APX GROUP HOLDINGS, INC., 10-Q filed on 11/8/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Nov. 07, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Entity Registrant Name APX Group Holdings, Inc.  
Entity Common Stock, Shares Outstanding   100
Amendment Flag false  
Document Period End Date Sep. 30, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Central Index Key 0001584423  
Current Fiscal Year End Date --12-31  
Entity Filer Category Non-accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Current Reporting Status No  
Entity Shell Company false  
v3.19.3
Condensed Consolidated Balance Sheets (unaudited) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Current Assets:    
Cash and cash equivalents $ 2,878 $ 12,773
Accounts and notes receivable, net 64,642 48,724
Inventories 99,602 50,552
Prepaid expenses and other current assets 12,685 11,449
Total current assets 179,807 123,498
Property, plant and equipment, net 60,216 73,401
Capitalized contract costs, net 1,247,678 1,115,775
Deferred financing costs, net 1,348 2,058
Intangible assets, net 197,236 255,085
Goodwill 836,040 834,855
Operating lease right-of-use assets 66,792 0
Long-term notes receivables and other assets, net 100,408 119,819
Total assets 2,689,525 2,524,491
Current Liabilities:    
Accounts payable 95,126 66,646
Accrued payroll and commissions 118,608 65,479
Accrued expenses and other current liabilities 177,306 136,715
Deferred revenue 233,783 186,953
Current portion of operating lease liabilities 11,316 0
Current portion of finance lease liabilities 7,577 7,743
Total current liabilities 643,716 463,536
Notes payable, net 2,946,762 2,961,947
Notes payable, net - related party 82,926 75,148
Revolving credit facility 134,000 0
Finance lease liabilities, net of current portion 4,377 5,571
Deferred revenue, net of current portion 418,840 323,585
Operating lease liabilities 65,644 0
Other long-term obligations 92,683 90,209
Deferred income tax liabilities 1,128 1,096
Total liabilities 4,390,076 3,921,092
Commitments and contingencies (See Note 11)
Stockholders’ deficit:    
Common stock, $0.01 par value, 100 shares authorized; 100 shares issued and outstanding 0 0
Additional paid-in capital 738,842 736,333
Accumulated deficit (2,411,357) (2,104,097)
Accumulated other comprehensive loss (28,036) (28,837)
Total stockholders’ deficit (1,700,551) (1,396,601)
Total liabilities and stockholders’ deficit $ 2,689,525 $ 2,524,491
v3.19.3
Condensed Consolidated Balance Sheets (unaudited) (Parenthetical) - $ / shares
Sep. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Common stock, par value (in USD per share) $ 0.01 $ 0.01
Common stock, authorized (in shares) 100 100
Common stock, issued (in shares) 100 100
Common stock, outstanding (in shares) 100 100
v3.19.3
Condensed Consolidated Statements of Operations (unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Revenues:        
Recurring and other revenue $ 290,844 $ 272,335 $ 848,146 $ 773,899
Costs and expenses:        
Operating expenses (exclusive of depreciation and amortization shown separately below) 99,759 92,703 274,848 265,784
Selling expenses (exclusive of amortization of deferred commissions of $45,981, $40,030, $134,299 and $121,609, respectively, which are included in depreciation and amortization shown separately below) 48,348 41,970 149,865 166,872
General and administrative expenses 47,693 50,542 141,471 150,715
Depreciation and amortization 137,536 130,636 403,261 381,767
Restructuring expenses 0 542 0 4,683
Total costs and expenses 333,336 316,393 969,445 969,821
(Loss) income from operations (42,492) (44,058) (121,299) (195,922)
Other expenses (income):        
Interest expense 65,233 61,881 194,798 180,998
Interest income 0 0 (23) (31)
Other (income) expenses, net (5,682) 14,510 (8,126) (25,999)
Loss before income tax expenses (102,043) (120,449) (307,948) (350,890)
Income tax expense (benefit) 249 (223) (604) (1,562)
Net loss $ (102,292) $ (120,226) $ (307,344) $ (349,328)
v3.19.3
Condensed Consolidated Statements of Operations (unaudited) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Income Statement [Abstract]        
Amortization of deferred commissions $ 45,981 $ 40,030 $ 134,299 $ 121,609
v3.19.3
Condensed Consolidated Statements of Comprehensive Loss (unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (102,292) $ (120,226) $ (307,344) $ (349,328)
Other comprehensive (loss) income, net of tax effects:        
Foreign currency translation adjustment (273) 406 801 (670)
Total other comprehensive (loss) income (273) 406 801 (670)
Comprehensive loss $ (102,565) $ (119,820) $ (306,543) $ (349,998)
v3.19.3
Condensed Consolidated Statements of Changes in Equity (Deficit) Statement - USD ($)
$ in Thousands
Total
Common Stock
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Stockholders' equity, beginning balance at Dec. 31, 2017   $ 0 $ 732,346 $ (1,358,571) $ (27,301)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Stock-based compensation     1,651    
Return of capital to Vivint Smart Home, Inc.     (2,369)    
Net Loss       (349,328)  
Foreign currency translation adjustment $ (670)       (670)
Stockholders' equity, ending balance at Sep. 30, 2018 (1,282,114) 0 736,328 (1,991,151) (27,291)
Stockholders' equity, beginning balance at Jun. 30, 2018   0 730,839 (1,870,925) (27,697)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Stock-based compensation     1,109    
Return of capital to Vivint Smart Home, Inc.     (320)    
Capital contribution     4,700    
Foreign currency translation adjustment 406        
Stockholders' equity, ending balance at Sep. 30, 2018 (1,282,114) 0 736,328 (1,991,151) (27,291)
Stockholders' equity, beginning balance at Dec. 31, 2018 (1,396,601) 0 736,333 (2,104,097) (28,837)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Stock-based compensation     3,292    
Return of capital to Vivint Smart Home, Inc.     (5,483)    
Capital contribution     4,700    
Net Loss       (307,344)  
Foreign currency translation adjustment 801       801
Stockholders' equity, ending balance at Sep. 30, 2019 (1,700,551) 0 738,842 (2,411,357) (28,036)
Stockholders' equity, beginning balance at Jun. 30, 2019   0 737,725 (2,309,065) (27,763)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Stock-based compensation     1,458    
Return of capital to Vivint Smart Home, Inc.     (5,041)    
Capital contribution     4,700    
Net Loss       (102,292)  
Foreign currency translation adjustment (273)       (273)
Stockholders' equity, ending balance at Sep. 30, 2019 $ (1,700,551) $ 0 $ 738,842 $ (2,411,357) $ (28,036)
v3.19.3
Condensed Consolidated Statements of Cash Flows (unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities:    
Net loss $ (307,344) $ (349,328)
Adjustments to reconcile net loss to net cash used in operating activities:    
Amortization of capitalized contract costs 323,451 294,802
Amortization of customer relationships 55,896 63,163
Depreciation and amortization of property, plant and equipment and other intangible assets 23,914 23,802
Amortization of deferred financing costs and bond premiums and discounts 3,528 3,944
Gain on fair value changes of equity securities (2,254) (1,385)
Loss (gain) on sale or disposal of assets 591 (49,942)
Loss on early extinguishment of debt 806 14,571
Stock-based compensation 3,292 1,651
Provision for doubtful accounts 16,988 14,318
Deferred income taxes (452) 0
Changes in operating assets and liabilities:    
Accounts and notes receivable, net (29,897) (26,830)
Inventories (48,976) 42,053
Prepaid expenses and other current assets (1,608) (1,327)
Capitalized contract costs, net (453,366) (439,711)
Long-term notes receivables, other assets, net and right-of-use assets 21,787 (30,231)
Accounts payable 22,812 (31,781)
Accrued payroll and commissions, accrued expenses, other current and long-term liabilities, and current and long-term operating lease liabilities 106,623 168,953
Deferred revenue 141,459 173,255
Net cash used in operating activities (122,750) (130,023)
Cash flows from investing activities:    
Capital expenditures (7,080) (15,355)
Proceeds from the sale of intangible assets 0 53,693
Proceeds from the sale of capital assets 578 185
Acquisition of intangible assets (1,393) (1,068)
Proceeds from sales of equity securities 5,430 0
Net cash (used in) provided by investing activities (2,465) 37,455
Cash flows from financing activities:    
Proceeds from notes payable 225,000 759,000
Proceeds from notes payable - related party 0 51,000
Repayment of notes payable (231,075) (520,166)
Borrowings from revolving credit facility 200,500 201,000
Repayments on revolving credit facility (66,500) (261,000)
Proceeds from capital contribution 4,700 4,700
Repayments of finance lease obligations (6,300) (9,882)
Financing costs 0 (11,317)
Deferred financing costs (4,896) (9,302)
Return of capital (6,131) (2,369)
Net cash provided by financing activities 115,298 201,664
Effect of exchange rate changes on cash 22 (2)
Net (decrease) increase in cash and cash equivalents (9,895) 109,094
Cash and cash equivalents:    
Beginning of period 12,773 3,872
End of period 2,878 112,966
Supplemental non-cash investing and financing activities:    
Finance lease additions 5,314 4,432
Intangible assets acquisitions included within accounts payable, accrued expenses and other current liabilities and other long-term obligations 1,700 424
Capital expenditures included within accounts payable 1,653 352
Financing costs included within accounts payable and accrued expenses and other current liabilities $ 0 $ 974
v3.19.3
Basis of Presentation and Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Basis of Presentation and Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
Going Concern
APX Group Holdings, Inc. and subsidiaries (the “Company”) has prepared its unaudited condensed consolidated financial statements assuming that the Company will continue as a going concern. However, if the Company does not make specified debt repayments prior to September 1, 2020, certain other indebtedness will become due and payable on that date as discussed below. The Company has historically generated recurring net losses and negative cash flows from operations and may be unable to refinance its debt or make such specified debt repayments prior to September 1, 2020. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3, certain of the Company’s debt agreements contain “springing maturity” provisions. Under the terms of these springing maturity provisions, if on September 1, 2020 more than $190.0 million aggregate principal amount under the 2020 notes remains outstanding or has not been refinanced, the 2022 notes and 2022 private placement notes will mature on September 1, 2020. If on September 1, 2020 more than $250.0 million aggregate principal amount under the 2020 notes remains outstanding or has not been refinanced, the revolving credit facility will also mature on September 1, 2020. In addition, if on September 1, 2020 more than $275.0 million aggregate principal amount under the 2020 notes remains outstanding or has not been refinanced, the Term Loan and the 2024 notes will also mature on September 1, 2020. As of September 30, 2019, the Company had $454.3 million aggregate principal amount of the 2020 notes outstanding.
As of September 30, 2019, the Company had $2.9 million of cash and cash equivalents and $140.3 million of availability under the Company’s revolving credit facility.
Management plans to use a portion of the proceeds from the Mosaic Merger to repay all of the outstanding 2020 notes, in which case the maturity dates for the debt discussed above would not accelerate to September 1, 2020 from the original maturity dates disclosed in Note 3. There is no assurance that the Mosaic Merger and the associated debt repayment will be completed as currently contemplated or at all. To the extent additional capital is not obtained through the Mosaic Merger, management will seek other forms of financing, which may include issuance of additional equity or debt or other means of timely addressing the Company’s debt obligations. There is no assurance such other forms of financing will be available.
Unaudited Interim Financial Statements
The accompanying interim unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by the Company without audit. The accompanying consolidated financial statements include the accounts of 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, 2018 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes as set forth in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019, 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 condensed consolidated financial statements and accompanying disclosures. Although these estimates are based on the Company’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the Company’s estimates. The results of operations presented herein are not necessarily indicative of the Company’s results for any future period.
Vivint Flex Pay
The Vivint Flex Pay plan (“Vivint Flex Pay”) 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 ways to pay for the Products: (1) qualified customers in the United States may finance the purchase of Products through third-party financing providers (“Consumer Financing Program”), (2) the Company offers to some customers not eligible for the Consumer Financing Program, but who qualify under the Company's underwriting criteria, the option to enter into a retail installment contract (“RIC”) directly with Vivint, or (3) customers may purchase the Products at the outset of the service contract by check, automatic clearing house payments (“ACH”), credit or debit card.
Although customers pay separately for Products and Services under the Vivint Flex Pay plan, the Company has determined that the sale of Products and Services are one single performance obligation. As a result, all forms of transactions under Vivint Flex Pay create deferred revenue for the gross amount of Products sold. Gross deferred revenues are reduced by imputed interest and estimated write-offs 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 loans provided by third-party financing providers up to $4,000. The annual percentage rates on these loans range between 0% and 9.99%, and are either installment or revolving loans with a 42 or 60 month term. Loan terms are determined based on the customer's credit quality.
For certain third-party provider loans, the Company pays a monthly fee based on either the average daily outstanding balance of the loans or the number of outstanding loans, depending on the third-party financing provider and the Company shares liability for credit losses, with the Company being responsible for between 5% and 100% of lost principal balances. Additionally, the Company is responsible for reimbursing certain third-party financing providers for credit card transaction fees associated with the loans. Because of the nature of these provisions, the Company records a derivative liability at its fair value when the third-party financing provider originates loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services. The derivative liability is reduced as payments are made by the Company to the third-party financing provider. Subsequent changes to the fair value of the derivative liability are realized through other expenses (income), net in the Condensed Consolidated Statement of Operations. (See Note 8).
For other third-party loans, the Company receives net proceeds (net of fees and expected losses) for which the Company has no further obligation to the third-party. The Company records these net proceeds to deferred revenue.
Retail Installment Contract Receivables
For subscribers that enter into a RIC to finance the purchase of Products and related installation, the Company records a receivable for the amount financed. Gross RIC receivables are reduced for (i) expected write-offs of uncollectible balances over the term of the RIC and (ii) a present value discount of the expected cash flows using a risk adjusted market interest rate (together, the “RIC Discount”). Therefore, the RIC receivables equal the present value of the expected cash flows to be received by the Company over the term of the RIC. 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 risk adjusted interest rate considers a number of factors, including credit quality of the subscriber base and other qualitative considerations such as macro-economic factors. The imputed interest income is recognized over the term of the RIC contract as recurring and other revenue on the condensed consolidated statements of operations.
When the Company determines that there are RIC receivables that have become uncollectible, it records an adjustment to the RIC Discount and reduces the related note receivable balance. On a regular basis, the Company also assesses the level of the RIC Discount balance based on historical RIC write-off trends and adjusts the balance, if necessary. Account balances are written-off if collection efforts are unsuccessful and future collection is unlikely based on the length of time from the day accounts become past due.
Accounts Receivable
Accounts receivable consists primarily of amounts due from subscribers for recurring monthly monitoring Services 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 $22.1 million and $16.5 million at September 30, 2019 and December 31, 2018, respectively net of the allowance for doubtful accounts of $6.7 million and $5.6 million at September 30, 2019 and December 31, 2018, 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 unaudited condensed consolidated statements of operations and totaled $5.4 million and $5.9 million for the three months ended September 30, 2019 and 2018, respectively, and $17.0 million and $14.3 million for the nine months ended September 30, 2019 and 2018, respectively.
The changes in the Company’s allowance for accounts receivable were as follows (in thousands):
 
 
Nine Months Ended September 30, 2019
 
Twelve Months Ended December 31, 2018
Beginning balance
$
5,594

 
$
5,356

Provision for doubtful accounts
16,988

 
19,405

Write-offs and adjustments
(15,843
)
 
(19,167
)
Balance at end of period
$
6,739

 
$
5,594


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, which is the period in which the parties to the contract have enforceable rights and obligations. The Company has determined that certain contracts that do not require a long-term commitment for monitoring services by the customer contain a material right to renew the contract, because the customer does not have to purchase Products upon renewal. Proceeds allocated to the material right are recognized over the period of benefit, which is generally three years.
The majority of the Company’s subscription contracts are between three and five years in length and are 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 that were 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, which is generally three to five years.
Capitalized Contract Costs
Capitalized contract costs represent the costs directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts. These include commissions, other compensation and related costs incurred directly for the origination and installation of new or upgraded customer contracts, as well as the cost of Products installed in the customer home at the commencement or modification of the contract. 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. The period of benefit of five years is longer than a typical contract term because of anticipated contract renewals. The Company applies this period of benefit to its entire portfolio of contracts. The Company updates its estimate of the period of benefit periodically and whenever events or circumstances indicate that the period of benefit could change significantly. Such changes, if any, are accounted for prospectively as a change in estimate. Amortization of capitalized contract costs is included in “Depreciation and Amortization” on the consolidated statements of operations. 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 subscriber contracts are expensed as incurred. These costs include those associated with housing, marketing and recruiting, non-direct lead generation costs, certain portions of sales commissions and residuals, overhead and other costs considered not directly and specifically tied to the origination of a particular subscriber.
On the condensed consolidated statement of cash flows, capitalized contract costs are classified as operating activities and reported as “Capitalized contract costs – deferred contract costs” as these assets represent deferred costs associated with subscriber contracts.
Cash and Cash Equivalents
Cash and cash equivalents consists of highly liquid investments with remaining maturities when purchased of three months or less.
Inventories
Inventories, which are comprised of smart home and security system 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.
Property, Plant and Equipment and Long-lived Assets
Property, plant and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives of the assets or the lease term for assets under finance leases, whichever is shorter. Intangible assets with definite lives are amortized over the remaining estimated economic life of the underlying technology or relationships, which ranges from 2 to 10 years. Definite-lived intangible assets are amortized on the straight-line method over the estimated useful life of the asset or in a pattern in which the economic benefits of the intangible asset are consumed. Amortization expense associated with leased assets is included 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 three and nine months ended September 30, 2019 and 2018, 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Amortization of capitalized contract costs
$
111,177

 
$
101,498

 
$
323,450

 
$
294,802

Amortization of definite-lived intangibles
20,016

 
22,741

 
60,484

 
68,193

Depreciation of property, plant and equipment
6,343

 
6,397

 
19,327

 
18,772

Total depreciation and amortization
$
137,536

 
$
130,636

 
$
403,261

 
$
381,767


Leases
Effective January 1, 2019 the Company accounts for leases under Topic 842 (see Recently Adopted Accounting Standards below). Under Topic 842, the Company determines if an arrangement is a lease at inception. Lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit rate when available. When implicit rates are not available, the Company uses an incremental borrowing rate based on the information available at commencement date. The lease ROU asset also includes any lease payments made and is reduced by lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not record lease ROU assets and liabilities for leases with terms of 12 months or less.
Leases are classified as either operating or finance at lease inception. Operating lease assets and liabilities and finance lease liabilities are stated separately on the condensed consolidated balance sheets. Finance lease assets are included in property, plant and equipment, net on the condensed consolidated balance sheets.
The Company has lease agreements with lease and non-lease components. For facility type leases, the Company separates the lease and non-lease components. Generally, the Company accounts for the lease and non-lease components as a single lease component for all other class of leases.
Prior to the adoption of Topic 842, the Company's leases were classified as either operating or capital leases. Capital lease liabilities were stated separately on the condensed consolidated balance sheets and capital lease assets were included in property, plant and equipment, net on the condensed consolidated balance sheets. Operating leases were not recognized in the balance sheet. Capital lease balances are presented on the same lines as finance lease balances for comparative prior periods in the unaudited condensed consolidated financial statements. See Recently Adopted Accounting Standards below and note 12 "Leases" for additional information related to the impact of adopting Topic 842.
Long-term Investments
The Company’s long-term investments are composed of equity securities in certain companies. As of December 31, 2018, the Company's equity investments totaled $3.9 million, including $0.7 million of equity investments without readily determinable fair values. The Company did not hold any equity security investments as of September 30, 2019.
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 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.
Deferred Financing Costs
Certain costs incurred in connection with obtaining debt financing are deferred and amortized utilizing the straight-line method, which approximates the effective-interest method, over the life of the related financing. Deferred financing costs associated with obtaining APX Group, Inc.’s (“APX”) revolving credit facility are amortized over the amended maturity dates discussed in Note 3. Deferred financing costs included in the accompanying unaudited condensed consolidated balance sheets within deferred financing costs, net at September 30, 2019 and December 31, 2018 were $1.3 million and $2.1 million, net of accumulated amortization of $10.3 million and $9.6 million, respectively. Deferred financing costs included in the accompanying unaudited condensed consolidated balance sheets within notes payable, net at September 30, 2019 and December 31, 2018 were $29.3 million and $32.4 million, net of accumulated amortization of $61.3 million and $54.6 million, respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying unaudited condensed consolidated statements of operations, totaled $2.4 million and $2.6 million for the three months ended September 30, 2019 and 2018, respectively, and $7.4 million and $7.9 million for the nine months ended September 30, 2019 and 2018, 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”). The Company also has a residual sales compensation plan (the “Residual Plan”) under which the Company's sales personnel (each, a “Plan Participant”) receive compensation based on the performance of the underlying contracts they create.
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 $5.2 million and $4.9 million at September 30, 2019 and December 31, 2018, respectively, and the amount included in other long-term obligations was $27.7 million and $17.6 million at September 30, 2019 and December 31, 2018, respectively.
Stock-Based Compensation
The Company measures compensation cost based on the grant-date fair value of the award and recognizes that cost over the requisite service period of the awards (See Note 10).
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs were $16.1 million and $13.1 million for the three months ended September 30, 2019 and 2018, respectively, and $46.1 million and $34.8 million for the nine months ended September 30, 2019 and 2018, 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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of receivables and cash. At times during the year, the Company maintains cash balances in excess of insured limits. The Company is not dependent on any single customer or geographic location. The loss of a customer would not adversely impact the Company’s operating results or financial position.
Concentrations of Supply Risk
As of September 30, 2019, approximately 87% of the Company’s installed panels were SkyControl panels, 13% were 2GIG Go!Control panels and 1% were other panels. During 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 nine months ended September 30, 2019 and 2018.
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 September 30, 2019 consisted of one reporting unit. As of September 30, 2019, 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 (income) expenses, net related to intercompany balances was as follows: (in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Translation loss (gain)
$
773

 
$
(1,459
)
 
$
(2,082
)
 
$
2,175


Letters of Credit
As of each September 30, 2019 and December 31, 2018, the Company had $13.8 million 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 disposal 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 15).
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.
Recently Adopted Accounting Standards
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.
The Company adopted ASU 2016-02 as of January 1, 2019, utilizing the modified retrospective approach and using certain practical expedients. The adoption of the standard resulted in recording ROU assets of $75.5 million and lease liabilities of $85.9 million as of January 1, 2019. The ROU assets are lower than the lease liabilities as existing deferred rent and lease incentive liabilities were recorded against the ROU assets at adoption in accordance with the standard. The standard did not materially affect the Company's condensed consolidated statements of operations or its condensed consolidated statements of cash flows. The standard also resulted in a reassessment that a sale would have occurred at January 1, 2019 for the Company's build-to-suit building. As a result, the Company classifies the leasing arrangement as an operating lease. The recognition of the sale-leaseback transaction resulted in an immaterial amount recorded to opening equity. See Note 6 for additional information on the sale-leaseback transaction. See Note 12 "Leases" for additional information related to the impact of adopting this standard.
v3.19.3
Revenue and Capitalized Contract Costs
9 Months Ended
Sep. 30, 2019
Revenue from Contract with Customer [Abstract]  
Revenue and Capitalized Contract Costs
Revenue and Capitalized Contract Costs
Customers are typically invoiced for Smart Home Services in advance or at the time the Company delivers the related Smart Home Services. The majority of customers pay at the time of invoice via credit card, debit card or ACH. Deferred revenue relates to the advance consideration received from customers, which precedes the Company’s satisfaction of the associated performance obligation. The Company’s deferred revenues primarily result from customer payments received in advance for recurring monthly monitoring and other Smart Home Services, or other one-time fees, because these performance obligations are satisfied over time.     
During the nine months ended September 30, 2019 and 2018, the Company recognized revenues of $178.4 million and $132.4 million, respectively, that were included in the deferred revenue balance as of December 31, 2018 and 2017, respectively.
Transaction Price Allocated to the Remaining Performance Obligations
As of September 30, 2019, approximately $2.6 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. The Company expects to recognize approximately 60% of the revenue related to these remaining performance obligations over the next 24 months, with the remaining balance recognized over an additional 36 months.
Timing of Revenue Recognition
The Company considers Products, related installation, and its proprietary back-end cloud platform software and services an integrated system that allows the Company’s customers to monitor, control and protect their homes. These Smart Home Services are accounted for as a single performance obligation that is recognized over the customer’s contract term, which is generally three to five years.
Capitalized Contract Costs
Capitalized contract costs generally include commissions, other compensation and related costs paid directly for the generation and installation of new or modified customer contracts, as well as the cost of Products installed in the customer home at the commencement or modification of the contract. The Company defers and amortizes these costs for new or modified subscriber contracts on a straight-line basis over the expected period of benefit of five years.
v3.19.3
Long-Term Debt
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Long-Term Debt
Long-Term Debt
The Company’s debt at September 30, 2019 and December 31, 2018 consisted of the following (in thousands): 
 
September 30, 2019
 
Outstanding
Principal
 
Unamortized
Premium (Discount)
 
Unamortized Deferred Financing Costs (1)
 
Net Carrying
Amount
Senior Secured Revolving Credit Facilities
$
134,000

 
$

 
$

 
$
134,000

8.750% Senior Notes due 2020
454,299

 
935

 
(2,190
)
 
453,044

8.875% Senior Secured Notes Due 2022
270,000

 
(1,768
)
 
(489
)
 
267,743

7.875% Senior Secured Notes Due 2022
900,000

 
16,679

 
(10,348
)
 
906,331

7.625% Senior Notes Due 2023
400,000

 

 
(3,292
)
 
396,708

8.500% Senior Secured Notes Due 2024
225,000

 

 
(4,656
)
 
220,344

Senior Secured Term Loan - noncurrent
793,800

 

 
(8,282
)
 
785,518

Total Long-Term Debt
3,177,099

 
15,846

 
(29,257
)
 
3,163,688

Senior Secured Term Loan - current
8,100

 

 

 
8,100

Total Debt
$
3,185,199

 
$
15,846

 
$
(29,257
)
 
$
3,171,788

 
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

Senior Secured Term Loan - noncurrent
799,875

 

 
(9,662
)
 
790,213

Total Long-Term Debt
3,049,174

 
20,286

 
(32,365
)
 
3,037,095

Senior Secured Term Loan - current
8,100

 

 

 
8,100

Total Debt
$
3,057,274

 
$
20,286

 
$
(32,365
)
 
$
3,045,195

 
 
(1)
Unamortized deferred financing costs related to the revolving credit facilities included in deferred financing costs, net on the condensed consolidated balance sheets at September 30, 2019 and December 31, 2018 were $1.3 million and $2.1 million, respectively.

Notes Payable
2020 Notes
As of September 30, 2019, APX had $454.3 million outstanding aggregate principal amount of 8.75% senior notes due 2020 (the “2020 notes”) with a maturity date of December 1, 2020.
2022 Private Placement Notes
As of September 30, 2019, APX had $270.0 million outstanding aggregate principal amount of 8.875% senior secured notes due 2022 (the “2022 private placement notes”). The 2022 private placement notes will mature on December 1, 2022, unless, under "Springing Maturity" provisions, 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 2020 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 2022 private placement notes, the 2022 notes (as defined below), the 2024 notes (as defined below) and the revolving credit facilities and the Term Loan (as defined below), in all cases, subject to certain exceptions and permitted liens.
2022 Notes    
As of September 30, 2019, APX had $900.0 million outstanding aggregate principal amount of 7.875% senior secured notes due 2022 (the “2022 notes”). The 2022 notes will mature on December 1, 2022, or on such earlier date when any outstanding pari passu lien indebtedness matures as a result of the operation of any “Springing Maturity” provision set forth in the agreements governing such pari passu lien indebtedness. The 2022 notes are secured, on a pari passu basis, by the collateral securing obligations under the 2022 private placement notes, the 2024 notes (as defined below), the revolving credit facilities and the Term Loan, in all cases, subject to certain exceptions and permitted liens.
2023 Notes
As of September 30, 2019, APX had $400.0 million outstanding aggregate principal amount of the 7.625% senior notes due 2023 (the “2023 notes”) with a maturity date of September 1, 2023.
2024 Notes    
In May 2019, APX issued $225.0 million outstanding aggregate principal amount of 8.50% senior secured notes due 2024 (the “2024 notes” and, together with the 2020 notes, the 2022 notes, the 2022 private placement notes and the 2023 notes the “Notes”). The net proceeds from the 2024 notes offering were used to redeem $225.0 million aggregate principal amount of our 2020 notes, and to pay the related accrued interest and to pay all fees and expenses related thereto. The 2024 notes will mature on November 1, 2024, unless, under “Springing Maturity” provisions, (1) on September 1, 2020 (the 91st day prior to the maturity of the 2020 notes) more than an aggregate principal amount of $275.0 million of such 2020 notes remain outstanding or have not been refinanced as permitted under the note purchase agreement for the 2020 notes, in which case the 2024 notes will mature on September 1, 2020 or (2) on June 1, 2023 (the 91st day prior to the maturity of the 2023 notes) more than an aggregate principal amount of $125.0 million of such 2023 notes remain outstanding or have not been refinanced as permitted under the note purchase agreement for the 2023 notes, in which case the 2024 Notes will mature on June 1, 2023. The 2024 notes are secured, on a pari passu basis, by the collateral securing obligations under the 2022 private placement notes, the 2022 notes, the revolving credit facilities and the Term Loan, in all cases, subject to certain exceptions and permitted liens.
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, 7.625% per annum for the 2023 notes and 8.50% per annum for the 2024 notes. Interest on the 2020 notes, 2022 private placement notes and 2022 notes is payable semiannually in arrears on June 1 and December 1 of each year. Interest on the 2023 notes is payable semiannually in arrears on March 1 and September 1 of each year. Interest on the 2024 notes is payable semiannually in arrears on May 1 and November 1 each year. APX may redeem the Notes at the prices and on the terms specified in the applicable indenture, or the note purchase 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, unless, under “Springing Maturity” provision, (1) on September 1, 2020 (the 91st day prior to the maturity of the 2020 notes) more than an aggregate principal amount of $275.0 million of such 2020 notes remain outstanding or have not been refinanced as permitted under the note purchase agreement for the 2020 notes, in which case the Term Loan will mature on September 1, 2020 or (2) on June 1, 2023 (the 91st day prior to the maturity of the 2023 notes) more than an aggregate principal amount of $125.0 million of such 2023 notes remain outstanding or have not been refinanced as permitted under the note purchase agreement for the 2023 notes, in which case the Term Loan will mature on June 1, 2023. 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
The Company performs analyses on a creditor-by-creditor basis for debt modifications and extinguishments to determine if repurchased debt was substantially different than debt issued to determine the appropriate accounting treatment of associated issuance costs. As a result of these analyses, the following amounts of other expense and loss on extinguishment and deferred financing costs were recorded (in thousands):
 
Original premium extinguished
 
Previously deferred financing costs extinguished
 
New financing costs
 
Total other expense and loss on extinguishment
 
New deferred financing costs
Nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
May 2019 issuance
$
(588
)
 
$
1,395

 
$

 
$
807

 
$
4,956

 
 
 
 
 
 
 
 
 
 
Three and nine months ended September 30, 2018











 
 
September 2018 issuance
$
(953
)

$
4,207


$
11,317


$
14,571

 
$
10,275


Deferred financing costs are amortized to interest expense over the life of the issued debt.    The Company had no debt issuances or related modification or extinguishment costs during the three months ended September 30, 2019.
The following table presents deferred financing activity for the nine months ended September 30, 2019 and year ended December 31, 2018 (in thousands):
 
Unamortized Deferred Financing Costs
 
Balance December 31, 2018
 
Additions
 
Early Extinguishment
 
Amortized
 
Balance September 30, 2019
Revolving Credit Facility
$
2,058

 
$

 
$

 
$
(710
)
 
$
1,348

2020 Notes
5,380

 

 
(1,395
)
 
(1,795
)
 
2,190

2022 Private Placement Notes
602

 

 

 
(113
)
 
489

2022 Notes
12,799

 

 

 
(2,451
)
 
10,348

2023 Notes
3,922

 

 

 
(630
)
 
3,292

2024 Notes

 
4,956

 

 
(300
)
 
4,656

Term Loan
9,662

 


 

 
(1,380
)
 
8,282

Total Deferred Financing Costs
$
34,423

 
$
4,956

 
$
(1,395
)
 
$
(7,379
)
 
$
30,605


 
Unamortized Deferred Financing Costs
 
Balance December 31, 2017
 
Additions
 
Early Extinguishment
 
Amortized
 
Balance December 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



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 is and, when in effect, the Series D Revolving Commitments of approximately $15.4 million was 2.0% per annum and (b) under the Series B Revolving Commitments of approximately $21.2 million was 3.0% and (2)(a) the applicable margin for LIBOR rate-based borrowings (a) under the Series A Revolving Commitments is, and, when in effect, the 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. 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 Series D Revolving Commitments of $15.4 million expired effective April 1, 2019 and the principal amount outstanding under the revolving credit facility will be due and payable in full with respect to the extended commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility on March 31, 2021, unless, under “Springing Maturity” provisions, on September 1, 2020 (the 91st day prior to the maturity of the 2020 notes) more than an aggregate principal amount of $250.0 million of such 2020 notes remain outstanding or have not been refinanced as permitted under note purchase agreement for the 2020 notes, in which case the principal amount outstanding under the revolving credit facility will mature on September 1, 2020.
As of September 30, 2019 there was $134.0 million of outstanding borrowings under the revolving credit facility. As of December 31, 2018, there were no outstanding borrowings under the revolving credit facility. As of September 30, 2019 the Company had $140.4 million of availability under the revolving credit facility (after giving effect to $13.8 million of letters of credit outstanding and $134.0 million of borrowings).

Guarantees
All of the obligations under the credit agreement governing the revolving credit facility, the credit agreement governing the Term Loan and the debt agreements governing the Notes are guaranteed by 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 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.
v3.19.3
Retail Installment Contract Receivables
9 Months Ended
Sep. 30, 2019
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 condensed consolidated unaudited balance sheets.
The following table summarizes the RIC receivables (in thousands):
 
September 30, 2019
 
December 31, 2018
RIC receivables, gross
$
200,123

 
$
175,250

RIC Discount
(64,263
)
 
(34,163
)
RIC receivables, net
$
135,860

 
$
141,087

 
 
 
 
Classified on the condensed consolidated unaudited balance sheets as:
 
 
 
Accounts and notes receivable, net
$
42,516

 
$
32,185

Long-term notes receivables and other assets, net
93,344

 
108,902

RIC receivables, net
$
135,860

 
$
141,087


The changes in the Company’s RIC Discount were as follows (in thousands):
 
Nine months ended September 30, 2019
 
Twelve months ended December 31, 2018
RIC Discount, beginning of period
$
34,163

 
$
36,048

Write-offs, net of recoveries
(16,445
)
 
(26,360
)
Change in RIC Discount on short-term and long-term RIC receivables
46,545

 
24,475

RIC Discount, end of period
$
64,263

 
$
34,163


The amount of RIC imputed interest income recognized in recurring and other revenue was $4.0 million and $4.1 million during the three months ended September 30, 2019 and 2018, respectively, and $10.6 million and $10.9 million during the nine months ended September 30, 2019 and 2018, respectively.
Change in Accounting Estimate in 2019
RIC receivables are recorded at their present value, net of the RIC Discount. The Company records the RIC Discount as an adjustment to deferred revenue and as an adjustment to the face amount of the related receivable. The RIC Discount considers a number of factors, including collection experience, credit quality of the subscriber base and other qualitative considerations such as macro-economic factors.
In the third quarter of 2019, with over two years of RIC customer history, the Company believed that it had sufficient data and experience from RIC receivables to reevaluate the remaining RIC Discount. The Company determined that actual RIC write-offs were trending higher than the expected write-offs used in the original estimates. Therefore, the Company determined that it was necessary to adjust the remaining RIC Discount balance primarily associated with subscribers originated in 2017 and 2018, to reflect the new estimate of the present value of cash expected to be collected over the remaining contractual periods.
In accordance with this change in accounting estimate, in the third quarter of 2019 the Company increased the RIC Discount and recognized an adjustment to revenue to record the proportional amount related to performance obligations that have already been delivered and the remaining amount (related to undelivered performance obligations) to deferred revenue. The Company recorded a total increase to the RIC Discount of $26.6 million, with a decrease to deferred revenue of $17.5 million and a decrease to recurring and other revenue of $9.1 million. The decrease to revenue resulted in a corresponding increase to net loss for the three and nine months ended September 30, 2019.
v3.19.3
Balance Sheet Components
9 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Balance Sheet Components
Balance Sheet Components
The following table presents material balance sheet component balances (in thousands):

 
September 30, 2019
 
December 31, 2018
Prepaid expenses and other current assets
 
 
 
Prepaid expenses
$
8,774

 
$
7,183

Deposits
1,702

 
904

Other
2,209

 
3,362

Total prepaid expenses and other current assets
$
12,685

 
$
11,449

Capitalized contract costs
 
 
 
Capitalized contract costs
$
2,819,747

 
$
2,361,795

Accumulated amortization
(1,572,069
)
 
(1,246,020
)
Capitalized contract costs, net
$
1,247,678

 
$
1,115,775

Long-term notes receivables and other assets
 
 
 
RIC receivables, gross
$
157,607

 
$
143,065

RIC Discount
(64,263
)
 
(34,164
)
Security deposits
6,764

 
6,586

Investments

 
3,865

Other
300

 
467

Total long-term notes receivables and other assets, net
$
100,408

 
$
119,819

Accrued payroll and commissions
 
 
 
Accrued commissions
$
80,646

 
$
28,726

Accrued payroll
37,962

 
36,753

Total accrued payroll and commissions
$
118,608

 
$
65,479

Accrued expenses and other current liabilities
 
 
 
Accrued interest payable
$
55,971

 
$
28,885

Current portion of derivative liability
82,047

 
67,710

Service warranty accrual
8,829

 
8,813

Current portion of notes payable
8,100

 
8,100

Loss contingencies
1,831

 
2,531

Other
20,528

 
20,676

Total accrued expenses and other current liabilities
$
177,306

 
$
136,715

v3.19.3
Property Plant and Equipment
9 Months Ended
Sep. 30, 2019
Property, Plant and Equipment [Abstract]  
Property Plant and Equipment
Property Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
Estimated Useful
Lives
Vehicles
$
45,679

 
$
45,050

 
3 - 5 years
Computer equipment and software
59,816

 
53,891

 
3 - 5 years
Leasehold improvements
27,760

 
26,401

 
2 - 15 years
Office furniture, fixtures and equipment
20,507

 
19,532

 
2 - 7 years
Build-to-suit lease building

 
8,247

 
10.5 years
Construction in process
3,737

 
2,975

 
 
Property, plant and equipment, gross
157,499

 
156,096

 
 
Accumulated depreciation and amortization
(97,283
)
 
(82,695
)
 
 
Property, plant and equipment, net
$
60,216

 
$
73,401

 
 


Property, plant and equipment, net includes approximately $22.8 million and $23.7 million of assets under finance or capital lease obligations at September 30, 2019 and December 31, 2018, respectively, net of accumulated amortization of $23.5 million and $22.2 million, respectively. Depreciation and amortization expense on all property, plant and equipment was $6.3 million and $6.4 million for the three months ended September 30, 2019 and 2018, respectively and $19.3 million and $18.8 million during the nine months ended September 30, 2019 and 2018, respectively. Amortization expense relates to assets under finance or capital leases and is included in depreciation and amortization expense.

As a result of implementing ASU 2016-02, effective January 1, 2019 the Company's build-to-suit leasing arrangement was considered a sale-leaseback and is classified as an operating lease. This resulted in a reduction to property, plant and equipment, net of $6.1 million and a reduction of $6.6 million related the financing lease obligation within accrued expenses and other current liabilities and other long-term obligations. See Note 12 "Leases" for additional information related to the impact of adopting ASU 2016-02.
v3.19.3
Goodwill and Intangible Assets
9 Months Ended
Sep. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill
As of September 30, 2019 and December 31, 2018, the Company had a goodwill balance of $836.0 million and $834.9 million, respectively. The change in the carrying amount of goodwill during the nine months ended September 30, 2019 was the result of foreign currency translation adjustments as well as a $0.4 million addition associated with the acquisition of CrowdStorage (defined below).
Intangible assets, net
The following table presents intangible asset balances (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
 
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
$
966,196

 
$
(775,117
)
 
$
191,079

 
$
964,100

 
$
(717,648
)
 
$
246,452

 
10 years
2GIG 2.0 technology
17,000

 
(16,224
)
 
776

 
17,000

 
(15,292
)
 
1,708

 
8 years
Other technology
4,725

 
(2,496
)
 
2,229

 
2,917

 
(1,667
)
 
1,250

 
2 - 7 years
Space Monkey technology
7,100

 
(6,546
)
 
554

 
7,100

 
(5,756
)
 
1,344

 
6 years
Patents
12,624

 
(10,085
)
 
2,539

 
12,123

 
(8,415
)
 
3,708

 
5 years
Total definite-lived intangible assets:
$
1,007,645

 
$
(810,468
)
 
$
197,177

 
$
1,003,240

 
$
(748,778
)
 
$
254,462

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
IP addresses

 

 

 
564

 

 
564

 
 
Domain names
59

 

 
59

 
59

 

 
59

 
 
Total Indefinite-lived intangible assets
59

 

 
59

 
623

 

 
623

 
 
Total intangible assets, net
$
1,007,704

 
$
(810,468
)
 
$
197,236

 
$
1,003,863

 
$
(748,778
)
 
$
255,085

 
 

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.
In January 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 $1.2 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.
In May 2019, the Company acquired majority ownership interest in CrowdStorage, Inc. (“CrowdStorage”), a distributed cloud storage solution company. The Company determined that CrowdStorage was a variable interest entity and the Company was the primary beneficiary, because CrowdStorage was dependent on the Company for ongoing financial support. As part of this acquisition, the Company recognized a definite-lived intangible asset of $1.8 million, included within the other technology asset class in the above table. The financial position and results of operations of CrowdStorage are consolidated by the Company and the non-controlling interest associated with the minority interest holders was immaterial as of, and for, the three and nine months ended September 30, 2019.
Amortization expense related to intangible assets was approximately $20.0 million and $22.7 million for the three months ended September 30, 2019 and 2018, respectively, and $60.5 million and $68.2 million for the nine months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, the remaining weighted-average amortization period for definite-lived intangible assets was 3.1 years. Estimated future amortization expense of intangible assets, excluding approximately $0.2 million in patents currently in process, is as follows as of September 30, 2019 (in thousands):
 
 
 
2019 - Remaining Period
$
19,942

2020
69,221

2021
58,850

2022
48,863

2023
66

Thereafter
5

Total estimated amortization expense
$
196,947

v3.19.3
Financial Instruments
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Financial Instruments
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.
The following tables set forth the Company’s cash and cash equivalents and Corporate Securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or long-term notes receivables and other assets, net as of September 30, 2019 and December 31, 2018 (in thousands):
 
September 30, 2019
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Long-Term Notes Receivables and Other Assets, net
Cash
$
2,874

 
$

 
$

 
$
2,874

 
$
2,874

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
4

 

 

 
4

 
4

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,878

 
$

 
$

 
$
2,878

 
$
2,878

 
$

 
December 31, 2018
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Long-Term Notes Receivables and Other Assets, net
Cash
$
6,681

 
$

 
$

 
$
6,681

 
$
6,681

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
6,092

 

 

 
6,092

 
6,092

 

Corporate securities
3,485

 

 
(304
)
 
3,181

 

 
3,181

Subtotal
9,577

 

 
(304
)
 
9,273

 
6,092

 
3,181

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
16,258

 
$

 
$
(304
)
 
$
15,954

 
$
12,773

 
$
3,181



The Company sold its Corporate Securities in June 2019 and realized a gain of $2.3 million. During the three and nine months ended September 30, 2018, the Company recorded unrealized gains of $0.6 million and $1.4 million, respectively, associated with the change in fair value of the Corporate Securities.
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
Components of long-term debt including the associated interest rates and related fair values are as follows (in thousands, except interest rates):
 
 
September 30, 2019
 
December 31, 2018
 
Stated Interest Rate
Issuance
 
Face Value
 
Estimated Fair Value
 
Face Value
 
Estimated Fair Value
 
2020 Notes
 
$
454,299

 
$
446,349

 
$
679,299

 
$
643,568

 
8.750
%
2022 Private Placement Notes
 
270,000

 
269,993

 
270,000

 
257,073

 
8.875
%
2022 Notes
 
900,000

 
894,690

 
900,000

 
855,000

 
7.875
%
2023 Notes
 
400,000

 
356,000

 
400,000

 
326,000

 
7.625
%
2024 Notes
 
225,000

 
227,250

 

 

 
8.500
%
Term Loan
 
801,900

 
801,900

 
807,975

 
807,975

 
N/A
Total
 
$
3,051,199

 
$
2,996,182

 
$
3,057,274

 
$
2,889,616

 
 

The Notes are fixed-rate debt considered Level 2 fair value measurements as the values were determined using observable market inputs, such as current interest rates, prices observable from less active markets, as well as prices observable from comparable securities. The Term Loan is floating-rate debt and approximates the carrying value as interest accrues at floating rates based on market rates.
Derivative Financial Instruments
Under the Consumer Financing Program, the Company pays a monthly fee to third-party financing providers based on either the average daily outstanding balance of the loans or the number of outstanding loans depending on third-party financing provider. The Company also shares the liability for credit losses, depending on the credit quality of the customer. Because of the nature of certain provisions under the Consumer Financing Program, the Company records a derivative liability that is not designated as a hedging instrument and is adjusted to fair value, measured using the present value of the estimated future payments. Changes to the fair value are recorded through other income, net in the Consolidated Statement of Operations. The following represent the contractual obligations with the third-party financing providers under the Consumer Financing Program that are components of the derivative:
The Company pays either a monthly fee based on the average daily outstanding balance of the loans, or the number of outstanding loans, depending on the third-party financing provider
The Company shares the liability for credit losses depending on the credit quality of the customer
The Company pays transactional fees associated with customer payment processing
The derivative is classified as a Level 3 instrument. The derivative positions are valued using a discounted cash flow model, with inputs consisting of available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral default rates and loss severity rates. These derivatives are priced quarterly using a credit valuation adjustment methodology. In summary, the fair value represents an estimate of the present value of the cash flows the Company will be obligated to pay to the 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 September 30, 2019 and December 31, 2018 (in thousands):
 
September 30, 2019
 
December 31, 2018
Consumer Financing Program Contractual Obligations:
 
 
 
Fair value
$
143,447

 
$
117,620

Notional amount
532,150

 
368,708

 
 
 
 
Classified on the condensed consolidated unaudited balance sheets as:
 
 
 
Accrued expenses and other current liabilities
82,047

 
67,710

Other long-term obligations
61,400

 
49,910

Total Consumer Financing Program Contractual Obligation
$
143,447

 
$
117,620

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 nine months ended September 30, 2019 and the twelve months ended December 31, 2018 (in thousands):
 
Nine months ended September 30, 2019
 
Twelve months ended December 31, 2018
Balance, beginning of period
$
117,620

 
$
46,496

Additions
71,433

 
93,095

Settlements
(40,470
)
 
(34,587
)
Net (gains) losses included in earnings
(5,136
)
 
12,616

Balance, end of period
$
143,447

 
$
117,620

v3.19.3
Income Taxes
9 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
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 benefit rate for the nine months ended September 30, 2019 and 2018 was approximately 0.20% and 0.45%, respectively. Income tax expense for the nine months ended September 30, 2019 was affected by year to date projected loss in Canada and estimated minimum state taxes in the US. Both the 2019 and 2018 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.
Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets, and evaluating the Company’s uncertain tax positions. In evaluating the ability to realize its deferred tax assets, in full or in part, the Company considers all available positive and negative evidence, including past operating results, forecasted future earnings, and prudent and feasible tax planning strategies. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, the Company has maintained a domestic valuation allowance against the deferred tax assets that remain after offset by domestic deferred tax liabilities, and the company currently anticipates recording a valuation allowance against net foreign deferred tax assets by the end of the current year.
v3.19.3
Stock-Based Compensation and Equity
9 Months Ended
Sep. 30, 2019
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation and Equity
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 September 30, 2019, 84,866,126 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 Inc. 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 June 2018 for those granted prior to the modification or the applicable vesting reference date for those granted on or following 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 the event of a change of control, all outstanding Incentive Units with time-based vesting conditions will become fully vested and exercisable.
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 2.61%.

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 and board members, 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 and/or its direct or indirect parents. 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 June 2018 for those granted prior to the Modification or the applicable vesting reference date for those granted on or following 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, 45,176,970 SARs were outstanding as o