account balances are written-off if collection efforts are unsuccessful and future collection is unlikely based on the length of time from the day accounts become past due.
Accounts ReceivableAccounts receivable consists primarily of amounts due from customers for recurring monthly monitoring Services and the billed portion of RIC receivables. The accounts receivable are recorded at invoiced amounts and are non-interest bearing and are included within accounts and notes receivable, net on the condensed consolidated balance sheets. Accounts receivable totaled $25.8 million and $24.3 million at June 30, 2018 and December 31, 2017, respectively net of the allowance for doubtful accounts of $4.6 million and $5.4 million at June 30, 2018 and December 31, 2017, respectively. The Company estimates this allowance based on historical collection experience and subscriber attrition rates. When the Company determines that there are accounts receivable that are uncollectible, they are charged off against the allowance for doubtful accounts. As of June 30, 2018 and December 31, 2017, no accounts receivable were classified as held for sale. The provision for doubtful accounts is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and totaled $4.4 million and $5.0 million for the three months ended June 30, 2018 and 2017, respectively, and $8.4 million and $9.7 million for the six months ended June 30, 2018 and 2017, respectively.
The changes in the Company’s allowance for accounts receivable were as follows for the periods ended (in thousands):
 
 
Six Months Ended June 30, 2018
 
Twelve Months Ended December 31, 2017
Beginning balance
$
5,356

 
$
4,138

Provision for doubtful accounts
8,409

 
22,465

Write-offs and adjustments
(9,138
)
 
(21,247
)
Balance at end of period
$
4,627

 
$
5,356

Revenue Recognition— The Company offers its customers smart home services combining Products, including a proprietary control panel, door and window sensors, door locks, security 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. 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 benefit, which is generally three years.

11


The majority of the Company’s subscription contracts are between three and five years in length and are 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 fees or installation fees are invoiced to the customer at the time of sale. Revenues for wireless internet service provided by Vivint Wireless Inc. (“Wireless Internet” or “Wireless”) and any Products or Services that are considered separate performance obligations are recognized when those Products or Services are delivered. Taxes collected from customers and remitted to governmental authorities are not included in revenue. Payments received or amounts billed in advance of revenue recognition are reported as deferred revenue.
Deferred Revenue— The Company's deferred revenues primarily consist of amounts for sales (including upfront proceeds) of Smart Home Services. Deferred revenues are recognized over the term of the related performance obligation.
Capitalized Contract CostsCapitalized 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 customer contracts. These include commissions, other compensation and related costs paid 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. These costs are deferred and amortized on a straight-line basis over the expected period of benefit that the Company has determined to be five years. Amortization of capitalized contract costs is included in “Depreciation and Amortization” on the consolidated statements of operations. These deferred costs are periodically reviewed for impairment. Contract costs not directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related customer contracts are expensed as incurred. These costs include those associated with housing, marketing and recruiting, non-direct lead generation costs, certain portions of sales commissions and residuals, overhead and other costs considered not directly and specifically tied to the origination of a particular subscriber.
On the 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 customer contracts.
Cash and Cash Equivalents— Cash and cash equivalents consists of highly liquid investments with remaining maturities when purchased of three months or less.
Inventories —Inventories, which are comprised of smart home and security system Products and parts, are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out (FIFO) method. The Company adjusts the inventory balance based on anticipated obsolescence, usage and historical write-offs.
Long-lived Assets and IntangiblesProperty, plant and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives of the assets or the lease term for assets under capital leases, whichever is shorter. Intangible assets with definite lives are amortized over the remaining estimated economic life of the underlying technology or relationships, which ranges from five to ten years. Definite-lived intangible assets are amortized on the straight-line method over the estimated useful life of the asset or in a pattern in which the economic benefits of the intangible asset are consumed. Amortization expense associated with leased assets is included with depreciation expense. Routine repairs and maintenance are charged to expense as incurred.
The Company reviews long-lived assets, including property, plant and equipment, capitalized contract costs, and definite-lived intangibles for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers whether or not indicators of impairment exist on a regular basis and as part of each quarterly and annual financial statement close process. Factors the Company considers in determining whether or not indicators of impairment exist include market factors and patterns of customer attrition. If indicators of impairment are identified, the Company estimates the fair value of the assets. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company conducts an indefinite-lived intangible impairment analysis annually as of October 1, and as necessary if changes in facts and circumstances indicate that the fair value of the Company’s indefinite-lived intangibles may be less than the carrying amount. When indicators of impairment do not exist and certain accounting criteria are met, the Company is able to evaluate indefinite-lived intangible impairment using a qualitative approach. When necessary, the Company’s quantitative impairment test consists of two steps. The first step requires that the Company compare the estimated fair value of its indefinite-lived intangibles to the carrying value. If the fair value is greater than the carrying value, the intangibles are not

12


considered to be impaired and no further testing is required. If the fair value is less than the carrying value, an impairment loss in an amount equal to the difference is recorded.
During the three and six months ended June 30, 2018 and 2017, no impairments to long-lived assets or intangibles were recorded.
The Company’s depreciation and amortization included in the consolidated statements of operations consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Amortization of capitalized contract costs
$
97,937

 
$

 
$
193,302

 
$

Amortization of subscriber acquisition costs

 
49,501

 

 
96,383

Amortization of definite-lived intangibles
22,732

 
25,368

 
45,452

 
50,720

Depreciation of property, plant and equipment
6,204

 
5,227

 
12,377

 
9,862

Total depreciation and amortization
$
126,873

 
$
80,096

 
$
251,131

 
$
156,965

Wireless Spectrum Licenses—The Company had capitalized, as an intangible asset, wireless spectrum licenses that its subsidiary, Vivint Wireless, acquired from a third party. The cost basis of the wireless spectrum asset included the purchase price paid for the licenses at the time of acquisition, plus costs incurred to acquire the licenses. The asset and related liability were recorded at the net present value of future cash outflows using the Company's incremental borrowing rate at the time of acquisition.
 The Company determined that the wireless spectrum licenses met the definition of indefinite-lived intangible assets because the licenses were able to be renewed periodically for a nominal fee, provided that the Company continued to meet the service and geographic coverage provisions. During the six months ended June 30, 2018, the Company terminated the wireless spectrum licenses for cash consideration. See Note 7 for further discussion.
Long-term Investments —The Company’s long-term investments are comprised of equity securities in both privately held and public companies. As of June 30, 2018 and December 31, 2017, the Company's equity investments totaled $4.2 million and $3.4 million, respectively.
Management determines the appropriate fair value measurement of its investments at the time of purchase and reevaluates the fair value measurement at each balance sheet date. Equity securities are classified as either short-term or long-term, based on the nature of each security and its availability for use in current operations. The Company’s equity securities are carried at fair value, with gains and losses reported in other income or loss within the statement of operations.
The Company's equity investments without readily determinable fair values totaled $0.7 million as of June 30, 2018 and December 31, 2017, respectively. The Company performs impairment analyses of its investments without readily determinable fair values when events occur or circumstances change that would, more likely than not, reduce the fair value of the investment below its carrying value. When indicators of impairment do not exist, the Company evaluates impairment using a qualitative approach. Additionally, increases or decreases in the carrying amount resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer are adjusted through the statement of operations as needed. As of June 30, 2018 and December 31, 2017, no indicators of impairment or changes in observable prices existed associated with investments without readily determinable fair values.
Deferred Financing Costs —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 incurred with draw downs on APX Group, Inc.’s (“APX”) revolving credit facility will be amortized over the amended maturity dates discussed in Note 3. If such financing is paid off or replaced prior to maturity with debt instruments that have substantially different terms, the unamortized costs are charged to expense. Deferred financing costs included in the accompanying unaudited condensed consolidated balance sheets within deferred financing costs, net at June 30, 2018 and December 31, 2017 were $2.6 million and $3.1 million, net of accumulated amortization of $9.1 million and $8.6 million, respectively. Deferred financing costs included in the accompanying unaudited condensed consolidated balance sheets within notes payable, net at June 30, 2018 and December 31, 2017 were $30.9 million and $35.7 million, net of accumulated amortization of $50.0 million and $45.2 million, respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying unaudited condensed consolidated statements of operations, totaled $2.7

13


million and $2.9 million for the three months ended June 30, 2018 and 2017, respectively and $5.3 million and $5.9 million for the six months ended June 30, 2018 and 2017, respectively (See Note 3).
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”). In addition, during the three months ended June 30, 2018, the Company introduced a new residual sales compensation plan (the “Residual Plan”). Under the Residual Plan, the Company's sales personnel (each, a “Plan Participant”) have the option to convert up to a specified portion of their earnings (as defined in the Residual Plan) into the right to receive monthly residual compensation payable over the life of the subscriber accounts sold by such Plan Participant.
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 initial costs and subsequent adjustments to the estimated liability 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. For the Channel Partner Plan, the amount included in accrued payroll and commissions was $4.4 million and $3.3 million at June 30, 2018 and December 31, 2017, respectively, and the amount included in other long-term obligations was $24.6 million and $18.5 million at June 30, 2018 and December 31, 2017, respectively, representing the present value of the estimated amounts owed to third-party sales channel partners. The impact of the Residual Plan to the Company’s unaudited interim financial statements for the three and six months ended June 30, 2018 was immaterial.
Stock-Based Compensation —The Company measures compensation costs 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).
Advertising Expense —Advertising costs are expensed as incurred. Advertising costs were $8.6 million and $10.2 million for the three months ended June 30, 2018 and 2017, respectively and $21.7 million and $21.1 million for the six months ended June 30, 2018 and 2017, 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.
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 June 30, 2018, approximately 76% of the Company’s installed panels were SkyControl panels and 23% were 2GIG Go!Control panels. During the three months ended March 31, 2018 the Company transitioned to a new panel supplier. The loss of the Company's panel supplier 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.


14


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 six months ended June 30, 2018 and 2017.
The carrying amounts of the Company’s accounts receivable, accounts payable and accrued and other liabilities approximate their fair values due to their short maturities.
Goodwill —The Company conducts a goodwill impairment analysis annually in the fourth fiscal quarter, as of October 1, and as necessary if changes in facts and circumstances indicate that the fair value of the Company’s reporting units may be less than their carrying amounts. When indicators of impairment do not exist and certain accounting criteria are met, the Company is able to evaluate goodwill impairment using a qualitative approach. When necessary, the Company’s quantitative goodwill impairment test consists of two steps. The first step requires that the Company compare the estimated fair value of its reporting units to the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit is greater than the carrying value of its net assets, goodwill is not considered to be impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the Company would be required to complete the second step of the test by analyzing the fair value of its goodwill. If the carrying value of the goodwill exceeds its fair value, an impairment charge is recorded. The Company’s reporting units are determined based on its current reporting structure, which as of December 31, 2017 and June 30, 2018 consisted of two reporting units. As of June 30, 2018, there were no changes in facts and circumstances since the most recent annual impairment analysis to indicate impairment existed.
Foreign Currency Translation and Other Comprehensive Income —The functional currency of Vivint Canada, Inc. is the Canadian dollar. Accordingly, Vivint Canada, Inc. assets and liabilities are translated from their respective functional currencies into U.S. dollars at period-end rates and Vivint Canada, Inc. revenue and expenses are translated at the weighted-average exchange rates for the period. Adjustments resulting from this translation process are classified as other comprehensive income (loss) and shown as a separate component of equity.
When intercompany foreign currency transactions between entities included in the consolidated financial statements are of a long term investment nature (i.e., those for which settlement is not planned or anticipated in the foreseeable future) foreign currency translation adjustments resulting from those transactions are included in stockholders’ deficit as accumulated other comprehensive loss or income. When intercompany transactions are deemed to be of a short term nature, translation adjustments are required to be included in the condensed consolidated statement of operations. The Company has determined that settlement of Vivint Canada, Inc. intercompany balances is anticipated and therefore such balances are deemed to be of a short term nature. Translation activity included in the statement of operations in other loss, net related to intercompany balances was as follows: (in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Translation loss (gain)
$
1,592

 
$
(1,763
)
 
$
3,633

 
$
(2,477
)
Letters of Credit —As of June 30, 2018 and December 31, 2017, the Company had $11.5 million and $9.5 million, respectively, of letters of credit issued in the ordinary course of business, all of which are undrawn.
Restructuring and Asset Impairment Charges —Restructuring and asset impairment charges represent expenses incurred in relation to activities to exit or dispose of portions of the Company's business that do not qualify as discontinued operations. Liabilities associated with restructuring are measured at their fair value when the liability is incurred. Expenses for related termination benefits are recognized at the date the Company notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period. Liabilities related to termination of a contract are measured and recognized at fair value when the contract does not have any future economic benefit to the entity and the fair value of the liability is determined based on the present value of the remaining obligation. The Company expenses all other costs related to an exit or disposal activity as incurred (See Note 14).
Recent Accounting Pronouncements —In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326)” which modifies the measurement of expected credit losses of certain financial instruments. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and must be applied using a modified-retrospective approach, with early adoption permitted. The Company is evaluating the adoption of ASU 2016-13 and plans to provide additional information about its expected impact at a future date.

15



In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 326)” to increase transparency and comparability among organizations as it relates to lease assets and lease liabilities. The update requires that lease assets and lease liabilities be recognized on the balance sheet, and that key information about leasing arrangements be disclosed. Prior to this update, GAAP did not require operating leases to be recognized as lease assets and lease liabilities on the balance sheet. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and must be applied using a modified retrospective approach, with early adoption permitted.
The Company is in the initial stages of evaluating the impact of ASU 2016-02 on its accounting policies, processes, and system requirements. The Company’s current operating lease portfolio is primarily comprised of network, real estate, and equipment leases. Upon adoption of this standard, the Company expects the balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. The Company has assigned internal resources to perform the evaluation. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard.
While the Company continues to assess the potential impacts of ASU 2016-02, including the areas described above, and anticipates this standard could have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements at this time.
Recently Adopted Accounting Standards
ASU 2016-01
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10)" which enhances the reporting model for financial instruments by addressing certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. Key provisions require equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income (loss). In addition, the exit price notion must be used when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2016-01 on January 1, 2018, with a cumulative-effect adjustment to increase accumulated deficit by $0.7 million for the net unrealized losses within accumulated other comprehensive income related to equity investments. During the three and six months ended June 30, 2018, the Company recorded a net gain of $0.4 million and $0.7 million, respectively, to other income associated with the change in fair value of equity investments.
ASU 2014-09
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as the “new standard”.
The Company adopted the new standard as of January 1, 2018, utilizing the modified retrospective method of transition (the cumulative catch-up transition method). Adoption of the new standard resulted in changes to the accounting policies for revenue recognition, deferred revenue, and capitalized contract costs (formerly subscriber acquisition costs). The cumulative effect of applying the new standard to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. The comparative information has not been adjusted and continues to be reported under Topic 605. See Note 2 "Revenue and Capitalized Contract Costs" for additional information related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.


16


NOTE 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. The Company does not generally record any contract assets. 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 records deferred revenues when cash payments are received or due in advance of performance of the Company's obligations, including amounts which are refundable. The increase in the deferred revenue balance during the six months ended June 30, 2018 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $92.1 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2017.
Transaction Price Allocated to the Remaining Performance Obligations
As of June 30, 2018, approximately $2.6 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. The Company expects to recognize revenue on approximately 59% of these remaining performance obligations over the next 24 months, with the remaining balance recognized over an additional 36 months.

Financial Statement Impact of Adopting Topic 606
The Company adopted Topic 606 using the cumulative catch-up transition method. The cumulative effect of applying the new standard to all contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to select consolidated balance sheet line items as of January 1, 2018 (in thousands):
Condensed Consolidated Balance Sheets (unaudited)
 
 
 
 
 
 
 
As Reported
 
Adjustments
 
Adjusted
 
December 31, 2017
 
 
January 1, 2018
Assets
 
 
 
 
 
Capitalized contract costs, net
$

 
$
1,020,408

 
$
1,020,408

Subscriber acquisition costs, net
1,308,558

 
(1,308,558
)
 

Long-term notes receivables and other assets, net
88,723

 
2,713

 
91,436

 
 
 
 
 
 
Liabilities and Stockholders' Deficit
 
 
 
 
 
Accrued expenses and other current liabilities
74,321

 
10,329

 
84,650

Deferred revenue
88,337

 
39,868

 
128,205

Deferred revenue, net of current portion
264,555

 
(53,062
)
 
211,493

Accumulated deficit
(1,358,571
)
 
(282,572
)
 
(1,641,143
)
The following tables compare the select reported condensed consolidated balance sheets, statements of operations and cash flows line items to the amounts had the previous guidance been in effect (in thousands):

17


Condensed Consolidated Balance Sheets (unaudited)

 
 
 
June 30, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
Assets
 
 
 
 
 
Capitalized contract costs, net
$
1,090,249

 
$

 
$
1,090,249

Subscriber acquisition costs, net

 
1,440,736

 
(1,440,736
)
Liabilities and Stockholders' Deficit
 
 
 
 
 
Accrued expenses and other current liabilities
104,976

 
93,668

 
11,308

Deferred revenue
152,948

 
114,922

 
38,026

Deferred revenue, net of current portion
300,045

 
371,791

 
(71,746
)
Accumulated deficit
(1,870,925
)
 
(1,541,807
)
 
(329,118
)
Accumulated other comprehensive loss
(27,697
)
 
(28,740
)
 
1,043

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2018
 
Six months ended June 30, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Recurring and other revenue
$
254,967

 
$
232,780

 
$
22,187

 
$
501,564

 
$
460,074

 
$
41,490

Service and other sales revenue

 
8,763

 
(8,763
)
 

 
16,798

 
(16,798
)
Activation fees

 
2,510

 
(2,510
)
 

 
5,141

 
(5,141
)
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
89,321

 
95,027

 
(5,706
)
 
173,081

 
183,015

 
(9,934
)
Depreciation and amortization
126,873

 
90,321

 
36,552

 
251,131

 
177,810

 
73,321

Loss before income taxes
(145,291
)
 
(125,359
)
 
(19,932
)
 
(230,441
)
 
(186,605
)
 
(43,836
)
Net loss
(144,385
)
 
(124,453
)
 
(19,932
)
 
(229,102
)
 
(185,266
)
 
(43,836
)
Other comprehensive loss, net of tax effects:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(417
)
 
(1,460
)
 
1,043

 
(1,076
)
 
(2,119
)
 
1,043

Total other comprehensive (loss) income
(417
)
 
(1,460
)
 
1,043

 
(1,076
)
 
(2,119
)
 
1,043

Comprehensive loss
(144,802
)
 
(125,913
)
 
(18,889
)
 
(230,178
)
 
(187,385
)
 
(42,793
)

18


Condensed Consolidated Statements of Cashflows (unaudited)

 
 
 
Six Months Ended June 30, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(229,102
)
 
$
(185,266
)
 
$
(43,836
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Amortization of capitalized contract costs
193,302

 

 
193,302

Amortization of subscriber acquisition costs

 
119,981

 
(119,981
)
Changes in operating assets and liabilities:
 
 
 
 
 
Capitalized contract costs – deferred contract costs
(266,251
)
 

 
(266,251
)
Subscriber acquisition costs – deferred contract costs

 
(256,317
)
 
256,317

Deferred revenue
114,345

 
133,896

 
(19,551
)
Net cash used in operating activities
(130,989
)
 
(130,989
)
 

Timing of Revenue Recognition
The Company previously recognized certain service and other sales revenue when the Services were provided or when title to Products sold transferred to the customer. Revenue from the sale of Products that were not part of the service offering (i.e., those Products sold subsequent to the date of the initial installation) were also generally recognized upon delivery of Products. Under the new standard, 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. Accordingly, the Company now defers a larger portion of certain Smart Home Services revenue, as prior to the adoption of Topic 606 certain of this revenue was recognized at the time services were provided or upon delivery.
The Company previously amortized deferred revenues related to sales of Products and activation fees on subscriber contracts over the expected life of the customer, which was 15 years using a 240% declining balance method. Under the new standard, activation fees are included in the transaction price allocated to the single Smart Home Service performance obligation and recognized straight-line 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 previously deferred and amortized these costs for new customer contracts in a pattern that reflected the estimated life of subscriber relationships and generally expensed all costs associated with modified customer contracts. Under the new standard, the Company defers and amortizes these costs for new or modified customer contracts on a straight-line basis over the expected period of benefit of five years.

NOTE 3 – LONG-TERM DEBT
Notes Payable
On November 16, 2012, APX issued $1.3 billion aggregate principal amount of notes, of which $925.0 million aggregate principal amount of 6.375% senior secured notes due 2019 (the “2019 notes”) mature on December 1, 2019 and are secured on a first-priority lien basis by substantially all of the tangible and intangible assets whether now owned or hereafter acquired by the Company, subject to permitted liens and exceptions, and $380.0 million aggregate principal amount of 8.75% senior notes due 2020 (the “2020 notes”), mature on December 1, 2020.

19


During 2013, APX completed two offerings of additional 2020 notes under the indenture dated November 16, 2012. On May 31, 2013, APX issued $200.0 million of 2020 notes at a price of 101.75% and on December 13, 2013, APX issued an additional $250.0 million of 2020 notes at a price of 101.50%.
During 2014, APX issued an additional $100.0 million of 2020 notes at a price of 102.00%.

In October 2015, APX issued $300.0 million aggregate principal amount of 8.875% senior secured notes due 2022 (the “2022 private placement notes”), pursuant to a note purchase agreement dated as of October 19, 2015 in a private placement exempt from registration under the Securities Act. The 2022 private placement notes will mature on December 1, 2022, unless on September 1, 2020 (the 91st day prior to the maturity of the 2020 notes) more than an aggregate principal amount of $190.0 million of such 2020 notes remain outstanding or have not been refinanced as permitted under the note purchase agreement for the 2022 private placement notes, in which case the 2022 private placement notes will mature on September 1, 2020. The 2022 private placement notes are secured, on a pari passu basis, by the collateral securing obligations under the 2019 notes, the 2022 private placement notes, the 2022 notes (as defined below), and the 2023 notes (as defined below) and the revolving credit facilities, in each case, subject to certain exceptions and permitted liens.

In May 2016, APX issued $500.0 million aggregate principal amount of 7.875% senior secured notes due 2022 (the “2022 notes”), pursuant to an indenture dated as of May 26, 2016 among APX, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. The 2022 notes will mature on December 1, 2022, or on such earlier date when any outstanding pari passu lien indebtedness matures as a result of the operation of any “Springing Maturity” provision set forth in the agreements governing such pari passu lien indebtedness. The 2022 notes are secured, on a pari passu basis, by the collateral securing obligations under the 2019 notes and 2022 private placement notes and the revolving credit facilities, in all cases, subject to certain exceptions and permitted liens. APX used a portion of the net proceeds from the issuance of the 2022 notes to repurchase approximately $235 million aggregate principal amount of the outstanding 2019 notes and 2022 private placement notes in privately negotiated transactions and repaid borrowings under the existing revolving credit facility.

In August 2016, APX issued an additional $100.0 million aggregate principal amount of the 2022 notes at a price of 104.00%.

In February 2017, APX issued an additional $300.0 million aggregate principal amount of the 2022 notes at a price of 108.25% (“February 2017 issuance”). A portion of the net proceeds from the offering of these 2022 notes were used to redeem $300.0 million aggregate principal amount of the existing 2019 notes and pay the related accrued interest and redemption premium, and to pay all fees and expenses related thereto and any remaining proceeds will be used for general corporate purposes.

In August 2017, APX issued $400.0 million aggregate principal amount of the 7.625% senior notes due 2023 (the “2023 notes” and, together with the 2019 notes, the 2020 notes and the 2022 private placement notes, the “notes”). The proceeds from the outstanding 2023 notes offering were used to redeem $150.0 million aggregate principal amount of the outstanding 2019 notes and pay the related accrued interest and redemption premium, and to pay all fees and expenses related thereto. Any remaining net proceeds have been or will be used for general corporate purposes, which may include the repayment of outstanding borrowings under the revolving credit facility.

The notes are fully and unconditionally guaranteed, jointly and severally by APX and each of APX’s existing restricted subsidiaries that guarantee indebtedness under APX’s revolving credit facility or the Company's other indebtedness. Interest accrues at the rate of 6.375% per annum for the 2019 notes, 8.75% per annum for the 2020 notes, 8.875% per annum for the 2022 private placement notes, 7.875% per annum for the 2022 notes and 7.625% per annum for the 2023 notes. Interest on the 2019 notes, 2020 notes, 2022 private placement notes and 2022 notes is payable semiannually in arrears on each June 1 and December 1. Interest on the 2023 notes is payable semiannually in arrears on each March 1 and September 1. APX may redeem the notes at the prices and on the terms specified in the applicable indenture or note purchase agreement.

Debt Modifications and Extinguishments
    
In accordance with ASC 470-50 Debt – Modifications and Extinguishments, the Company performed analyses on a creditor-by-creditor basis for the February 2017 issuance to determine if the repurchased notes were substantially different than the notes issued to determine the appropriate accounting treatment of associated issuance fees. As a result of these analyses the company recorded the following amounts of other expense and loss on extinguishment and deferred financing costs during the six months ended June 30, 2017 (in thousands):


20


 
Other expense and loss on extinguishment
 
Deferred financing costs
Issuance
Original discount extinguished
 
Original deferred financing costs extinguished
 
New financing costs
 
Total other expense and loss on extinguishment
 
Original deferred financing rolled over
 
New deferred financing costs
 
Total deferred financing costs
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
February 2017 issuance
$

 
$
3,259

 
$
9,491

 
$
12,750

 
$
1,476

 
$
6,076

 
$
7,552


The original unamortized portion of deferred financing costs associated with new creditors and creditors under the repurchased notes, whose debt instruments were not deemed to be substantially different, will be amortized to interest expense over the life of the issued notes. The Company had no debt issuances or related modification or extinguishment costs during the three and six months ended June 30, 2018 or the three months ended June 30, 2017.

The following table presents deferred financing activity for the six months ended June 30, 2018 and year ended December 31, 2017 (in thousands):
 
Unamortized Deferred Financing Costs
 
Balance December 31, 2017
 
Additions
 
Refinances
 
Early Extinguishment
 
Amortized
 
Balance
June 30,
2018
Revolving Credit Facility
$
3,099

 
$

 
$

 
$

 
$
(521
)
 
$
2,578

2019 Notes
2,877

 

 

 

 
(751
)
 
2,126

2020 Notes
11,209

 

 

 

 
(1,922
)
 
9,287

2022 Private Placement Notes
752

 

 

 

 
(75
)
 
677

2022 Notes
16,067

 

 

 

 
(1,634
)
 
14,433

2023 Notes
4,762

 

 

 

 
(420
)
 
4,342

Total Deferred Financing Costs
$
38,766

 
$

 
$

 
$

 
$
(5,323
)
 
$
33,443

 
Unamortized Deferred Financing Costs
 
Balance December 31, 2016
 
Additions
 
Refinances
 
Early Extinguishment
 
Amortized
 
Balance December 31, 2017
Revolving Credit Facility
$
4,420

 
$
399

 
$

 
$

 
$
(1,720
)
 
$
3,099

2019 Notes
11,693

 

 
(1,949
)
 
(4,667
)
 
(2,200
)
 
2,877

2020 Notes
15,053

 

 

 

 
(3,844
)
 
11,209

2022 Private Placement Notes
903

 

 

 

 
(151
)
 
752

2022 Notes
11,714

 
6,076

 
1,476

 

 
(3,199
)
 
16,067

2023 Notes

 
4,569

 
473

 

 
(280
)
 
4,762

Total Deferred Financing Costs
$
43,783

 
$
11,044

 
$

 
$
(4,667
)
 
$
(11,394
)
 
$
38,766



Revolving Credit Facility
On November 16, 2012, APX entered into a $200.0 million senior secured revolving credit facility, with a five year maturity. On March 6, 2015, APX amended and restated the credit agreement governing the revolving credit facility to provide for, among other things, (1) an increase in the aggregate commitments previously available to APX thereunder from $200.0 million to $289.4 million (“Revolving Commitments”) and (2) the extension of the maturity date with respect to certain of the previously available commitments. On August 10, 2017, APX further amended and restated the credit agreement governing the revolving credit facility to provide for, among other things, (1) an increase in the aggregate commitments previously available

21


to the Company from $289.4 million to $324.3 million and (2) the extension of the maturity date with respect to certain of the previously available commitments.
Borrowings under the amended and restated revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at APX’s option, either (1) the base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined by reference to the London interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based borrowings (1)(a) under the Series A Revolving Commitments of approximately $267.0 million and Series D Revolving Commitments of approximately $15.4 million is currently 2.0% per annum and (b) under the Series B Revolving Commitments of approximately $21.2 million is currently 3.0% and (2)(a) the applicable margin for LIBOR rate-based borrowings (a) under the Series A Revolving Commitments, Series C Revolving Commitments, and Series D Revolving Commitments is currently 3.0% per annum and (b) under the Series B Revolving Commitments is currently 4.0%. The applicable margin for borrowings under the revolving credit facility is subject to one step-down of 25 basis points based on APX meeting a consolidated first lien net leverage ratio test at the end of each fiscal quarter. In November 2017, previous commitments of $20.8 million under the Series C Revolving Commitments had expired. Outstanding borrowings under the amended and restated revolving credit facility are allocated on a pro-rata basis between each Series based on the total Revolving Commitments.
In addition to paying interest on outstanding principal under the revolving credit facility, APX is required to pay a quarterly commitment fee (which will be subject to one interest rate step-down of 12.5 basis points, based on APX meeting a consolidated first lien net leverage ratio test) to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. APX also pays customary letter of credit and agency fees.
APX is not required to make any scheduled amortization payments under the revolving credit facility. The principal amount outstanding under the revolving credit facility will be due and payable in full on (1) with respect to the non-extended commitments under the Series D, March 31, 2019 and (2) with respect to the extended commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2021.
As of June 30, 2018 and December 31, 2017, there were $160.0 million and $60.0 million, respectively, of outstanding borrowings under the credit facility. As of June 30, 2018 the Company had $132.1 million of availability under our revolving credit facility (after giving effect to $11.5 million of letters of credit outstanding and $160.0 million in borrowings).
The Company’s debt at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
 
June 30, 2018
 
Outstanding
Principal
 
Unamortized
Premium (Discount)
 
Unamortized Deferred Financing Costs (1)
 
Net Carrying
Amount
Series D Revolving Credit Facility Due 2019
$
8,108

 
$

 
$

 
$
8,108

Series A, B Revolving Credit Facilities Due 2021
151,892

 

 

 
151,892

6.375% Senior Secured Notes due 2019
269,465

 

 
(2,126
)
 
267,339

8.75% Senior Notes due 2020
930,000

 
3,774

 
(9,287
)
 
924,487

8.875% Senior Secured Notes Due 2022
270,000

 
(2,346
)
 
(677
)
 
266,977

7.875% Senior Secured Notes Due 2022
900,000

 
22,419

 
(14,433
)
 
907,986

7.625% Senior Notes Due 2023
400,000

 

 
(4,342
)
 
395,658

Total Long-Term Debt
$
2,929,465

 
$
23,847

 
$
(30,865
)
 
$
2,922,447


22


 
December 31, 2017
 
Outstanding
Principal
 
Unamortized
Premium (Discount)
 
Unamortized Deferred Financing Costs (1)
 
Net Carrying
Amount
Series D Revolving Credit Facility Due 2019
$
3,000

 
$

 
$

 
$
3,000

Series A, B Revolving Credit Facilities Due 2021
57,000

 

 

 
57,000

6.375% Senior Secured Notes due 2019
269,465

 

 
(2,877
)
 
266,588

8.75% Senior Notes due 2020
930,000

 
4,465

 
(11,209
)
 
923,256

8.875% Senior Secured Notes due 2022
270,000

 
(2,559
)
 
(752
)
 
266,689

7.875% Senior Secured Notes due 2022
900,000

 
24,593

 
(16,067
)
 
908,526

7.625% Senior Secured Notes Due 2023
400,000

 

 
(4,762
)
 
395,238

Total Long-Term Debt
$
2,829,465

 
$
26,499

 
$
(35,667
)
 
$
2,820,297

 
 
(1)
Unamortized deferred financing costs related to the revolving credit facilities included in deferred financing costs, net on the condensed consolidated balance sheets at June 30, 2018 and December 31, 2017 was $2.6 million and $3.1 million, respectively.

23


NOTE 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 condensed consolidated unaudited balance sheets.
The following table summarizes the installment receivables (in thousands):
 
June 30, 2018
 
December 31, 2017
RIC receivables, gross
$
164,236

 
$
131,024

Deferred interest
(38,471
)
 
(36,048
)
RIC receivables, net of deferred interest
$
125,765

 
$
94,976

 
 
 
 
Classified on the condensed consolidated unaudited balance sheets as:
 
 
 
Accounts and notes receivable, net
$
24,882

 
$
16,469

Long-term notes receivables and other assets, net
100,883

 
78,507

RIC receivables, net
$
125,765

 
$
94,976

Activity in the deferred interest for the RIC receivables was as follows (in thousands):
 
Six months ended June 30, 2018
 
Twelve months ended December 31, 2017
Deferred interest, beginning of period
$
36,048

 
$

Write-offs, net of recoveries
(12,464
)
 
(6,055
)
Change in deferred interest on short-term and long-term RIC receivables
14,887

 
42,103

Deferred interest, end of period
$
38,471

 
$
36,048

The amount of RIC imputed interest income recognized in recurring and other revenue was $3.5 million and $1.1 million during the three months ended June 30, 2018 and 2017, respectively, and $6.8 million and $1.2 million during the six months ended June 30, 2018 and 2017, respectively.


24


NOTE 5 – BALANCE SHEET COMPONENTS
The following table presents material balance sheet component balances (in thousands):

 
June 30, 2018
 
December 31, 2017
Prepaid expenses and other current assets
 
 
 
Prepaid expenses
$
13,431

 
$
8,000

Deposits
2,419

 
1,596

Other
2,044

 
6,554

Total prepaid expenses and other current assets
$
17,894

 
$
16,150

Capitalized contract costs
 
 
 
Capitalized contract costs
$
2,134,715

 
$

Accumulated amortization
(1,044,466
)
 

Capitalized contract costs, net
$
1,090,249

 
$

Subscriber acquisition costs
 
 
 
Subscriber acquisition costs
$

 
$
1,837,388

Accumulated amortization

 
(528,830
)
Subscriber acquisition costs, net
$

 
$
1,308,558

Long-term notes receivables and other assets
 
 
 
RIC receivables, gross
$
139,354

 
$
114,556

RIC deferred interest
(38,471
)
 
(36,049
)
Security deposits
6,595

 
6,427

Investments
4,156

 
3,429

Other
331

 
360

Total long-term notes receivables and other assets, net
$
111,965

 
$
88,723

Accrued payroll and commissions
 
 
 
Accrued commissions
$
50,255

 
$
27,485

Accrued payroll
23,368

 
30,267

Total accrued payroll and commissions
$
73,623

 
$
57,752

Accrued expenses and other current liabilities
 
 
 
Accrued interest payable
$
28,534

 
$
28,737

Current portion of derivative liability
43,794

 
25,473

Service warranty accrual
8,958

 

Accrued taxes
5,479

 
4,585

Spectrum license obligation

 
3,861

Accrued payroll taxes and withholdings
3,735

 
3,185

Loss contingencies
3,156

 
2,156

Blackstone monitoring fee, a related party
2,900

 
933

Other
8,420

 
5,391

Total accrued expenses and other current liabilities
$
104,976

 
$
74,321


25


NOTE 6 – PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
Estimated Useful
Lives
Vehicles
$
45,746

 
$
42,008

 
3 - 5 years
Computer equipment and software
50,201

 
46,651

 
3 - 5 years
Leasehold improvements
24,556

 
20,783

 
2 - 15 years
Office furniture, fixtures and equipment
18,883

 
17,202

 
7 years
Build-to-suit lease building
8,268

 
8,268

 
10.5 years
Construction in process
4,457

 
4,299

 
 
Property, plant and equipment, gross
152,111

 
139,211

 
 
Accumulated depreciation and amortization
(70,861
)
 
(61,130
)
 
 
Property, plant and equipment, net
$
81,250

 
$
78,081

 
 

Property, plant and equipment, net includes approximately $27.2 million and $26.2 million of assets under capital lease obligations at June 30, 2018 and December 31, 2017, respectively, net of accumulated amortization of $19.3 million and $16.6 million at June 30, 2018 and December 31, 2017, respectively. Depreciation and amortization expense on all property, plant and equipment was $6.2 million and $5.2 million for the three months ended June 30, 2018 and 2017, respectively and $12.4 million and $9.9 million for the six months ended June 30, 2018 and 2017, respectively. Amortization expense relates to assets under capital leases and is included in depreciation and amortization expense.

26


NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of June 30, 2018 and December 31, 2017, the Company had a goodwill balance of $835.8 million and $837.0 million, respectively. The change in the carrying amount of goodwill during the six months ended June 30, 2018 was the result of foreign currency translation adjustments.
Intangible assets, net
The following table presents intangible asset balances (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
 
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
$
966,848

 
$
(677,652
)
 
$
289,196

 
$
970,147

 
$
(637,780
)
 
$
332,367

 
10 years
2GIG 2.0 technology
17,000

 
(14,283
)
 
2,717

 
17,000

 
(13,274
)
 
3,726

 
8 years
Other technology
2,917

 
(1,458
)
 
1,459

 
2,917

 
(1,250
)
 
1,667

 
5 - 7 years
Space Monkey technology
7,100

 
(4,911
)
 
2,189

 
7,100

 
(4,066
)
 
3,034

 
6 years
Patents
11,470

 
(7,093
)
 
4,377

 
10,616

 
(5,835
)
 
4,781

 
5 years
Total definite-lived intangible assets:
$
1,005,335

 
$
(705,397
)
 
$
299,938

 
$
1,007,780

 
$
(662,205
)
 
$
345,575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Spectrum licenses
$

 
$

 
$

 
$
31,253

 
$

 
$
31,253

 
 
IP addresses
564

 

 
564

 
564

 

 
564

 
 
Domain names
59

 

 
59

 
59

 

 
59

 
 
Total Indefinite-lived intangible assets
623

 

 
623

 
31,876

 

 
31,876

 
 
Total intangible assets, net
$
1,005,958

 
$
(705,397
)
 
$
300,561

 
$
1,039,656

 
$
(662,205
)
 
$
377,451

 
 
During the year ended December 31, 2016, Vivint Wireless entered into leasing agreements with Nextlink Wireless, LLC (“Nextlink”) for designated radio frequency spectrum in 40 mid-sized metropolitan markets. The lease term was for seven years, with an option to become the licensor of record with the Federal Communications Commission (“FCC”) with respect to the applicable spectrum licenses at the end of this term for a nominal fee. The Company acquired $31.3 million of spectrum licenses, measured using the present value of the lease payments, and recorded an intangible asset and a corresponding liability within other long-term obligations. While licenses are issued for only a fixed time, such licenses are subject to renewal by the FCC.
On January 10, 2018, Vivint Wireless and Verizon consummated the transactions contemplated by a termination agreement to which the parties agreed, among other things, to terminate the spectrum leases between Vivint Wireless and Nextlink, a subsidiary of Verizon, in exchange for a cash payment by Verizon to Vivint Wireless. The calculation of the gain recorded included cash proceeds of $55.0 million, extinguishment of the spectrum license liability of $27.9 million, offset by the write-off of the spectrum license asset in the amount of $31.3 million and regulatory costs associated with the sale of $1.3 million for a total net gain on sale of $50.4 million which is included in other income, net in the condensed consolidated statement of operations.
Amortization expense related to intangible assets was approximately $22.7 million and $25.4 million for the three months ended June 30, 2018 and 2017, respectively and $45.5 million and $50.7 million during the six months ended June 30, 2018 and 2017, respectively.

27


As of June 30, 2018, the remaining weighted-average amortization period for definite-lived intangible assets was 4.3 years. Estimated future amortization expense of intangible assets, excluding approximately $0.3 million in patents currently in process, is as follows as of June 30, 2018 (in thousands):
 
 
 
2018 - Remaining Period
$
45,503

2019
78,993

2020
67,808

2021
58,608

2022
48,734

Thereafter
40

Total estimated amortization expense
$
299,686


28


NOTE 8 – FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Equity Securities
Cash equivalents and equity securities with readily available determinable fair values (“Corporate Securities”) are classified as level 1 assets, as they have readily available market prices in an active market. As of June 30, 2018 and December 31, 2017, the Company held an immaterial amount of money market funds. As of June 30, 2018 and December 31, 2017, the company held $3.4 million and $2.7 million, respectively, of Corporate Securities classified as level 1 investments.
The following tables set forth the Company’s cash and cash equivalents and Corporate Securities’ adjusted cost, gross unrealized gains, gross unrealized losses, gross realized gains, gross realized losses and fair value by significant investment category recorded as cash and cash equivalents or long-term notes receivables and other assets, net as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Long-Term Notes Receivables and Other Assets, net
Cash
$
4,514

 
$

 
$

 
$
4,514

 
$
4,514

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
6

 

 

 
6

 
6

 

Corporate securities
2,703

 
741

 

 
3,444

 

 
3,444

Subtotal
2,709

 
741

 

 
3,450

 
6

 
3,444

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,223

 
$
741

 
$

 
$
7,964

 
$
4,520

 
$
3,444

 
December 31, 2017
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Long-Term Notes Receivables and Other Assets, net
Cash
$
3,866

 
$

 
$

 
$
3,866

 
$
3,866

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
6

 

 

 
6

 
6

 

Corporate securities
4,018

 

 
(1,315
)
 
2,703

 

 
2,703

Subtotal
4,024

 

 
(1,315
)
 
2,709

 
6

 
2,703

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,890

 
$

 
$
(1,315
)
 
$
6,575

 
$
3,872

 
$
2,703


The Corporate Securities represents the Company's investment of $3.0 million in publicly traded common stock of a non-affiliated company (“investee”). During the three months ended June 30, 2018 and 2017, the Company recorded an unrealized gain of $0.4 million and an unrealized loss of $0.4 million, respectively, associated with the change in fair value of the investee's stock. During the six months ended June 30, 2018 and 2017, the Company recorded an unrealized gain of $0.7 million and $0.2 million, respectively, associated with the change in fair value of the investee's stock. As of June 30, 2018 the Company had no accumulated other comprehensive income associated with unrealized gains and losses for the change in fair value of the investment as a result of the adoption of ASU 2016-01. The balance of accumulated other comprehensive income associated with unrealized gains and losses for the change in fair value totaled net losses of $0.3 million at December 31, 2017.

The carrying amounts of the Company’s accounts and notes receivable, accounts payable and accrued and other liabilities approximate their fair values.
Long-Term Debt

29


Components of long-term debt including the associated interest rates and related fair values are as follows (in thousands, except interest rates):
 
 
June 30, 2018
 
December 31, 2017
 
Stated Interest Rate
Issuance
 
Face Value
 
Estimated Fair Value
 
Face Value
 
Estimated Fair Value
 
2019 Notes
 
$
269,465

 
$
271,136

 
$
269,465

 
$
273,507

 
6.375
%
2020 Notes
 
930,000

 
892,149

 
930,000

 
952,134

 
8.75
%
2022 Private Placement Notes
 
270,000

 
274,666

 
270,000

 
276,486

 
8.875
%
2022 Notes
 
900,000

 
895,320

 
900,000

 
966,420

 
7.875
%
2023 Notes
 
400,000

 
355,000

 
400,000

 
425,000

 
7.625
%
Total
 
$
2,769,465

 
$
2,688,271

 
$
2,769,465

 
$
2,893,547

 
 
The fair values of the 2019 notes, the 2020 notes, the 2022 private placement notes, the 2022 notes and the 2023 notes were considered Level 2 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.
Derivative Financial Instruments
Under the Consumer Financing Program, the Company pays a monthly fee to a third-party financing provider based on the average daily outstanding balance of the installment loans and 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 loss (income), net in the Consolidated Statement of Operations. The following represent the contractual obligations with the third-party financing provider under the Consumer Financing Program that are components of the derivative:
The Company pays a monthly fee based on the average daily outstanding balance of the installment loans
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 third-party financing provider for each component of the derivative.
The following table summarizes the fair value and the notional amount of the Company’s outstanding derivative instrument as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Consumer Financing Program Contractual Obligations:
 
 
 
Fair value
$
83,294

 
$
46,496

Notional amount
282,337

 
163,032

 
 
 
 
Classified on the condensed consolidated unaudited balance sheets as:
 
 
 
Accrued expenses and other current liabilities
43,794

 
25,473

Other long-term obligations
39,500

 
21,023

Total Consumer Financing Program Contractual Obligation
$
83,294

 
$
46,496


30


Changes in Level 3 Fair Value Measurements
The following table summarizes the change in the fair value of the Level 3 outstanding derivative liability instrument for the six months ended June 30, 2018 and the twelve months ended December 31, 2017 (in thousands):
 
Six months ended June 30, 2018
 
Twelve months ended December 31, 2017
Balance, beginning of period
$
46,496

 
$

Additions
43,534

 
44,913

Settlements
(13,632
)
 
(7,972
)
Losses included in earnings
6,896

 
9,555

Balance, end of period
$
83,294

 
$
46,496



31


NOTE 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 six months ended June 30, 2018 and 2017 was approximately 0.69% and a negative 0.53%, respectively. Income tax expense for the six months ended June 30, 2018 was affected by year to date loss in Canada and estimated minimum state taxes in the US. Both the 2018 and 2017 effective tax rates differ from the statutory rate primarily due to the combination of not benefiting from expected pre-tax US losses, a result of changes to the valuation allowance, and recognizing current state income tax expense for minimum state taxes.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law.  Among other changes in the Tax Reform, effective January 1, 2018, the U.S. statutory tax rate was lowered from 35% to 21%, the deduction for net business interest is limited to 30% of adjusted taxable income, business deductions are disallowed for entertainment expenses, limitation of net operating losses generated after fiscal 2017 to 80% of taxable income, and certain exceptions for performance-based compensation and commissions were eliminated from the definition of applicable employee remuneration subject to a $1.0 million deduction limit.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting relating to Tax Reform under ASC Topic 740. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete, but it is able to determine a reasonable estimate, the company should report a provisional estimate in its financial statements. Where a reasonable estimate cannot be determined, a company should continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform.
The Company has not fully completed its accounting for the income tax effects of Tax Reform but will have an updated analysis at year end.
Items for which a reasonable estimate has been determined include the impact of the change in the corporate tax rate from 35% to 21%, limitation on the current deductibility of net interest expense in excess of 30 percent of adjusted taxable income, changes to the non-deductible executive compensation provisions, and entertainment and other expense deduction limitations.
Other significant provisions that did not have an impact on the interim provision but may impact income taxes at the Company’s year-end or in future years include: a limitation of net operating losses generated after fiscal 2017 to 80% of taxable income, 100% bonus depreciation on certain assets, and the impact of the inclusion of any global intangible low-taxed income, the potential deductions on foreign-derived intangible income and the GILTI inclusion amount, and the base erosion and anti-abuse tax.  
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 valuation allowance against the domestic deferred tax assets that remain after offset by domestic deferred tax liabilities. The Company has not recorded a valuation allowance against its foreign deferred tax assets due to being in a net deferred tax liability position.

32


NOTE 10 – STOCK-BASED COMPENSATION AND EQUITY
313 Incentive Units
The Company’s indirect parent, 313 Acquisition LLC (“313”), which is majority owned by Blackstone, has authorized the award of profits interests, representing the right to share a portion of the value appreciation on the initial capital contributions to 313 (“Incentive Units”). As of June 30, 2018, 85,362,836 Incentive Units had been awarded, and were outstanding, to current and former members of senior management and a board member, of which 42,169,456 were outstanding to the Company’s Chief Executive Officer and President. In June 2018, the Incentive Units and SARs (defined below) vesting terms were modified (“Modification”). Prior to the Modification, the Incentive Units were subject to time-based and performance-based vesting conditions, with (1) one-third subject to ratable time-based vesting over a five year period from the applicable vesting reference date and (2) two-thirds subject to the achievement of certain investment return thresholds by The Blackstone Group, L.P. and its affiliates (“Blackstone”). Pursuant to the Modification the Incentive Units are subject to time-based and performance-based vesting conditions, with (1) one-third subject to ratable time-based vesting over a five year period from the applicable vesting reference date, (2) one-third subject to the achievement of certain investment return thresholds by Blackstone and (3) one-third subject to ratable time-based vesting over a five year period from the applicable vesting reference date or June 2018 for those granted prior to the modification. The Company has not recorded any expense related to the performance-based portion of the awards, as the achievement of the vesting condition is not yet deemed probable. The fair value of stock-based awards is measured at the grant date, or the Modification date, and is recognized as expense over the employee’s requisite service period. The grant date fair value was primarily determined using a Monte Carlo simulation valuation approach with the following assumptions: expected volatility varies from 55% to 125%; expected exercise term between 3.96 and 6.00 years; and risk-free rates between 0.62% and 1.18%.

Vivint Stock Appreciation Rights
The Company’s subsidiary, Vivint Group, Inc. (“Vivint Group”), has awarded Stock Appreciation Rights (“SARs”) to various levels of key employees, pursuant to an omnibus incentive plan. The purpose of the SARs is to attract and retain personnel and provide an opportunity to acquire an equity interest of Vivint Group. Prior to the Modification in June 2018, the SARs were subject to time-based and performance-based vesting conditions, with (1) one-third subject to ratable time-based vesting over a five year period from the applicable vesting reference date and (2) two-thirds subject to the achievement of certain investment return thresholds by Blackstone. Pursuant to the Modification the Incentive Units are subject to time-based and performance-based vesting conditions, with (1) one-third subject to ratable time-based vesting over a five year period from the applicable vesting reference date, (2) one-third subject to the achievement of certain investment return thresholds by Blackstone and (3) one-third subject to ratable time-based vesting over a five year period from the applicable vesting reference date or June 2018 for those granted prior to the modification. The Company has not recorded any expense related to the performance-based portion of the awards, as the achievement of the vesting condition is not yet deemed probable. In connection with this plan, 43,098,869 SARs were outstanding as of June 30, 2018. In addition, 53,621,891 SARs have been set aside for funding incentive compensation pools pursuant to long-term sales and installation employee incentive plans established by the Company.
The fair value of the Vivint Group awards is measured at the grant date, or the Modification date, and is recognized as expense over the employee’s requisite service period. The fair value is determined using a Black-Scholes option valuation model with the following assumptions: expected volatility varies from 55% to 125%, expected dividends of 0%; expected exercise term between 6.00 and 6.47 years; and risk-free rates between 0.61% and 1.77%. Due to the lack of historical exercise data, the Company used the simplified method in determining the estimated exercise term, for all Vivint Group awards.