APX GROUP HOLDINGS, INC., 10-K/A filed on 3/8/2019
Amended Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Mar. 05, 2019
Jun. 29, 2018
Document And Entity Information [Abstract]      
Document Type 10-K/A    
Amendment Flag true    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol ck0001584423    
Entity Registrant Name APX Group Holdings, Inc.    
Entity Central Index Key 0001584423    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Current Reporting Status No    
Entity Voluntary Filers Yes    
Entity Filer Category Non-accelerated Filer    
Entity Common Stock, Shares Outstanding   100  
Entity Public Float     $ 0
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Amendment Description This Amendment No. 1 to APX Group Holdings, Inc.’s Annual Report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2018 is being filed solely for the purpose of (1) filing Exhibits 4.8, 10.18 and 10.31 to the Form 10-K, (2) correcting a clerical error in the disclosure under the heading “Risks Relating to Our Indebtedness” in Part I. Item 1A Risk Factors and (3) correcting a clerical error in Note 5 - Long-Term Debt to the Consolidated Financial Statements of APX Group Holdings, Inc. and Subsidiaries. This amendment speaks as of the original filing date of the Form 10-K and does not reflect events that may have occurred subsequent to the original filing date.    
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current Assets:    
Cash and cash equivalents $ 12,773 $ 3,872
Accounts and notes receivable, net 48,724 40,721
Inventories 50,552 115,222
Prepaid expenses and other current assets 11,449 16,150
Total current assets 123,498 175,965
Property, plant and equipment, net 73,401 78,081
Capitalized contract costs, net 1,115,775 0
Subscriber acquisition costs, net 0 1,308,558
Deferred financing costs, net 2,058 3,099
Intangible assets, net 255,085 377,451
Goodwill 834,855 836,970
Long-term notes receivables and other assets, net 119,819 88,723
Total assets 2,524,491 2,868,847
Current Liabilities:    
Accounts payable 66,646 107,347
Accrued payroll and commissions 65,479 57,752
Accrued expenses and other current liabilities 136,715 74,321
Deferred revenue 186,953 88,337
Current portion of capital lease obligations 7,743 10,614
Total current liabilities 463,536 338,371
Notes payable, net 2,961,947 2,760,297
Notes payable, net - related party 75,148 0
Revolving line of credit 0 60,000
Capital lease obligations, net of current portion 5,571 11,089
Deferred revenue, net of current portion 323,585 264,555
Other long-term obligations 90,209 79,020
Deferred income tax liabilities 1,096 9,041
Total liabilities 3,921,092 3,522,373
Commitments and contingencies (See Note 13)
Stockholders’ deficit:    
Common stock, $0.01 par value, 100 shares authorized; 100 shares issued and outstanding 0 0
Additional paid-in capital 736,333 732,346
Accumulated deficit (2,104,097) (1,358,571)
Accumulated other comprehensive loss (28,837) (27,301)
Total stockholders’ deficit (1,396,601) (653,526)
Total liabilities and stockholders’ deficit $ 2,524,491 $ 2,868,847
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Consolidated Balance Sheets (Parenthetical) - $ / shares
Dec. 31, 2018
Dec. 31, 2017
Statement of Financial Position [Abstract]    
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, outstanding (in shares) 100 100
Common stock, issued (in shares) 100 100
Common stock, authorized (in shares) 100 100
v3.10.0.1
Consolidated Statements of Operations - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Revenues:      
Revenues $ 1,050,441 $ 881,983 $ 757,907
Costs and expenses:      
Operating expenses (exclusive of depreciation and amortization shown separately below) 355,813 321,476 264,865
Selling expenses (exclusive of amortization of deferred commissions of $165,797, $84,152 and $64,007, respectively, which are included in depreciation and amortization shown separately below) 213,386 198,348 131,421
General and administrative expenses 204,536 188,397 143,168
Depreciation and amortization 514,082 329,255 288,542
Restructuring and asset impairment charges 4,683 0 1,013
Total costs and expenses 1,292,500 1,037,476 829,009
Loss from operations (242,059) (155,493) (71,102)
Other expenses (income):      
Interest expense 245,214 225,772 197,965
Interest income (425) (130) (432)
Other (income) loss, net (17,323) 27,986 7,255
Loss before income taxes (469,525) (409,121) (275,890)
Income tax (benefit) expense (1,611) 1,078 67
Net loss (467,914) (410,199) (275,957)
Recurring and other revenue      
Revenues:      
Revenues 1,050,441 843,420 724,478
Service and other sales revenue      
Revenues:      
Revenues 0 26,988 22,855
Activation fees      
Revenues:      
Revenues $ 0 $ 11,575 $ 10,574
v3.10.0.1
Consolidated Statements of Operations (Parenthetical) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Amortization of deferred commissions $ 165,797 $ 84,152 $ 64,007
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Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net loss $ (467,914) $ (410,199) $ (275,957)
Other comprehensive (loss) income, net of tax effects:      
Foreign currency translation adjustment (2,218) 3,155 2,482
Unrealized (loss) gain on marketable securities 0 (1,693) 1,011
Total other comprehensive (loss) income (2,218) 1,462 3,493
Comprehensive loss $ (470,132) $ (408,737) $ (272,464)
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Consolidated Statements of Changes in Equity (Deficit) - USD ($)
$ in Thousands
Total
Common Stock
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Beginning Balance at Dec. 31, 2015 $ (76,993) $ 0 $ 627,645 $ (672,382) $ (32,256)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net loss (275,957)     (275,957)  
Foreign currency translation adjustment 2,482       2,482
Unrealized (loss) gain on marketable securities 1,011       1,011
Stock-based compensation 3,868   3,868    
Capital contribution 100,407   100,407    
Ending Balance at Dec. 31, 2016 (245,182) 0 731,920 (948,339) (28,763)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net loss (410,199)     (410,199)  
Foreign currency translation adjustment 3,155       3,155
Unrealized (loss) gain on marketable securities (1,693)       (1,693)
Stock-based compensation 1,544   1,577 (33)  
Return of capital to Vivint Smart Home, Inc. (1,151)   (1,151)    
Ending Balance at Dec. 31, 2017 (653,526) 0 732,346 (1,358,571) (27,301)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Net loss (467,914)     (467,914)  
Foreign currency translation adjustment (2,218)       (2,218)
Unrealized (loss) gain on marketable securities 0        
Stock-based compensation 2,416   2,416    
Capital contribution 4,700   4,700    
Return of capital to Vivint Smart Home, Inc. (3,129)   (3,129)    
Ending Balance at Dec. 31, 2018 $ (1,396,601) $ 0 $ 736,333 $ (2,104,095) $ (28,839)
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities:      
Net loss from operations $ (467,914) $ (410,199) $ (275,957)
Adjustments to reconcile net loss to net cash used in operating activities of operations:      
Amortization of capitalized contract costs 398,174 0 0
Amortization of subscriber acquisition costs 0 206,153 154,877
Amortization of customer relationships 84,174 94,863 108,178
Gain on fair value changes of equity securities (477) 0 0
Depreciation and amortization of property, plant and equipment and other intangible assets 31,734 28,239 25,488
Amortization of deferred financing costs and bond premiums and discounts 5,152 6,586 10,447
(Gain) loss on sale or disposal of assets (49,762) 458 (33)
Loss on early extinguishment of debt 14,571 23,062 10,085
Stock-based compensation 2,505 1,595 3,868
Provision for doubtful accounts 19,405 22,465 19,624
Deferred income taxes (2,149) 929 (478)
Restructuring and asset impairment charges 0 0 7,126
Changes in operating assets and liabilities, net of acquisitions:      
Accounts and notes receivable, net (34,008) (49,590) (24,338)
Inventories 64,442 (75,580) (11,827)
Prepaid expenses and other current assets 4,695 (5,975) (5,165)
Capitalized contract costs, net 499,252 0 0
Subscriber acquisition costs, net 0 (457,679) (419,509)
Long-term notes receivables and other assets, net (29,118) (74,801) 368
Accounts payable (27,045) 70,525 (2,978)
Accrued payroll and commissions, expenses and other current and long-term liabilities 91,469 62,208 12,702
Restructuring liability 0 (91) (2,797)
Deferred revenue 172,905 247,500 24,613
Net cash used in operating activities (220,499) (309,332) (365,706)
Cash flows from investing activities:      
Subscriber acquisition costs – company owned equipment 0 0 (5,243)
Capital expenditures (19,412) (20,391) (11,642)
Proceeds from the sale of intangible assets 53,693 0 0
Proceeds from the sale of capital assets 127 776 3,123
Acquisition of intangible assets (1,486) (1,745) (1,385)
Acquisition of other assets 0 (301) 0
Net cash provided by (used in) investing activities 32,922 (21,661) (15,147)
Cash flows from financing activities:      
Proceeds from notes payable 759,000 724,750 604,000
Proceeds from notes payable - related party 51,000 0 0
Repayments of notes payable (522,191) (450,000) (235,535)
Borrowings from revolving line of credit 201,000 196,895 57,000
Repayments on revolving line of credit (261,000) (136,895) (77,000)
Repayments of capital lease obligations (12,354) (10,007) (8,315)
Payments of other long-term obligations 0 (2,983) 0
Financing costs (11,317) (18,277) (9,036)
Deferred financing costs (9,302) (11,119) (9,241)
Return of capital (3,129) (1,151) 0
Proceeds from capital contributions 4,700 0 100,407
Net cash provided by financing activities 196,407 291,213 422,280
Effect of exchange rate changes on cash 71 132 (466)
Net increase (decrease) in cash and cash equivalents 8,901 (39,648) 40,961
Cash and cash equivalents:      
Beginning of period 3,872 43,520 2,559
End of period 12,773 3,872 43,520
Supplemental cash flow disclosures:      
Income tax paid 330 219 435
Interest paid 239,441 207,433 189,170
Supplemental non-cash investing and financing activities:      
Capital lease additions 4,569 14,633 8,411
Intangible asset acquisitions included within accounts payable, accrued expenses and other current liabilities and other long-term obligations 974 557 31,283
Capital expenditures included within accounts payable, accrued expenses and other current liabilities 128 2,531 2,345
Change in fair value of equity securities 0 1,314 1,011
Property acquired under build-to-suit agreements included within other long-term obligations $ 0 $ 2,300 $ 4,619
v3.10.0.1
Description of Business
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business
Description of Business
APX Group Holdings, Inc. (“Holdings” or “Parent”), and its wholly-owned subsidiaries, (collectively the “Company”), is one of the largest smart home companies in North America. The Company is engaged in the sale, installation, servicing and monitoring of smart home and security systems, primarily in the United States and Canada. Holdings is wholly-owned by Vivint Smart Home, Inc., which is majority owned by 313 Acquisition, LLC. Vivint Smart Home, Inc. and APX Group Holdings, Inc. have no operations.
v3.10.0.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Significant Accounting Policies
Significant Accounting Policies
Basis of Presentation
The Company has prepared the accompanying consolidated financial statements pursuant to generally accepted accounting principles in the United States (“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 by check, automatic clearing house payments (“ACH”), credit or debit card.
Although customers pay separately for the Products and Services under the Vivint Flex Pay plan, the Company has determined that the shift in its sales 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 Consolidated Statement of Operations. (See Note 9).

Retail Installment Contract Receivables
For 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 discount. At the time of installation, the Company records a long-term note receivable within long-term notes receivables and other assets, net on the 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 consolidated balance sheets. The billed amounts of notes receivables are included in accounts receivable within accounts and notes receivable, net on the 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 consolidated statement of operations.
When the Company determines that there are RIC receivables that have become uncollectible, it records an adjustment to the imputed interest discount and reduces 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. (See Note 4).
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.
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.
Accounts Receivable
Accounts 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 consolidated balance sheets. Accounts receivable totaled $16.5 million and $24.3 million and December 31, 2018 and 2017, respectively net of the allowance for doubtful accounts of $5.6 million and $5.4 million at December 31, 2018 and 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. The provision for doubtful accounts is included in general and administrative expenses in the accompanying consolidated statements of operations and totaled $19.4 million and $22.5 million for the years ended December 31, 2018 and 2017, respectively.
The changes in the Company’s allowance for accounts receivable were as follows for the periods ended (in thousands):
 
 
Year ended December 31,
 
2018
 
2017
 
2016
Beginning balance
$
5,356

 
$
4,138

 
$
3,541

Provision for doubtful accounts
19,405

 
22,465

 
19,624

Write-offs and adjustments
(19,167
)
 
(21,247
)
 
(19,027
)
Balance at end of period
$
5,594

 
$
5,356

 
$
4,138


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 10).
Principles of Consolidation
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.
Capitalized Contract Costs
Capitalized contract costs represent the costs directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related customer contracts. These include commissions, other compensation and related costs incurred directly for the origination and installation of new or upgraded customer contracts, as well as the cost of Products installed in the customer home at the commencement or modification of the contract. 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 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 equipment and parts are stated at the lower of cost or market 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.
Property, Plant and Equipment and Long-lived Assets
Property, plant and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives of the assets or the lease term for assets under 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 5 to 10 years. Definite-lived intangible assets are amortized on the straight-line method over the estimated useful life of the asset or in a pattern in which the economic benefits of the intangible asset are consumed. Amortization expense associated with leased assets is included 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 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 years ended December 31, 2018, 2017 and 2016, 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):
 
Year ended December 31,
 
2018
 
2017
 
2016
Amortization of capitalized contract costs
$
398,174

 
$

 
$

Amortization of subscriber acquisition costs

 
206,153

 
154,877

Amortization of definite-lived intangibles
90,945

 
101,827

 
116,865

Depreciation of property, plant and equipment
24,963

 
21,275

 
16,800

Total depreciation and amortization
$
514,082

 
$
329,255

 
$
288,542



Wireless Spectrum Licenses
The Company had capitalized as an intangible asset wireless spectrum licenses that were acquired from third parties. The cost basis of the wireless spectrum asset includes 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. In January 2018, the Company terminated the wireless spectrum licenses for cash consideration. See Note 8 for further discussion.
 Long-term Investments
The Company’s long-term investments are composed of equity securities in both privately held and public companies. As of December 31, 2018 and 2017, the Company's equity investments totaled $3.9 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 as of both December 31, 2018 and 2017 totaled $0.7 million. The Company performs impairment analyzes of its cost based investments 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 December 31, 2018, no indicators of impairment or changes in observable prices existed associated with investments without readily determinable fair values.
Deferred Financing Costs
Certain costs incurred in connection with obtaining debt financing are deferred and amortized utilizing the straight-line method, which approximates the effective-interest method, over the life of the related financing. Deferred financing costs associated with obtaining APX's revolving credit facility are amortized over the amended maturity dates discussed in Note 5. 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 consolidated balance sheets within deferred financing costs, net at December 31, 2018 and 2017 were $2.1 million and $3.1 million, net of accumulated amortization of $9.6 million and $8.6 million, respectively. Deferred financing costs included in the accompanying consolidated balance sheets within notes payable, net at December 31, 2018 and 2017 were $32.4 million and $35.7 million, net of accumulated amortization of $54.6 million and $45.2 million, respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying consolidated statements of operations totaled $10.4 million, $11.4 million and $11.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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, in 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 costs are recorded to capitalized contract costs. The Company monitors actual payments and customer attrition on a periodic basis and, when necessary, makes adjustments to the liability. The amount included in accrued payroll and commissions was $4.5 million and $3.3 million as of December 31, 2018 and 2017, respectively, and the amount included in other long-term obligations was $13.0 million and $18.5 million at December 31, 2018 and 2017, respectively, representing the present value of the estimated amounts owed to third-party sales channel partners.
Stock-Based Compensation
The Company measures compensation cost based on the grant-date fair value of the award and recognizes that cost over the requisite service period of the awards (See Note 12).
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs were approximately $47.2 million, $42.5 million and $33.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Income Taxes
The Company accounts for income taxes based on the asset and liability method. Under the asset and liability method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets when it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
The Company recognizes the effect of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company’s policy for recording interest and penalties is to record such items as a component of the provision for income taxes.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The Company records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company’s results of operations, financial condition, or cash flows (See Note 11).
Contracts Sold
During the year ended December 31, 2016, the Company sold all of its New Zealand and Puerto Rico subscriber contracts and ceased operations in these geographical regions ("2016 Contract Sales"). As a result, during the year ended December 31, 2016 the Company recorded the impact of these transactions in restructuring and asset impairment (See Note 10).
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 December 31, 2018, approximately 80% of the Company’s installed panels were SkyControl panels and 19% 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.
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 years ended December 31, 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, 2018 consisted of two reporting units. The Company found that no indicators of goodwill impairment existed during the year ended December 31, 2018, thus a qualitative approach was used and it was determined that no impairment existed for goodwill.
During the years ended December 31, 2018, 2017 and 2016, no impairments to goodwill were recorded.
Foreign Currency Translation and Other Comprehensive Income
The functional currencies of Vivint Canada, Inc. and Vivint New Zealand, Ltd. are the Canadian and New Zealand dollars, respectively. Accordingly, assets and liabilities are translated from their respective functional currencies into U.S. dollars at period-end rates and 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 (loss) income and shown as a separate component of equity. During the year ended December 31, 2016, the Company completed the 2016 Contract Sales which included all contracts in the New Zealand, Ltd. entity. (See Note 10)
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) equity 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 consolidated statement of operations. The Company has determined that settlement of Vivint Canada, Inc. and Vivint New Zealand, Ltd. intercompany balances are anticipated and therefore such balances are deemed to be of a short-term nature. Translation activity included in the statements of operations in other loss, net related to intercompany balances was a loss of $7.1 million for the year ended December 31, 2018, a gain of $4.9 million for the year ended December 31, 2017, and a gain of $2.1 million for the year ended December 31, 2016.
Letters of Credit
As of December 31, 2018 and 2017, the Company had $13.8 million and $9.5 million, respectively, of letters of credit issued in the ordinary course of business, all of which are undrawn.
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.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” 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, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11 which provides companies the option to adopt using a modified retrospective approach or a prospective adoption approach.
The Company is continuing its evaluation of the impact of ASU 2016-02 on its accounting policies. 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 to record a right of use asset and liability related to 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.
The Company expects the standard will have a material impact on the Company’s consolidated balance sheets but will not have a material impact on the consolidated statements of operations. The most significant impact will be the recognition of right of use assets and lease liabilities for operating leases. In connection with the adoption of the new lease accounting standard, the Company has completed scoping reviews and continues to make progress implementing new processes, systems, accounting policies and internal controls relevant to the standard. The Company will adopt this standard on January 1, 2019 using the prospective adoption approach and has elected to use the practical expedients allowed under the standard.
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. 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 year ended December 31, 2018, the Company recorded a net loss of $0.3 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 3 "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.
v3.10.0.1
Revenue and Capitalized Contract Costs (Notes)
12 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue and Capitalized Contract Costs
Revenue and Capitalized Contract Costs
Subscribers are typically invoiced for Smart Home Services monthly in advance or at the time the Company delivers the related Smart Home Services. The majority of subscribers pay at the time of invoice via credit card, debit card or ACH. The Company does not generally record any contract assets. The Company records deferred revenues when cash payments (or other consideration) 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 year ended December 31, 2018 was primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $144.1 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 December 31, 2018, approximately $2.2 billion of revenue is expected to be recognized from remaining performance obligations for existing subscription contracts over the remaining contract term and excludes the effect of any cancellations. The Company expects to recognize approximately 62.5% of the revenue related to 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 modified retrospective method. The cumulative effect of applying the new standard to all contracts with subscribers 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 cumulative catch-up adjustments were made to select consolidated balance sheet line items as of January 1, 2018 (in thousands):
Consolidated Balance Sheets
 
 
 
 
 
 
 
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

Deferred income tax liabilities
9,041

 
(5,641
)
 
3,400

Accumulated deficit
(1,358,571
)
 
(276,931
)
 
(1,635,502
)
The following tables compare the select reported consolidated balance sheets, statements of operations and cash flows line items to the amounts had the previous guidance been in effect (in thousands):
Consolidated Balance Sheets

 
 
 
December 31, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
Assets
 
 
 
 
 
Capitalized contract costs, net
$
1,115,775

 
$

 
$
1,115,775

Subscriber acquisition costs, net

 
1,518,188

 
(1,518,188
)
Liabilities and Stockholders' Deficit
 
 

 
 
Accrued expenses and other current liabilities
136,715

 
126,900

 
9,815

Deferred revenue
186,953

 
126,582

 
60,371

Deferred revenue, net of current portion
323,585

 
440,474

 
(116,889
)
Deferred income tax liabilities
1,096

 
8,682

 
(7,586
)
Accumulated deficit
(2,104,097
)
 
(1,754,426
)
 
(349,671
)
Accumulated other comprehensive loss
(28,837
)
 
(30,384
)
 
1,547

Consolidated Statements of Operations and Comprehensive Loss
 
 
 
Year ended December 31, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
Revenues:
 
 
 
 
 
Recurring and other revenue
$
1,050,441

 
$
950,661

 
$
99,780

Service and other sales revenue

 
46,177

 
(46,177
)
Activation fees

 
9,705

 
(9,705
)
Total revenues
1,050,441

 
1,006,543

 
43,898

Costs and expenses:
 
 

 
 
Operating expenses
355,813

 
385,672

 
(29,859
)
Depreciation and amortization
514,082

 
367,879

 
146,203

Loss from operations
(242,059
)
 
(169,613
)
 
(72,446
)
Income tax (benefit) expense
(1,611
)
 
806

 
(2,417
)
Net loss
(467,914
)
 
(397,885
)
 
(70,029
)
Other comprehensive loss, net of tax effects:
 
 

 
 
Foreign currency translation adjustment
(2,218
)
 
(3,765
)
 
1,547

Total other comprehensive (loss) income
(2,218
)
 
(3,765
)
 
1,547

Comprehensive loss
(470,132
)
 
(401,650
)
 
(68,482
)
Consolidated Statements of Cashflows

 
 
 
Year ended December 31, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Higher/(Lower)
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(467,914
)
 
$
(397,885
)
 
$
(70,029
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Amortization of capitalized contract costs
398,174

 

 
398,174

Amortization of subscriber acquisition costs

 
251,971

 
(251,971
)
Changes in operating assets and liabilities:
 
 
 
 
 
Capitalized contract costs – deferred contract costs
(499,252
)
 

 
(499,252
)
Subscriber acquisition costs – deferred contract costs

 
(469,393
)
 
469,393

Accrued expenses and other current liabilities
91,469

 
93,886

 
(2,417
)
Deferred revenue
172,905

 
216,803

 
(43,898
)
Net cash used in operating activities
(220,499
)
 
(220,499
)
 


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 subscriber. 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 subscribers to monitor, control and protect their homes. These Smart Home Services are accounted for as a single performance obligation that is recognized over the subscriber’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, revenues related to sales of Products and activation fees are included in the transaction price allocated to the single Smart Home Service performance obligation and recognized straight-line over the subscriber’s contract term, which is generally three to five years.
Capitalized Contract Costs
Capitalized contract costs generally include commissions, other compensation and related costs incurred directly for the generation and installation of new or modified subscriber contracts, as well as the cost of Products installed in the subscriber's home at the commencement or modification of the contract. The Company previously deferred and amortized these costs for new subscriber contracts in the same manner as deferred revenue and generally expensed all costs associated with modified subscriber contracts. Under the new standard, the Company defers and amortizes these costs for new or modified subscriber contracts on a straight-line basis over the expected period of benefit of five years.
v3.10.0.1
Retail Installment Contract Receivables
12 Months Ended
Dec. 31, 2018
Receivables [Abstract]  
Retail Installment Contract Receivables
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 consolidated balance sheets.
The following table summarizes the installment receivables (in thousands):
 
December 31, 2018
 
December 31, 2017
RIC receivables, gross
$
175,250

 
$
131,024

Deferred interest
(34,163
)
 
(36,048
)
RIC receivables, net of deferred interest
$
141,087

 
$
94,976

 
 
 
 
Classified on the consolidated balance sheets as:
 
 
 
Accounts and notes receivable, net
$
32,185

 
$
16,469

Long-term notes receivables and other assets, net
108,902

 
78,507

RIC receivables, net
$
141,087

 
$
94,976


Activity in the deferred interest for the RIC receivables was as follows (in thousands):
 
For the Years Ended
 
December 31, 2018
 
December 31, 2017
Deferred interest, beginning of period
$
36,048

 
$

Write-offs, net of recoveries
(26,360
)
 
(6,055
)
Change in deferred interest on short-term and long-term RIC receivables
24,475

 
42,103

Deferred interest, end of period
$
34,163

 
$
36,048


During year ended December 31, 2018 and 2017, the amount of RIC imputed interest income recognized in recurring and other revenue was $14.9 million and $7.3 million, respectively.
v3.10.0.1
Long-Term Debt
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Long-Term Debt
Long-Term Debt
Notes Payable
2019 Notes
On November 16, 2012, APX issued $925.0 million aggregate principal amount of 6.375% senior secured notes due 2019 (the “2019 notes”) with a maturity date of December 1, 2019 which were 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.
The Company repurchased $205.5 million, $300.0 million and $150.0 million aggregate principal amount of the outstanding 2019 notes in May 2016, February 2017, and August 2017, respectively. In September 2018, the Company redeemed in full the entire remaining $269.5 million outstanding aggregate principal amount of the 2019 notes.
2020 Notes
On November 16, 2012, APX issued $380.0 million aggregate principal amount of 8.75% senior notes due 2020 (the “2020 notes”) with a maturity date of December 1, 2020.
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 September 2018, the Company repurchased $250.7 million outstanding aggregate principal amount of the 2020 notes.
2022 Private Placement Notes
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 and the Term Loan (as defined below), in each case, subject to certain exceptions and permitted liens.
In May 2016, the Company repurchased $29.5 million outstanding aggregate principal amount of the 2022 private placement notes.
2022 Notes
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, the revolving credit facilities and the Term Loan, 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.
2023 Notes
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”) (“August 2017 issuance”). 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.
All of the obligations under the credit agreement governing the revolving credit facility, the credit agreement governing the Term Loan (defined below) and the debt agreements governing the Existing Notes are guaranteed by APX Group Holdings, Inc. and each of APX Group, Inc.'s existing and future material wholly-owned U.S. restricted subsidiaries. However, such subsidiaries shall only be required to guarantee the obligations under the debt agreements governing the Existing Notes for so long as such entities guarantee the obligations under the revolving credit facility, the credit agreement governing the Term Loan or the Company's other indebtedness. Interest accrues at the rate of 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 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 Existing Notes at the prices and on the terms specified in the applicable indenture, note purchase agreement or credit agreement.
Term Loan
In September 2018, APX entered into a credit agreement (the “September 2018 issuance”) for total term loans of $810.0 million (the “Term Loan”). The Company is required to make quarterly amortization payments under the Term Loan in an amount equal to 0.25% of the aggregate principal amount of Term Loan outstanding on the closing date thereof. The remaining principal amount outstanding under the Term Loan will be due and payable in full on March 31, 2024, or earlier if certain springing maturity conditions apply. The net proceeds from the Term Loan were used in-part to redeem in full the entire $269.5 million outstanding aggregate principal amount of the 2019 Notes and pay the related accrued interest and redemption premium, to repurchase approximately $250.7 million aggregate principal amount of the outstanding 2020 Notes, to repay the outstanding borrowings under the revolving credit facility and to pay fees and expenses related to the Term Loan and the transactions described above.
Borrowings under the Term Loan bear interest at a rate per annum equal to an applicable margin plus, at the Company's option, either (1) the base rate determined by reference to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined by reference to the London interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based borrowings is 4.0% per annum and the applicable margin for LIBOR rate-based borrowings is 5.0% per annum. APX may prepay the Term Loan at the prices and on the terms specified in the credit agreement covering the Term Loan.
Debt Modifications and Extinguishments
In accordance with ASC 470-50 Debt – Modifications and Extinguishments, the Company performed analyses for the September 2018, August 2017 and February 2017 issuances to determine if the notes repurchased with the proceeds from those issuances 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 years ended December 31, 2018, 2017 and 2016 (in thousands):

 
Other expense and loss on extinguishment
 
Deferred financing costs
Issuance
Original premium extinguished
 
Previously deferred financing costs extinguished
 
New financing costs
 
Total other expense and loss on extinguishment
 
Previously deferred financing rolled over
 
New deferred financing costs
 
Total deferred financing costs
For the year ended December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
September 2018 issuance
$
(953
)
 
$
4,207

 
$
11,317

 
$
14,571

 
$

 
$
10,275

 
$
10,275

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
August 2017 issuance
$

 
$
1,408

 
$
8,881

 
$
10,289

 
$
473

 
$
4,569

 
$
5,042

February 2017 issuance

 
3,259

 
9,491

 
12,750

 
1,476

 
6,076

 
7,552

Total
$

 
$
4,667

 
$
18,372

 
$
23,039

 
$
1,949

 
$
10,645

 
$
12,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
May 2016 issuance
$
355

 
$
695

 
$
9,036

 
$
10,086

 
$
3,423

 
$
6,628

 
$
10,051



Deferred financing costs are amortized to interest expense over the life of the issued debt.    The following table presents deferred financing activity for the year ended December 31, 2018 and 2017 (in thousands):

 
Unamortized Deferred Financing Costs
 
Balance 12/31/2017
 
Additions
 
Refinances
 
Early Extinguishment
 
Amortized
 
Balance 12/31/2018
Revolving Credit Facility
$
3,099

 
$

 
$

 
$

 
$
(1,041
)
 
$
2,058

2019 Notes
2,877

 

 

 
(1,877
)
 
(1,000
)
 

2020 Notes
11,209

 

 

 
(2,330
)
 
(3,499
)
 
5,380

2022 Private Placement Notes
752

 

 

 

 
(150
)
 
602

2022 Notes
16,067

 

 

 

 
(3,268
)
 
12,799

2023 Notes
4,762

 

 

 

 
(840
)
 
3,922

Term Loan

 
10,275

 

 

 
(613
)
 
9,662

Total Deferred Financing Costs
$
38,766

 
$
10,275

 
$

 
$
(4,207
)
 
$
(10,411
)
 
$
34,423



 
Unamortized Deferred Financing Costs
 
Balance 12/31/2016
 
Additions
 
Refinances
 
Early Extinguishment
 
Amortized
 
Balance 12/31/2017
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 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 March 31, 2021.
As of December 31, 2018 there was no outstanding borrowings under the revolving credit facility. As of December 31, 2017, there was $3.0 million outstanding borrowings under the revolving credit facility. As of December 31, 2018, the Company had $289.8 million of availability under the revolving credit facility (after giving effect to $13.8 million of outstanding letters of credit and no borrowings).
The Company’s debt at December 31, 2018 and 2017 consisted of the following (in thousands):
 
 
December 31, 2018
 
Outstanding
Principal
 
Unamortized
Premium
(Discount)
 
Unamortized Deferred Financing Costs (1)
 
Net Carrying
Amount
8.75% Senior Notes due 2020
$
679,299

 
$
2,230

 
$
(5,380
)
 
$
676,149

8.875% Senior Secured Notes Due 2022
270,000

 
(2,122
)
 
(602
)
 
267,276

7.875% Senior Secured Notes Due 2022
900,000

 
20,178

 
(12,799
)
 
907,379

7.625% Senior Notes Due 2023
400,000

 

 
(3,922
)
 
396,078

Term Loan - noncurrent
799,875

 

 
(9,662
)
 
790,213

Total Long-Term Debt
3,049,174

 
20,286

 
(32,365
)
 
3,037,095

Term Loan - current
8,100

 

 

 
8,100

Total Debt
$
3,057,274

 
$
20,286

 
$
(32,365
)
 
$
3,045,195

 
 
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 Notes Due 2023
400,000

 

 
(4,762
)
 
395,238

Total 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 consolidated balance sheets at December 31, 2018 and 2017 was $2.1 million and $3.1 million, respectively.
v3.10.0.1
Balance Sheet Components
12 Months Ended
Dec. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
Balance Sheet Components
The following table presents material balance sheet component balances as of December 31, 2018 and December 31, 2017 (in thousands):
 
 
December 31,
 
2018
 
2017
Prepaid expenses and other current assets
 
 
 
Prepaid expenses
$
7,183

 
$
8,000

Deposits
904

 
1,596

Other
3,362

 
6,554

Total prepaid expenses and other current assets
$
11,449

 
$
16,150

Capitalized contract costs
 
Capitalized contract costs
$
2,361,795

 
$

Accumulated amortization
(1,246,020
)
 

Capitalized contract costs, net
$
1,115,775

 
$

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
$
143,065

 
$
114,556

RIC deferred interest
(34,164
)
 
(36,049
)
Security deposits
6,586

 
6,427

Investments
3,865

 
3,429

Other
467

 
360

Total long-term notes receivables and other assets, net
$
119,819

 
$
88,723

Accrued payroll and commissions
 
Accrued payroll
$
36,753

 
$
30,267

Accrued commissions
28,726

 
27,485

Total accrued payroll and commissions
$
65,479

 
$
57,752

Accrued expenses and other current liabilities
 
Accrued interest payable
$
28,885

 
$
28,737

Current portion of derivative liability
67,710

 
25,473

Service warranty accrual
8,813

 

Current portion of notes payable
8,100

 

Blackstone monitoring fee, a related party
4,793

 
933

Accrued taxes
5,351

 
4,585

Spectrum license obligation

 
3,861

Accrued payroll taxes and withholdings
5,097

 
3,185

Loss contingencies
3,131

 
2,156

Other
4,835

 
5,391

Total accrued expenses and other current liabilities
$
136,715

 
$
74,321

v3.10.0.1
Property Plant and Equipment
12 Months Ended
Dec. 31, 2018
Property, Plant and Equipment [Abstract]  
Property Plant and Equipment
Property Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
 
December 31,
 
Estimated
Useful Lives
 
2018
 
2017
 
Vehicles
$
45,050

 
$
42,008

 
3-5 years
Computer equipment and software
53,891

 
46,651

 
3-5 years
Leasehold improvements
26,401

 
20,783

 
2-15 years
Office furniture, fixtures and equipment
19,532

 
17,202

 
7 years
Build-to-suit lease building
8,247

 
8,268

 
10.5 years
Construction in process
2,975

 
4,299

 
 
Property, plant and equipment, gross
156,096

 
139,211

 
 
Accumulated depreciation and amortization
(82,695
)
 
(61,130
)
 
 
Property, plant and equipment, net
$
73,401

 
$
78,081

 
 

Property plant and equipment includes approximately $23.7 million and $26.2 million of assets under capital lease obligations, net of accumulated amortization of $22.2 million and $16.6 million at December 31, 2018 and 2017, respectively. Depreciation and amortization expense on all property plant and equipment was $25.0 million, $21.275 million and $16.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense relates to assets under capital leases as included in depreciation and amortization expense.
In June 2016, the Company entered into a non-cancellable lease to occupy a new building constructed in Logan, UT as a location to further sales recruitment and training, as well as conduct research and development (the "Logan Facility"). Because of its involvement in certain aspects of the construction of the Logan Facility, per the terms of the lease, the Company was deemed the owner of the building for accounting purposes during the construction period. Accordingly, the Company recorded a build-to-suit lease asset and a corresponding build-to-suit lease liability during the construction period.
In April 2017, construction on the Logan Facility was completed and the Company commenced occupancy. In accordance with ASC 840-40 Sale-Leaseback Transactions, the building did not qualify for sale-leaseback treatment. As such, the Company retains the building asset and corresponding lease obligation on the balance sheet.
v3.10.0.1
Goodwill and Intangible Assets
12 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017, were as follows (in thousands):
 
 
 
Balance as of January 1, 2017
$
835,233

Effect of Foreign Currency Translation
1,737

Balance as of December 31, 2017
836,970

Effect of Foreign Currency Translation
(2,115
)
Balance as of December 31, 2018
$
834,855


Intangible assets, net
The following table presents intangible asset balances as of December 31, 2018 and 2017 (in thousands):

 
December 31, 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
$
964,100

 
$
(717,648
)
 
$
246,452

 
$
970,147

 
$
(637,780
)
 
$
332,367

 
10 years
2GIG 2.0 technology
17,000

 
(15,292
)
 
1,708

 
17,000

 
(13,274
)
 
3,726

 
8 years
Other technology
2,917

 
(1,667
)
 
1,250

 
2,917

 
(1,250
)
 
1,667

 
5 - 7 years
Space Monkey technology
7,100

 
(5,756
)
 
1,344

 
7,100

 
(4,066
)
 
3,034

 
6 years
Patents
12,123

 
(8,415
)
 
3,708

 
10,616

 
(5,835
)
 
4,781

 
5 years
Total definite-lived intangible assets:
1,003,240

 
(748,778
)
 
254,462

 
1,007,780

 
(662,205
)
 
345,575

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Spectrum licenses

 

 

 
31,253

 

 
31,253