VIVINT SMART HOME, INC. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K. Certain year-to-year comparisons between 2021 and 2020 have been omitted from this Annual Report on Form 10-K, but may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for they ear endedDecember 31, 2021 . This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. Business OverviewVivint Smart Home is a leading smart home platform company serving approximately 1.9 million subscribers as ofDecember 31, 2022 . Our brand name,Vivint , means to "to live intelligently" and our mission is to help our customers do exactly that by providing them with technology and services to create a smarter, greener, safer home that saves our customers money every month. Although a number of companies offer single devices such as a doorbell camera, smart speaker or thermostat, single offerings do not make a home smart. Rather, a smart home has multiple devices, properly located and installed, all integrated into a single expandable platform that incorporates artificial intelligence ("AI") and machine-learning in its operating system. We make creating this smart home easy and affordable with an integrated platform, exceptional products, hassle-free professional installation and zero percent annual percentage rate ("APR") consumer financing for most customers. We help consumers create a customized solution for their home by integrating smart cameras (indoor, outdoor, doorbell), locks, lights, thermostats, garage door control, car protection and a host of safety and security sensors. As ofDecember 31, 2022 , on average, the subscribers on our cloud-based home platform had approximately 15 security and smart home devices in each home. We provide a fully integrated solution for consumers with our vertically integrated business model that includes hardware, software, sales, installation, support and professional monitoring. This model strengthens our ability to deliver superior experiences at every customer touchpoint and a complete end-to-end smart home experience. This seamless integration of high-quality products and services results in an Average Subscriber Lifetime of approximately nine years, as ofDecember 31, 2022 . This model also facilitates our ability to offer adjacent products and services that leverage our existing platform and infrastructure, which we believe can extend the Average Subscriber Lifetime and increase the lifetime value we derive from our subscribers. Our cloud-based home platform currently manages more than 27 million in-home devices as ofDecember 31, 2022 . Our subscribers are able to interact with their connected home by using their voice or mobile device-anytime, anywhere. They can engage with people at their front door; view live and recorded video inside and outside their home; control thermostats, locks, lights, and garage doors; and proactively manage the comings and goings of family, friends and visitors. The average subscriber on our cloud-based home platform engages with our smart home app approximately 11 times per day. Our technology and people are the foundation of our business. Our trained professionals educate consumers on the value and affordability of a smart home, design a customized solution for their homes and their individual needs, teach them how to use our platform to enhance their experience, and provide ongoing tech-enabled services to manage, monitor and secure their home.
We believe that our unique business model and platform gives us a distinct advantage in the market through:
•a proprietary cloud-based platform,
•a differentiated end-to-end distribution model,
•strong growth with compelling unit economics, and
•multiple levers for sustained profitable growth.
As a result, we believe we can integrate new customer offerings from large
adjacent markets that logically link back to our smart home platform,
compounding the value that we already deliver to our approximately 1.9 million
customers. With the large number of devices we have installed per home, we own a
rich first-party data environment that helps us not only protect our customers,
but also improve the efficiency of their homes and increase their peace of mind.
We believe our unique focus on the importance of owning the entire technology
stack, coupled with an end-to-end distribution model, leads to an exceptional
customer experience. By continuously enhancing our platform, we can improve our
customers' experience wherever they
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interact with it. We believe that as our customers' satisfaction increases, it creates multiple potential opportunities for sustained profitable growth for years to come. Our integrated Smart Home business model generates subscription-based, high-margin recurring revenue from subscribers who sign up for our smart home services. More than 94% of our revenue is recurring, which provides long-term visibility and predictability to our business.
For 2022, some key metrics of our business included:
•Total Subscribers - As ofDecember 31, 2022 and 2021, we had approximately 1.9 million and 1.9 million subscribers, respectively, representing year-over-year growth of 3.7%.
•Revenues - In 2022 and 2021, we generated revenue of approximately
•Net Loss - In 2022 and 2021 we had a net loss of
•Adjusted EBITDA - In 2022 and 2021, we generated Adjusted EBITDA of
approximately
OnDecember 6, 2022 ,Vivint Smart Home entered into an Agreement and Plan of Merger, by and among the Company, NRG Energy, Inc., aDelaware corporation, andJetson Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of NRG Energy, Inc., pursuant to whichJetson Merger Sub, Inc. will be merged with and into the Company with the Company surviving the NRG Merger as a wholly owned subsidiary of NRG Energy, Inc. The board of directors of the Company (the "Board of Directors") unanimously determined that the transactions contemplated by the NRG Merger Agreement, including the NRG Merger, are in the best interests of the Company and its stockholders, and approved the NRG Merger Agreement and the transactions contemplated thereby, and unanimously resolved to recommend that the Company's stockholders adopt and approve the NRG Merger Agreement and the NRG Merger. Following execution of the NRG Merger Agreement onDecember 6, 2022 , stockholders holding approximately 59% of the issued and outstanding shares of the Company's Class A common stock duly executed and delivered to the Company a written consent adopting and approving the NRG Merger Agreement and the transactions contemplated thereby, including the NRG Merger. At the effective time of the NRG Merger, each share of the Company's common stock (other than shares held by the Company (including shares held in treasury), NRG Energy, Inc. or any of their respective wholly-owned subsidiaries and shares owned by stockholders who have properly made and not withdrawn or lost a demand for appraisal rights) will be converted into the right to receive$12.00 in cash, without interest and less applicable withholding taxes. Key Factors Affecting Operating Results Our future operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including our ability to grow our subscriber base in a cost-effective manner, expand our Product and Service offerings to generate increased revenue per user, provide high quality Products and subscriber service, including adjacent products and services, to maximize subscriber lifetime value and improve the leverage of our business model.
Key factors affecting our operating results include the following:
Subscriber Lifetime and Associated Cash Flows
Our subscribers are the foundation of our recurring revenue-based model. Our operating results are significantly affected by the level of our Net Acquisition Costs per New Subscriber and the value of Products and Services purchased by those New Subscribers. A reduction in Net Subscriber Acquisition Costs per New Subscriber or an increase in the total value of Products or Services purchased by a New Subscriber increases the life-time value of that subscriber, which in turn, improves our operating results and cash flows over time. The net upfront cost of adding subscribers is a key factor impacting our ability to scale and our operating cash flows. Vivint Flex Pay, which became our primary equipment financing model in early 2017, has significantly improved our cash flows associated with originating New Subscribers. Prior to Vivint Flex Pay, we recovered the cost of equipment installed in subscribers' homes over time through their monthly service billings. We generally offer to a limited number of customers who are not eligible for the CFP, or do not choose to Pay-in-Full at the time of origination, but who qualify under our underwriting
1 See the section titled "Key Performance Measures-Adjusted EBITDA" for information regarding our use of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.
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criteria, the option to enter into a RIC directly with us, which we fund through our balance sheet. Under Vivint Flex Pay, we've experienced the following financing mix for New Subscribers:
Year ended December 31,
2022 2021 2020
New Subscribers (U.S. only):
Financed through CFP 72 % 74 % 75 %
Paid-in-Full 27 % 24 % 22 %
Purchased through RICs 1 % 2 % 3 %
This shift in financing from RICs to the CFP has significantly reduced our Net
Subscriber Acquisition Cost per New Subscriber, as well as the cash required to
acquire New Subscribers. Going forward, we expect the percentage of subscriber
contracts financed through RICs to remain a very small percentage of our
financing mix. We will also continue to explore ways of growing our subscriber
base in a cost-effective manner through our existing sales and marketing
channels, through the growth of our financing programs, as well as through
strategic partnerships and new channels, as these opportunities arise.
Existing subscribers are also able to use Vivint Flex Pay to upgrade their
systems or to add new Products, which we believe further increases subscriber
lifetime value. This positively impacts our operating performance, and we
anticipate that adding new financing options to the CFP will generate additional
opportunities for revenue growth and a subsequent increase in subscriber
lifetime value.
We seek to increase our average monthly revenue per user, or AMRRU, by
continually innovating and offering new smart home solutions that further
leverage the investments made to date in our existing platform and sales
channels. Since 2010, we have successfully expanded our smart home platform,
which has allowed us to generate higher AMRRU and in turn realize higher smart
home device revenue from new subscribers for these additional offerings. For
example, the introduction of our proprietary Vivint Smart Hub, Vivint SkyControl
Panel , Vivint Doorbell Camera Pro , Vivint Indoor Camera, Vivint Outdoor Camera
Pro , and Vivint Smart Thermostat has expanded our smart home platform. We
believe that growing our AMRRU will improve our operating results and operating
cash flows over time. Our ability to improve our operating results and cash
flows, however, is subject to a number of risks and uncertainties as described
in greater detail elsewhere in this filing and there can be no assurance that we
will achieve such improvements. To the extent that we do not scale our business
efficiently, we will continue to incur losses and require a significant amount
of cash to fund our operations, which in turn could have a material adverse
effect on our business, cash flows, operating results and financial condition.
Our ability to retain our subscribers also has a significant impact on our
financial results, including revenues, operating income, and operating cash
flows. Because we operate a business built on recurring revenues, subscriber
lifetime is a key determinant of our operating success. Our Average Subscriber
Lifetime is approximately 108 months (or approximately nine years) as of
December 31, 2022 . If our expected long-term annualized attrition rate increased
by 1% to 12.1%, Average Subscriber Lifetime would decrease to approximately 99
months. Conversely, if our expected attrition decreased by 1% to 10.1%, our
Average Subscriber Lifetime would increase to approximately 119 months. Our
ability to increase overall revenue growth and extend our Average Subscriber
Lifetime depends, in part, on our ability to successfully expand into new
adjacent products and services, such as smart energy and Smart Insurance . This
success is dependent on our ability to scale these adjacent businesses in a
cost-effective manner and integrate them into our existing smart home platform,
where appropriate.
The operating margins from smart energy and Smart Insurance are lower than for
our smart home business. Therefore, while we expect total Adjusted EBITDA
dollars to increase as a result of smart energy and Smart Insurance , they will
reduce our overall Adjusted EBITDA Margin percentage.
Our ability to service our existing customer base in a cost-effective manner,
while minimizing customer attrition, also has a significant impact on our
financial results and operating cash flows. Critical to managing the cost of
servicing our subscribers is limiting the number of calls into our customer care
call centers, and in turn, limiting the number of calls requiring the deployment
of a Smart Home Pro to the customer's home to resolve the issue. We believe that
our proprietary end-to-end solution allows us to proactively manage the costs to
service our customers by directly controlling the design, interoperability and
quality of our Products. It also provides us the ability to identify and resolve
potential product issues through remote software or firmware updates, typically
before the customer is even aware of an issue.
A portion of the subscriber base can be expected to cancel its service every
year. Subscribers may choose not to renew or may terminate their contracts for a
variety of reasons, including, but not limited to, relocation, cost, switching
to a competitor's service or service issues. We analyze our attrition by
tracking the number of subscribers who cancel their service as a percentage of
the monthly average number of subscribers at the end of each 12-month period. We
caution investors that not all companies, investors and analysts in our industry
define attrition in this manner.
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The table below presents our smart home and security subscriber data for the
years ended
Year ended December 31,
2022 2021 2020
Beginning balance of subscribers 1,855,141 1,695,498 1,552,541 New subscribers 364,718 360,509 343,434 Sale of Canada business (1) (85,786) - - Attritted subscribers (209,442) (200,866) (200,477) Ending balance of subscribers 1,924,631 1,855,141 1,695,498 Monthly average subscribers 1,893,810 1,776,794 1,616,311 Attrition rate 11.1 % 11.3 % 12.4 % ____________________
(1) Subscriber accounts from the sale of our
Historically, we have experienced an increased level of subscriber cancellations in the months surrounding the expiration of such subscribers' initial contract term. Attrition in any twelve month period may be impacted by the number of subscriber contracts reaching the end of their initial term in such period. Attrition in the twelve months endedDecember 31, 2022 includes the effect of the 2017 60-month and 2018 42-month contracts reaching the end of their initial contract term. Attrition in the twelve months endedDecember 31, 2021 includes the effect of the 2016 60-month and 2017 42-month contracts reaching the end of their initial contract term.
Sales and Marketing Efficiency
As discussed above, our continued ability to attract and sign new subscribers in a cost-effective manner will be a key determinant of our future operating performance. Because our direct-to-home and national inside sales channels are currently our primary means of subscriber acquisition, we have invested heavily in scaling these channels. Our sales representatives generally become more productive as they gain more experience. As a result, the tenure mix among our sales teams, and our ability to retain experienced sales representatives, impacts our level of new subscriber acquisitions and overall operating success. The continued productivity of our sales teams is instrumental to our subscriber growth and vital to our future success. Originating subscriber growth through these investments in our sales teams depends, in part, on our ability to launch cost-effective marketing campaigns, both online and offline. This is particularly true for our national inside sales channel, because national inside sales fields inbound requests from subscribers who find us using online search and submitting our online contact form. Our marketing campaigns are created to attract potential subscribers and build awareness of our brand across all our sales channels. We also believe that building brand awareness is important to countering the competition we face from other companies selling their solutions in the geographies we serve, particularly in those markets where our direct-to-home sales representatives are present.
Expand Monetization of Platform and Related Services
To date, we have made significant investments in our smart home platform and the development of our organization, and expect to leverage these investments to continue expanding the breadth and depth of our Product and Service offerings over time, including integration with third party products and expanding into adjacent products and services to drive future revenue. As smart home technology develops, we will continue expanding these offerings to reflect the growing needs of our subscriber base and focus on expanding our platform through the addition of new smart home Products, experiences and use cases. As a result of our investments to date, we have approximately 1.9 million active customers on our smart home platform. We intend to continue developing this platform to include new complex automation capabilities, use case scenarios, and comprehensive device integrations. Our platform supports over 27 million connected devices as ofDecember 31, 2022 . We believe that the smart home of the future will be an ecosystem in which businesses seek to deliver products and services to subscribers in a way that addresses the individual subscriber's lifestyle and needs. As smart home technology becomes the setting for the delivery of a wide range of these products and services, including healthcare, entertainment, home maintenance, aging in place and consumer goods, we hope to become the hub of this ecosystem and the strategic partner of choice for the businesses delivering these products and services. Our success in connecting with business partners who integrate with our smart home platform in order to reach and interact with our subscriber base is expected to be a part of our continued operating success. We expect that additional partnerships will generate incremental revenue by increasing the value of Products purchased by our customers as a result of integration of these partners' products with our smart home platform. If we are able to 50
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continue expanding our partnerships with influential companies, as we already have withSmart Insurance and smart energy, will allow us to grow revenue and further monetize our subscriber base, because it improves our ability to offer tailored service packages to subscribers with different needs. Key Performance Measures In evaluating our results, we review several key performance measures discussed below. We believe that the presentation of such metrics is useful to our investors and lenders because they are used to measure the value of companies such as ours with recurring revenue streams. Management uses these metrics to analyze its continuing operations and to monitor, assess, and identify meaningful trends in the operating and financial performance of the company.
Total Subscribers
Total Subscribers is the aggregate number of active smart home and security subscribers at the end of a given period.
Total Monthly Recurring Revenue
Total monthly recurring revenue, or Total MRR, is the average smart home and security total monthly recurring revenue recognized during the period. These revenues exclude non-recurring revenues that are recognized at the time of sale.
Average Monthly Recurring Revenue per User
Average monthly revenue per user, or AMRRU, is Total MRR divided by average monthly Total Subscribers during a given period.
Total Monthly Service Revenue
Total monthly service revenue, or MSR, is the contracted recurring monthly service billings to our smart home and security subscribers, based on the Total Subscribers number as of the end of a given period.
Average Monthly Service Revenue per User
Average monthly service revenue per user, or AMSRU, is Total MSR divided by Total Subscribers at the end of a given period.
Attrition Rate
Attrition rate is the aggregate number of canceled smart home and security subscribers during the prior 12-month period divided by the monthly weighted average number of Total Subscribers based on the Total Subscribers at the beginning and end of each month of a given period. Subscribers are considered canceled when they terminate in accordance with the terms of their contract, are terminated by us or if payment from such subscribers is deemed uncollectible (when at least four monthly billings become past due). If a sale of a service contract to third parties occurs, or a subscriber relocates but continues their service, we do not consider this as a cancellation. If a subscriber transfers their service contract to a new subscriber, we do not consider this as a cancellation.
Average Subscriber Lifetime
Average subscriber lifetime, in number of months, is 100% divided by our expected long-term annualized attrition rate multiplied by 12 months.
Net Service Cost per Subscriber
Net service cost per subscriber is the average monthly service costs incurred during the period (both period and capitalized service costs), including monitoring, customer service, field service and other service support costs, and equipment and associated financing fees (estimated) less total non-recurring smart home services billings and cellular network maintenance fees for the period, divided by average monthly Total Subscribers for the same period.
Net Service Margin
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Net service margin is the monthly average MSR for the period, less total average net service costs for the period divided by the monthly average MSR for the period.
New Subscribers
New subscribers is the aggregate number of net new smart home and security subscribers originated during a given period. This metric excludes new subscribers acquired by the transfer of a service contract from one subscriber to another.
Net Subscriber Acquisition Costs per New Subscriber
Net Subscriber Acquisition Costs per New Subscriber is the net cash cost to create new smart home and subscribers during a given 12-month period divided by New Subscribers for that period. These costs include commissions, equipment and associated financing fees (estimated), installation, marketing, sales support and other allocations (general and administrative); less upfront payments received from the sale of equipment associated with the initial installation, and installation fees. These costs exclude capitalized contract costs and upfront proceeds associated with contract modifications.
Adjusted EBITDA
Adjusted EBITDA is defined as net income (loss) before interest, taxes, depreciation, amortization, stock-based compensation (or non-cash compensation), changes in the fair value of the derivative liability associated with our public and private warrants and certain other non-recurring expenses or gains. Adjusted EBITDA is not defined under GAAP and is subject to important limitations. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies. We believe that the presentation of Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors, and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. In addition, targets based on Adjusted EBITDA are among the measures we use to evaluate our management's performance for purposes of determining their compensation under our incentive plans. Adjusted EBITDA and other non-GAAP financial measures have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:
•excludes certain tax payments that may represent a reduction in cash available to us;
•does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized, including capitalized contract costs, that may have to be replaced in the future;
•does not reflect changes in, or cash requirements for, our working capital needs;
•does not reflect the significant interest expense to service our debt;
•does not include changes in the fair value of the warrant liabilities; and
•does not include non-cash stock-based employee compensation expense and other non-cash charges.
We believe that the most directly comparable GAAP measure to Adjusted EBITDA is net income (loss). We have included the calculation of Adjusted EBITDA and reconciliation of Adjusted EBITDA to net loss for the periods presented below under Key Operating Metrics - Adjusted EBITDA.
Net Loss Margin
Net Loss Margin is net loss as a percentage of total revenues for the period.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of total revenues for the period.
Components of Results of Operations
Total Revenues
Recurring and Other Revenue
Our revenues are primarily generated through the sale and installation of our
smart home services contracted for by our subscribers. Recurring smart home
services for our subscriber contracts are billed directly to the subscriber in
advance, generally monthly, pursuant to the terms of subscriber contracts and
recognized ratably over the service period. Revenues from Products are deferred
and generally recognized on a straight-line basis over the customer contract
term, the amount of which is
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dependent on the total sales price of Products sold. Imputed interest associated with RIC receivables is recognized over the initial term of the RIC. The amount of revenue from Services is dependent upon which of our service offerings is included in the subscriber contracts. Our smart home and video offerings generally provide higher service revenue than our base smart home service offering. Historically, we have generally offered contracts to subscribers that range in length from 36 to 60 months, which are subject to automatic monthly renewal after the expiration of the initial term. In addition, to a lesser extent, we offer month-to-month contracts to subscribers who pay-in-full for their Products at the time of contract origination. At the end of each monthly period, the portion of recurring fees related to services not yet provided are deferred and recognized as these services are provided. To a lesser extent, our revenues are generated through the sales of products and other one-time fees such as service or installation fees, which are invoiced to the customer at the time of sale.
The revenue related to our smart energy business is primarily from commissions received by operating as a sales dealer for third-party residential solar installers. We invoice the solar installer, and recognize the associated revenue, at the time the solar installation is complete.
To date, revenue from our
Total Costs and Expenses Operating Expenses Operating expenses primarily consists of labor associated with monitoring and servicing subscribers, costs associated with Products used in service repairs, stock-based compensation and housing for our Smart Home Pros who perform subscriber installations. We also incur equipment costs associated with excess and obsolete inventory and rework costs related to Products removed from subscribers' homes. In addition, a portion of general and administrative expenses, primarily comprised of certain human resources, facilities and information technology costs are allocated to operating expenses. This allocation is primarily based on employee headcount and facility square footage occupied. Because our full-time Smart Home Pros perform most subscriber installations related to customer moves, customer upgrades or those generated through our national inside sales channels, the costs incurred within field service associated with these installations are allocated to capitalized contract costs. We generally expect our operating expenses to increase in absolute dollars as the total number of subscribers we service continues to grow, but to remain relatively constant in the near to intermediate term as a percentage of our revenue. Selling Expenses Selling expenses are primarily comprised of costs associated with housing for our Smart Home Pros sales representatives, advertising and lead generation, marketing and recruiting, sales commissions related to our smart energy andSmart Insurance businesses, certain portions of sales commissions associated with our direct-to-home sales channel (residuals), stock-based compensation, overhead (including allocation of certain general and administrative expenses as discussed above) and other costs not directly tied to a specific subscriber origination. These costs are expensed as incurred. We generally expect our selling expenses to increase in the near to intermediate term, both in absolute dollars and as a percentage of our revenue, resulting from increases in the total number of subscriber originations.
General and Administrative Expenses
General and administrative expenses consist largely of research and development, or R&D, finance, legal, information technology, human resources, facilities and executive management expenses, including stock-based compensation expense. Stock-based compensation expense is recorded within various components of our costs and expenses. General and administrative expenses also include the provision for doubtful accounts. We allocate between one-fourth and one-third of our gross general and administrative expenses, excluding stock-based compensation and the provision for doubtful accounts, into operating and selling expenses in order to reflect the overall costs of those components of the business. We generally expect our general and administrative expenses to remain relatively flat in the near to intermediate term in absolute dollars, but decrease as a percentage of our revenues, resulting from economies of scale as we grow our business.
Depreciation and Amortization
Depreciation and amortization consist of depreciation from property, plant and
equipment, amortization of equipment leased under finance leases, capitalized
contract costs and intangible assets. We generally expect our depreciation and
amortization expenses to increase in absolute dollars as we grow our business
and increase the number of new subscribers originated on an annual basis, but to
remain relatively constant in the near to intermediate term as a percentage of
our revenue.
Restructuring Expenses
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Restructuring expenses are comprised of costs incurred in relation to activities to exit or dispose of portions of our business that do not qualify as discontinued operations. Expenses for related termination benefits are recognized at the date we notify the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period. Liabilities related to termination of a contract are measured and recognized at fair value when the contract does not have any future economic benefit to the entity and the fair value of the liability is determined based on the present value of the remaining obligation.
Critical Accounting Estimates
In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, loss from operations and net loss, as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, deferred revenue, Consumer Financing Program, retail installment contract receivables, capitalized contract costs, and loss contingencies have the greatest potential impact on our consolidated financial statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 2 to the accompanying audited consolidated financial statements.
Revenue Recognition
We offer our customers smart home services combining Products, including our proprietaryVivint smart hub control panel, door and window sensors, door locks, cameras and smoke alarms; installation; and a proprietary backend cloud platform software and Services. These together create an integrated system that allows our customers to monitor, control and protect their home. Our customers are buying this integrated system that provides them with these smart home services. The number and type of Products purchased by a customer depends on their desired functionality. Because the Products and Services included in the customer's contract are integrated and highly interdependent, and because they must work together to deliver the smart home services, we have concluded that installed Products, related installation and Services contracted for by the customer are generally not distinct within the context of the contract and, therefore, constitute a single, combined performance obligation. Revenues for this single, combined performance obligation are recognized on a straight-line basis over the customer's contract term, which is the period in which the parties to the contract have enforceable rights and obligations. We have determined that certain contracts that do not require a long-term commitment for monitoring services by the customer contain a material right to renew the contract, because the customer does not have to purchase Products upon renewal. Proceeds allocated to the material right are recognized over the period of benefit, which is generally three years. The majority of our subscription contracts are between three and five years in length and are generally non-cancelable. These contracts with customers generally convert into month-to-month agreements at the end of the initial term, and some customer contracts are month-to-month from inception. Payment for recurring monitoring and other smart home services is generally due in advance on a monthly basis. Sales of Products and other one-time fees such as service or installation fees are invoiced to the customer at the time of sale. Any Products or Services that are considered separate performance obligations are recognized when those Products or Services are delivered. Taxes collected from customers and remitted to governmental authorities are not included in revenue. Payments received or amounts billed in advance of revenue recognition are reported as deferred revenue. Beginning in late 2020, we began operating as a third-party dealer for residential solar installers in several states throughout theU.S. , whereby we earn a commission from the installer for selling their solar services. Because we have no further performance obligations once the installation is complete, we recognize the commissions we receive as revenue at that time.
To date, revenues from our
Consumer Financing Program Vivint Flex Pay became our primary equipment financing model beginning inMarch 2017 . Under Vivint Flex Pay, customers pay separately for the products (including control panel, security peripheral equipment, smart home equipment, and related installation) ("Products") andVivint's smart home and security services ("Services"). The customer has the following three ways to pay for the Products: (1) qualified customers inthe United States may finance the purchase of Products through our CFP, (2) we generally offer to a limited number of customers not eligible for the CFP, but who qualify under our underwriting criteria, the option to enter into a RIC directly withVivint , or (3) customers may purchase the Products at the 54
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outset of the service contract either by paying the full amount at that time or by obtaining short-term financing (generally no more than six month installment terms) through us. Although customers pay separately for Products and Services under theVivint Flex Pay plan, we have determined that the sale of Products and Services are one single performance obligation. As a result, all forms of transactions under Vivint Flex Pay create deferred revenue for the gross amount of Products sold. For RICs, gross deferred revenues are reduced by imputed interest and estimated write-offs. For Products financed through the CFP, gross deferred revenues are reduced by (i) any fees or estimated credit losses the Financing Provider is contractually entitled to receive at the time of loan origination, and (ii) the present value of expected future payments due to Financing Providers. Under the CFP, qualified customers are eligible for Loans originated by Financing Providers of between$150 and$6,000 . The terms of most Loans are determined based on the customer's credit quality. The annual percentage rates on these loans is either 0% or 9.99%, depending on the customer's credit quality, and the Loans are issued on either an installment or revolving basis with repayment terms ranging from with a 6- to 60-months.
For certain Financing Provider Loans:
•We pay a monthly fee based on either the average daily outstanding balance of the installment loans, or the number of outstanding Loans.
•We incur fees at the time of the Loan origination and receive proceeds that are net of these fees.
•We also share liability for credit losses, with us being responsible for between 2.6% and 100% of lost principal balances.
•We are responsible for reimbursing certain Financing Providers for merchant transaction fees and other fees associated with the Loans.
Because of the nature of these provisions, we record a derivative liability that is not designated as a hedging instrument and is adjusted to fair value, measured using the present value of the estimated future payments when the Financing Provider originates Loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services. The derivative positions are valued using a discounted cash flow model, with inputs consisting of available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral default rates and loss severity rates. These derivatives are priced quarterly using a credit valuation adjustment methodology. In summary, the fair value represents an estimate of the present value of the cash flows we will be obligated to pay to the Financing Provider for each component of the derivative. The derivative liability is reduced as payments are made by us to the Financing Provider. Subsequent changes to the fair value of the derivative liability are realized through other expenses (income), net in the consolidated statement of operations.
For certain other Loans, we receive net proceeds (net of fees and expected losses) for which we have no further obligation to the Financing Provider. We record these net proceeds to deferred revenue.
See Note 10 to the accompanying audited consolidated financial statements for further information on our CFP derivative arrangement.
Retail Installment Contract Receivables
For subscribers that enter into a RIC to finance the purchase of Products, we record a receivable for the amount financed. Gross RIC receivables are reduced for (i) expected write-offs of uncollectible balances over the term of the RIC and (ii) a present value discount of the expected cash flows using a risk adjusted market interest rate. Therefore, the RIC receivables equal the present value of the expected cash flows to be received by us over the term of the RIC, evaluated on a pool basis. RICs are pooled based on customer credit quality, contract length and geography. At the time of installation, we record a long-term note receivable within long-term notes receivables and other assets, net on the consolidated balance sheets for the present value of the receivables that are expected to be collected beyond 12 months of the reporting date. The unbilled receivable amounts that are expected to be collected within 12 months of the reporting date are included as a short-term notes receivable within accounts and notes receivable, net on the consolidated balance sheets. The billed amounts of notes receivables are included in accounts receivable within accounts and notes receivable, net on the consolidated balance sheets.
We impute the interest on the RIC receivable using a risk adjusted market interest rate and record it as a reduction to deferred revenue and as an adjustment to the face amount of the related receivable. The risk adjusted interest rate considers a number of factors, including credit quality of the subscriber base and other qualitative considerations such as macro-economic factors. The imputed interest income is recognized over the term of the RIC contract as recurring and other revenue on the consolidated statements of operations.
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When we determine that there are RIC receivables that have become uncollectible, we record an adjustment to the allowance and reduce the related note receivable balance. On a regular basis, we also reassess the expected remaining cash flows, based on historical RIC write-off trends, current market conditions and both Company and third-party forecast data. If we determine there is a change in expected remaining cash flows, the total amount of this change for all RICs is recorded in the current period to the provision for credit losses, which is included in general and administrative expenses in the accompanying consolidated statements of operations. Account balances are written-off if collection efforts are unsuccessful and future collection is unlikely based on the length of time from the day accounts become past due.
Capitalized Contract Costs
Capitalized contract costs represent the costs directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts. These include commissions, other compensation and related costs incurred directly for the origination and installation of new or upgraded customer contracts, as well as the cost of Products installed in the customer home at the commencement or modification of the contract. We calculate amortization by accumulating all deferred contract costs into separate portfolios based on the initial month of service and amortize those deferred contract costs on a straight-line basis over the expected period of benefit that we have determined to be five years, consistent with the pattern in which we provide services to our customers. We believe this pattern of amortization appropriately reduces the carrying value of the capitalized contract costs over time to reflect the decline in the value of the assets as the remaining period of benefit for each monthly portfolio of contracts decreases. The period of benefit of five years is longer than a typical contract term because of anticipated contract renewals. We apply this period of benefit to our entire portfolio of contracts. We update our estimate of the period of benefit periodically and whenever events or circumstances indicate that the period of benefit could change significantly. Such changes, if any, are accounted for prospectively as a change in estimate. Amortization of capitalized contract costs is included in "Depreciation and Amortization" on the consolidated statements of operations. The carrying amount of the capitalized contract costs is periodically reviewed for impairment. In performing this review, we consider whether the carrying amount of the capitalized contract costs will be recovered. In estimating the amount of consideration we expect to receive in the future related to capitalized contract costs, we consider factors such as attrition rates, economic factors, and industry developments, among other factors. If it is determined that capitalized contract costs are impaired, an impairment loss is recognized for the amount by which the carrying amount of the capitalized contract costs and the anticipated costs that relate directly to providing the future services exceed the consideration that has been received and that is expected to be received in the future. Contract costs not directly related and incremental to the origination of new contracts, modification of existing contracts or to the fulfillment of the related subscriber contracts are expensed as incurred. These costs include those associated with housing, marketing, advertising, recruiting, non-direct lead generation costs, certain portions of sales commissions and residuals, overhead and other costs considered not directly and specifically tied to the origination of a particular subscriber. On the consolidated statement of cash flows, capitalized contract costs are classified as operating activities and reported as "Capitalized contract costs - deferred contract costs" as these assets represent deferred costs associated with subscriber contracts. Loss Contingencies We record accruals for various contingencies including legal and regulatory proceedings and other matters that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of legal counsel. We record an accrual when a loss is deemed probable to occur and is reasonably estimable. We evaluate these matters each quarter to assess our loss contingency accruals, and make adjustments in such accruals, upward or downward, as appropriate, based on our management's best judgment after consultation with counsel. Factors that we consider in the determination of the likelihood of a loss and the estimate of the range of that loss in respect of legal and regulatory matters include the merits of a particular matter, the nature of the litigation or claim, the length of time the matter has been pending, the procedural posture of the matter, whether we intend to defend the matter, the likelihood of settling for an insignificant amount and the likelihood of the plaintiff or regulator accepting an amount in this range. However, the outcome of such legal and regulatory matters is inherently unpredictable and subject to significant uncertainties. There is no assurance that these accruals for loss contingencies will not need to be adjusted in the future or that, in light of the uncertainties involved in such matters, the ultimate resolution of these matters will not significantly exceed the accruals that we have recorded.
Recent Accounting Pronouncements
See Note 2 to our accompanying audited Consolidated Financial Statements.
Basis of Presentation
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We conduct business through one operating segment,Vivint , and have historically operated in two geographic regions:The United States andCanada . InJune 2022 , the Company sold itsCanada business. See Note 17 in the accompanying consolidated financial statements for more information about our geographic regions. Results of operations Year ended December 31, 2022 2021 2020 (in thousands) Total revenues$ 1,682,490 $ 1,479,388 $ 1,252,267 Total costs and expenses 1,610,946 1,633,626 1,514,325 Income (loss) from operations 71,544 (154,238) (262,058) Other expenses 120,928 148,843 340,190 Loss before taxes (49,384) (303,081) (602,248) Income tax expense 2,350 2,471 1,083 Net loss$ (51,734) $ (305,552) $ (603,331) Key performance measures Year ended December 31, 2022 2021 2020 Total Subscribers (in thousands) 1,924.6 1,855.1 1,695.5 Total MSR (in thousands)$ 89,935 $ 86,652 $ 82,989 AMSRU$ 46.73 $ 46.71 $ 48.95 Net subscriber acquisition costs per new subscriber$ 128 $ 58 $ 139 Net service cost per subscriber$ 9.68 $ 10.91 $ 10.94 Net service margin 79 % 77 % 78 % Average subscriber lifetime (months) 108 106 92 Total MRR (in thousands)$ 131,279 $ 118,285 $ 103,968 AMRRU$ 69.21 $ 66.32 $ 64.09 Adjusted EBITDA The following table sets forth a reconciliation of net loss to Adjusted EBITDA (in millions): Year ended December 31, 2022 2021 2020 Net loss$ (51.7) $ (305.6) $ (603.3) Interest expense, net 165.3 184.5 220.5 Income tax expense, net 2.4 2.5 1.1 Depreciation 17.4 16.5 20.2 Amortization (1) 604.4 585.0 550.6 Stock-based compensation (2) 78.7 166.4 198.2 Restructuring expenses (3) - - 20.9 CEO transition (4) - 11.8 - Loss contingency (5) - - 23.2
Change in fair value of warrant derivative liabilities (6)
(21.3) (50.1) 109.3
Other expense (income), net (7) (23.1) 14.5 10.4
Adjusted EBITDA $ 772.1 $ 625.5 $ 551.1
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57-------------------------------------------------------------------------------- Table of Contents (1)Excludes loan amortization costs that are included in interest expense. (2)Reflects non-cash compensation costs related to employee and director stock incentive plans. (3)Employee severance and termination benefits expenses associated with restructuring plans. (4)Hiring and severance expenses associated with CEO transition inJune 2021 . (5)Reflects an increase to the loss contingency accrual relating to the regulatory matters described in Note 14 to the accompanying consolidated financial statements. (6)Reflects the change in fair value of our derivative liability associated with our public warrants and private placement warrants. (7)Primarily consists of changes in our derivative instruments, foreign currency exchange and other gains and losses associated with financing and other transactions.
Year Ended
Revenues
The following table provides our revenue for the years endedDecember 31, 2022 and 2021: 2022 2021 % Change (in thousands) Recurring and other revenue$ 1,682,490 $ 1,479,388 14 % Recurring and other revenue increased$203.1 million , or 14% for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . The increase was primarily a result of:
•$140.7 million increase resulting from the change in Total Subscribers of approximately 4%;
•$51.3 million increase from the change in AMRRU; and
•$47.2 million in non-recurring revenues primarily from our smart energy
initiative, and to a lesser extent our
These increases were partially offset by a decrease of$35.8 million resulting from the change in recurring and other revenue from ourCanada business, which we sold inJune 2022 . Costs and Expenses
The following table provides the significant components of our costs and
expenses for the years ended
2022 2021 % Change
(in thousands)
Operating expenses $ 389,921 $ 384,365 1 %
Selling expenses 351,391 379,497 (7) %
General and administrative 247,812 268,312 (8) %
Depreciation and amortization 621,822 601,452 3 %
Total costs and expenses $ 1,610,946 $ 1,633,626 (1) %
Operating expenses for the year ended
•$6.4 million in personnel and related support costs;
•$6.3 million in expensed equipment costs;
•$2.8 million in facility related costs;
•$2.0 million in third-party contracted services;
•$1.3 million in information technology costs;
•$1.3 million in payment processing fees; and
•$1.1 million cost of fuel.
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These increases were partially offset by decreases of:
•$8.7 million in stock-based compensation; and
•$7.5 million in reduction of expenses due to the sale of our
Selling expenses, excluding capitalized contract costs, decreased
•$63.6 million decrease in stock-based compensation;
•$14.7 million decrease in marketing costs associated with branding and lead generation costs; and
•$1.3 million in reduction of expenses due to the sale of our
These decreases were partially offset by increases of:
•$46.8 million in commissions, recruiting and other costs associated primarily from the scaling of our smart energy initiative and to a lesser extent ourSmart Insurance and other pilot initiatives;
•$2.2 million in facility and housing costs;
•$1.3 million in information technology costs; and
•$1.2 million in third-party contracted services.
General and administrative expenses decreased$20.5 million , or 8%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . This decrease was primarily due to decreases of:
•$15.3 million in stock-based compensation;
•$11.3 million in severance related expenses;
•$8.9 million in marketing costs primarily related to costs associated with building brand awareness;
•$3.1 million in third-party contracted service costs; and
•$1.8 million in research and development costs related to devices and infrastructure; and
•$1.1 million in facility related costs.
These decreases were partially offset by increases of:
•$9.0 million in bad debt expenses;
•$6.2 million in loss contingency related expenses (See Note 14 to the accompanying consolidated financial statements); and
•$5.7 million in personnel and related support costs.
Depreciation and amortization for the year endedDecember 31, 2022 increased$20.4 million , or 3%, as compared to the year endedDecember 31, 2021 primarily due to increased amortization of capitalized contract costs related to new subscribers.
Other Expenses, net
The following table provides the significant components of our other expenses,
net, for the years ended
2022 2021 % Change
(in thousands)
Interest expense $ 166,755 $ 184,993 (10) %
Interest income (1,438) (532) NMChange in fair value of warrant liabilities (21,332) (50,107)
NM
Other (income) loss, net (23,057) 14,489 NM
Total other expenses, net $ 120,928 $ 148,843 (19) %
Interest expense decreased $18.2 million , or 10%, for the year ended
December 31, 2022 , as compared with the year ended December 31, 2021 , primarily
due to lower outstanding debt principal and interest rates associated with the
July 2021 debt refinance (See Note 5 to the accompanying consolidated financial
statements).
Change in fair value of warrant liabilities for the year ended December 31, 2022
and 2021 represents the change in fair value measurements of our outstanding
stock warrants.
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Other (income) loss, net represented income of$23.1 million for the year endedDecember 31, 2022 , as compared to a loss of$14.5 million for the year endedDecember 31, 2021 . The other income during the year endedDecember 31, 2022 was primarily due to a$25.1 million gain on sale of theCanada business inJune 2022 offset by a$2.2 million loss on our financing derivative instrument.
The other loss during the year ended
•$30.2 million from losses on debt modification and extinguishment; and
•$14.7 million gain on our CFP derivative instrument, which partially offset these losses.
See Note 5 to our accompanying consolidated financial statements for further information on our long-term debt related to other expenses, net.
Income Taxes
The following table provides the significant components of our income tax
expense for the years ended
2022 2021 % Change
(in thousands)
Income tax expense $ 2,350 $ 2,471 (5) %
Income tax expense was $2.4 million for the year ended December 31, 2022 , as
compared to $2.5 million for the year ended December 31, 2021 . Our tax expense
for the years ended December 31, 2022 and 2021, respectively, resulted primarily
from the income in our Canadian subsidiary and U.S. state income taxes where use
of a net operating loss carryover is currently limited or suspended.
Liquidity and Capital Resources
Cash from operations may be affected by various risks and uncertainties, including, but not limited to, the risks detailed in the Risk Factors section of this Annual Report on Form 10-K for the year endedDecember 31, 2022 . Based on our current business plan and revenue prospects, we believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months from the date of this filing.
Our primary source of liquidity has historically been cash from operations,
proceeds from issuances of debt securities, borrowings under our credit
facilities and, to a lesser extent, capital contributions and issuances of
equity. As of
As market conditions warrant, we and our equity holders, including the Sponsor, its affiliates, and members of our management, may from time to time, seek to purchase our outstanding debt securities or loans in privately negotiated or open market transactions, by tender offer or otherwise. Subject to any applicable limitations contained in the agreements governing our indebtedness, any purchases made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt, including additional borrowings under our Revolving Credit Facility. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchases may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the "adjusted issue price" (as defined forU.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us. Depending on conditions in the credit and capital markets and other factors, we will, from time to time, consider various financing transactions, the proceeds of which could be used to refinance our indebtedness or for other purposes.
Cash Flow and Liquidity Analysis
Our cash flows provided by operating activities include recurring monthly billings, cash received from the sale of Products to our customers that either pay-in-full at the time of installation or finance their purchase of Products under the CFP, commissions we receive related to our smart energy andSmart Insurance businesses and other fees received from the customers we service. Cash used in operating activities includes the cash costs to monitor and service our subscribers, a portion of subscriber acquisition costs, interest associated with our debt, general and administrative costs and smart energy and Smart 60
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Insurance commissions paid to our sales staff. Historically, we financed subscriber acquisition costs through our operating cash flows, the issuance of debt, and to a lesser extent, through the issuance of equity. Currently, the upfront proceeds from the CFP, and subscribers that pay-in-full at the time of the sale of Products, offset a significant portion of the upfront investment associated with subscriber acquisition costs. Sales from our direct-to-home channel are seasonal in nature. We make investments in the recruitment of our direct-to-home sales representatives, inventory and other support costs for the April through August sales period prior to each sales season. We experience increases in capitalized contract costs, as well as costs to support the sales force throughout theU.S. , prior to and during this time period. The incremental inventory purchased to support the direct-to-home sales season is generally consumed prior to the end of the calendar year in which it is purchased.
The following table provides a summary of cash flow data (in thousands):
Year ended
2022 2021 2020
Net cash provided by operating activities $ 39,423 $ 82,454 $ 226,664
Net cash provided by (used in) investing activities 68,694 (17,481) (11,663)
Net cash (used in) provided by financing activities (32,543) (170,216) 94,112
Cash Flows from Operating Activities
We generally reinvest the cash flows from our recurring monthly billings and cash received from the sale of Products through the Vivint Flex Pay Program associated with the initial installation of the customer's equipment, primarily to (1) maintain and grow our subscriber base, (2) expand our infrastructure to support this growth, (3) enhance our existing Smart Home Service offerings, (4) develop new Smart Home Product and Service offerings and (5) expand into new sales channels and adjacent offerings. These investments are focused on generating new subscribers, increasing the revenue from our existing subscriber base, extending our Average Subscriber Lifetime, enhancing the overall quality of service provided to our subscribers, and increasing the productivity and efficiency of our workforce and back-office functions necessary to scale our business. For the year endedDecember 31, 2022 , net cash provided by operating activities was$39.4 million . This cash provided was primarily from a net loss of$51.7 million , adjusted for:
•$705.4 million in non-cash amortization, depreciation, and stock-based compensation,
•a
•a
•a
Cash used in operating activities also resulted from changes in operating assets and liabilities, including:
•$661.3 million in additions to capitalized contract costs related to New Subscribers generated during the year,
•$46.5 million increase in additions to accounts receivable,
•$72.6 million decrease in accrued expenses and other liabilities due primarily from increases in accrued interest on our long-term debt and accrued payroll related costs,
•$10.4 million decrease in right-of-use operating lease liabilities,
•$10.5 million increase in prepaid expenses and other current assets, and
•$28.2 million increase in inventories on hand.
These uses of operating cash were partially offset by:
•$166.5 million increase in deferred revenue due to the increased subscriber base and the increase of deferred revenues associated with Product sales under Vivint Flex Pay,
•$23.4 million decrease in other assets primarily due to decreases in notes receivables associated with RICs,
•$9.2 million decrease in right-of-use operating assets.
For the year endedDecember 31, 2021 , net cash provided by operating activities was$82.5 million . This cash provided was primarily from a net loss of$305.6 million , adjusted for:
•$770.8 million in non-cash amortization, depreciation, and stock-based compensation,
•a
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•a
•a
•a
Cash used in operating activities also resulted from changes in operating assets and liabilities, including:
•$611.5 million in additions to capitalized contract costs related to New Subscribers generated during the year,
•$30.7 million increase in additions to accounts receivable,
•$22.8 million decrease in accrued expenses and other liabilities due primarily from increases in accrued interest on our long-term debt and accrued payroll related costs,
•$8.1 million decrease in right-of-use operating lease liabilities,
•$5.1 million increase in prepaid expenses and other current assets, and
•$4.0 million increase in inventories on hand.
These uses of operating cash were partially offset by:
•$259.1 million increase in deferred revenue due to the increased subscriber base and the increase of deferred revenues associated with Product sales under Vivint Flex Pay,
•$16.3 million decrease in other assets primarily due to decreases in notes receivables associated with RICs,
•$6.9 million decrease in right-of-use operating assets.
For the year endedDecember 31, 2020 , net cash provided by operating activities was$226.7 million . This cash provided was primarily from a net loss of$603.3 million , adjusted for:
•$773.0 million in non-cash amortization, depreciation, and stock-based compensation,
•a
•a
•a
•a
Cash used in operating activities also resulted from changes in operating assets and liabilities, including:
•$584.2 million in additions to capitalized contract costs,
•$24.7 million increase in accounts receivable,
•$13.3 million decrease in right-of-use operating lease liabilities, and
•$2.3 million increase in prepaid expenses and other current assets.
These uses of operating cash were partially offset by:
•$304.4 million increase in deferred revenue due to the increased subscriber base and the increase of deferred revenues associated with Product sales under Vivint Flex Pay, •$156.8 million increase in accrued expenses and other liabilities due primarily from increases in accrued interest on our long-term debt and accrued payroll related costs,
•$29.0 million decrease in other assets primarily due to decreases in notes receivables associated with RICs,
•$17.3 million decrease in inventories on hand, and
•$12.4 million decrease in right-of-use operating assets.
Our outstanding aggregate principal debt as ofDecember 31, 2022 was approximately$2.7 billion . Net cash interest paid for the years endedDecember 31, 2022 , 2021 and 2020 related to our indebtedness (excluding finance leases) totaled$143.8 million ,$170.7 million and$212.6 million , respectively. Our net cash from operating activities for the years endedDecember 31, 2022 , 2021 and 2020, before these interest payments, were inflows of$183.2 million ,$253.2 million and$439.3 million , respectively. Accordingly, our net cash from operating activities were sufficient for the years endedDecember 31, 2022 , 2021 and 2020 to cover such interest payments. For additional information regarding our outstanding indebtedness see "-Long-Term Debt" below.
Cash Flows from Investing Activities
Historically, our investing activities have primarily consisted of capital expenditures, business combinations and technology acquisitions. Capital expenditures primarily consist of periodic additions to property, plant and equipment to support the growth in our business.
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For the year endedDecember 31, 2022 , net cash provided by investing activities was$68.7 million , primarily from proceeds from the sale of ourCanada business of$86.1 million , partially offset by capital expenditures of$19.4 million .
For the year ended
For the year endedDecember 31, 2020 , net cash used in investing activities was$11.7 million . This cash used primarily consisted of capital expenditures of$25.2 million and acquisition of intangible assets of$4.5 million . These cash uses were offset by$18.1 million in proceeds on the sale of assets.
Cash Flows from Financing Activities
Historically, our cash flows provided by financing activities primarily related to the issuance of equity securities and debt, primarily to fund the portion of upfront costs associated with generating new subscribers that are not covered through our operating cash flows or through our Vivint Flex Pay program. Uses of cash for financing activities are generally associated with the return of capital to our stockholders, the repayment of debt and the payment of financing costs associated with the issuance of debt. For the year endedDecember 31, 2022 , net cash used in financing activities was$32.5 million . Repayments of outstanding debt consisted of$13.5 million principal amounts of the term loan. Additionally, we incurred$15.4 million for taxes paid related to net share settlements of stock-based compensation awards and$3.7 million of repayments under our finance lease obligations. For the year endedDecember 31, 2021 , net cash used in financing activities was$170.2 million . Repayments of outstanding debt consisted of$946.3 million ,$677.0 million ,$400.0 million and$225.0 million aggregate principal amounts of term loans, 2022 Notes, 2023 Notes and 2024 Notes, respectively. Additionally, we incurred$50.2 million in related debt financing costs,$29.4 million for taxes paid related to net share settlements of stock-based compensation awards and$3.2 million of repayments under our finance lease obligations. These cash uses were offset by proceeds from the issuance of$800.0 million aggregate principal amount of 2029 Notes,$1,350.0 million in borrowings under Term Loan Facility and$10.8 million from the exercise of warrants. For the year endedDecember 31, 2020 , net cash provided by financing activities was$94.1 million , consisting of proceeds from the issuance of$600.0 million aggregate principal amount of 2027 Notes and$950.0 million in borrowings under Term Loans,$463.5 million capital contribution associated with the Merger,$359.2 million in borrowings on the revolving credit facility and$120.8 million from the exercise of warrants. This was offset with$1,754.3 million of repayments on existing notes,$604.2 million of repayments on the revolving credit facility,$24.1 million in financing costs,$9.2 million for taxes paid related to net share settlements of stock-based compensation awards, and$7.7 million of repayments under our finance lease obligations.
Long-Term Debt
We are a highly leveraged company with significant debt service requirements. As ofDecember 31, 2022 , we had$2,733.1 million of aggregate principal total debt outstanding, consisting of$800.0 million of outstanding 2029 notes,$600.0 million of outstanding 2027 notes and$1,333.1 million of outstanding Term Loan with$358.9 million of availability under our revolving credit facility (after giving effect to$11.1 million of outstanding letters of credit and no borrowings).
Debt Refinance 2021
OnJuly 9, 2021 ,APX Group, Inc. (the "Issuer" or "APX"), our indirect, wholly owned subsidiary, issued$800.0 million aggregate principal amount of 5.75% Senior Notes due 2029 (the "2029 Notes"), pursuant to an indenture, dated as ofJuly 9, 2021 , among the Issuer, the guarantors party thereto andWilmington Trust, National Association , as trustee and collateral agent. Concurrently with the Notes offering, the Issuer refinanced its existing credit facilities with (i) a new$1,350.0 million first lien senior secured term loan facility (the "Term Loan Facility") and (ii) a new$370.0 million senior secured revolving credit facility (together with the Term Loan Facility, the "New Senior Secured Credit Facilities"), with the lenders party thereto andBank of America, N.A . as a lender, administrative agent and collateral agent. The Issuer is the borrower under the New Senior Secured Credit Facilities. The net proceeds from the 2029 Notes offering, together with the borrowings under the New Senior Secured Credit Facilities and cash on hand, were used to (i) redeem (the "2022 Notes Redemption") all of the Issuer's outstanding 7.875% Senior Secured Notes due 2022, (ii) redeem (the "2023 Notes Redemption") all of the Issuer's outstanding 7.625% Senior Notes due 63
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2023, (iii) redeem (the "2024 Notes Redemption" and together with the 2022 Notes Redemption and the 2023 Notes Redemption, the "Redemptions") all of the Issuer's outstanding 8.50% Senior Secured Notes due 2024, (iv) repay amounts outstanding, and to terminate all commitments, under its existing revolving credit facility and term loan facility and (v) pay the related redemption premiums and all fees and expenses related thereto.
2027 Notes
As ofDecember 31, 2022 , APX had$600.0 million outstanding aggregate principal amount of its 2027 notes. As ofDecember 31, 2022 , our maximum commitment for interest payments was$120.9 million for the remaining duration of the 2027 notes. Interest on the 2027 notes is payable semiannually in arrears onFebruary 15 andAugust 15 each year. We may, at our option, redeem at any time and from time to time prior toFebruary 15, 2023 , some or all of the 2027 notes at 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date plus the applicable "make-whole premium." From and afterFebruary 15, 2023 , we may, at our option, redeem at any time and from time to time some or all of the 2027 notes at 103.375%, declining to par from and afterMay 1, 2025 , in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior toFebruary 15, 2023 , we may, at our option, redeem up to 40% of the aggregate principal amount of the 2027 notes with the proceeds from certain equity offerings at 100% plus an applicable premium, plus accrued and unpaid interest to the date of redemption. In addition, on or prior toFebruary 15, 2023 , during any 12 month period, we also may, at our option, redeem at any time and from time to time up to 10% of the aggregate principal amount of the 2027 notes at a price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, to but excluding the redemption date. The 2027 notes will mature onFebruary 15, 2027 . The 2027 notes are secured, on a pari passu basis, by the collateral securing obligations under the existing senior secured notes, the Revolving Credit Facility and the Term Loan Facility, in each case, subject to certain exceptions and permitted liens.
2029 Notes
As ofDecember 31, 2022 , APX had$800.0 million outstanding aggregate principal amount of its 2029 notes. As ofDecember 31, 2022 , our maximum commitment for interest payments was$322.1 million for the remaining duration of the 2029 notes. Interest on the 2029 notes is payable semiannually in arrears onJanuary 15 andJuly 15 each year. We may, at our option, redeem at any time and from time to time prior toJuly 15, 2024 , some or all of the 2029 notes at 100% of the principal amount thereof plus accrued and unpaid interest to the redemption date plus the applicable "make-whole premium." From and afterJuly 15, 2024 , we may, at our option, redeem at any time and from time to time some or all of the 2029 notes at 102.875%, declining to par from and afterJuly 15, 2026 , in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior toJuly 15, 2024 , we may, at our option, redeem up to 40% of the aggregate principal amount of the 2029 notes with the proceeds from certain equity offerings at 100% plus an applicable premium, plus accrued and unpaid interest to the date of redemption. In addition, on or prior toJuly 15, 2024 , we may redeem the 2029 notes, in whole or in part, at a redemption price equal to the sum of (A) 100.0% of the principal amount of the 2029 notes redeemed, plus (B) the applicable premium as of the redemption date, plus (C) accrued and unpaid interest, if any.
The 2029 notes will mature on
Senior Secured Credit Facilities
InJuly 2021 , APX amended and restated its existing senior secured term loan credit agreement and existing senior secured revolving credit facility with a new senior secured credit agreement (the "Credit Agreement") that provides for (i) a term loan facility in an aggregate principal amount of$1,350.0 million (the "Term Loan Facility", and the loans thereunder, the "Term Loans") and (ii) a revolving credit facility with commitments in an aggregate principal amount of$370.0 million (the "Revolving Credit Facility", and the loans thereunder, the "Revolving Loans"). As ofDecember 31, 2022 , APX had outstanding term loans under the Term Loan Facility in an aggregate principal amount of$1,333.1 million . As ofDecember 31, 2022 , our maximum commitment for interest payments was$753.5 million for the remaining duration of the term loans under the Term Loan Facility. APX is required to make quarterly amortization payments under the Term Loan Facility in an amount equal to 0.25% of the aggregate principal amount of the Term Loans outstanding on the closing date thereof. The remaining outstanding principal amount of the Term Loans will be due and payable in full onJuly 9, 2028 . APX may prepay the Term Loans on the terms specified in the Credit Agreement. No amortization payments are required under the Revolving Credit Facility. 64
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In addition to paying interest on outstanding principal under the Revolving Credit Facility, APX is required to pay a quarterly commitment fee of 50 basis points (which will be subject to two interest rate step-downs of 12.5 basis points, based on APX meeting consolidated first lien net leverage ratio tests) to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. APX also pays customary letter of credit and agency fees. The revolving credit commitments outstanding under the Revolving Credit Facility will be due and payable in full onJuly 9, 2026 . Borrowings under the amended and restated Term Loan Facility and Revolving Credit Facility bear interest, at APX's option, at a rate per annum equal to either (a)(i) a base rate determined by reference to the highest of (1) the "Prime Rate" inthe United States as published inThe Wall Street Journal , (2) the federal funds effective rate plus 0.50% and (3) the LIBO rate for a one month interest period plus 1.00%, plus (ii) 2.50% (or after the delivery of financial statements for the fiscal quarter endingDecember 31, 2021 , between 2.50% and 2.00%, depending on the first lien net leverage ratio of the applicable fiscal quarter) or (b)(i) a LIBO rate determined by reference to the applicable page for the LIBO rate for the interest period relevant to such borrowing plus (ii) 3.50% (or after the delivery of financial statements for the fiscal quarter endingDecember 31, 2021 , between 3.50% and 3.00%, depending on the first lien net leverage ratio of the applicable fiscal quarter), subject in each case to an agreed interest rate floor. There were no outstanding borrowings under the Revolving Credit Facility as ofDecember 31, 2022 andDecember 31, 2021 . As ofDecember 31, 2022 , we had$358.9 million of availability under our revolving credit facility (after giving effect to$11.1 million of letters of credit outstanding and no borrowings). 65
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Guarantees and Security (Credit Agreement and Notes)
All of the obligations under the Credit Agreement and the debt agreements governing the Notes are guaranteed byAPX Group Holdings, Inc. , each ofAPX Group's existing and future material wholly ownedU.S. restricted subsidiaries (subject to customary exclusions and qualifications) and solely in the case of the Notes,Vivint Smart Home, Inc. However, such subsidiaries shall only be required to guarantee the obligations under the debt agreements governing the Notes for so long as such entities guarantee the obligations under the Revolving Credit Facility, the Term Loan Facility or the Company's other indebtedness. The obligations under the Revolving Credit Facility, the Term Loans and the 2027 notes are secured by a security interest in (1) substantially all of the present and future tangible and intangible assets ofAPX Group, Inc. , and the subsidiary guarantors, including without limitation equipment, subscriber contracts and communication paths, intellectual property, material fee-owned real property, general intangibles, investment property, material intercompany notes and proceeds of the foregoing, subject to permitted liens and other customary exceptions, (2) substantially all personal property ofAPX Group, Inc. and the subsidiary guarantors consisting of accounts receivable arising from the sale of inventory and other goods and services (including related contracts and contract rights, inventory, cash, deposit accounts, other bank accounts and securities accounts), inventory and intangible assets to the extent attached to the foregoing books and records ofAPX Group, Inc. and the subsidiary guarantors, and the proceeds thereof, subject to permitted liens and other customary exceptions, in each case held byAPX Group, Inc. and the subsidiary guarantors and (3) a pledge of all of the capital stock ofAPX Group, Inc. , each of its subsidiary guarantors and each restricted subsidiary ofAPX Group, Inc. and its subsidiary guarantors, in each case other than excluded assets and subject to the limitations and exclusions provided in the applicable collateral documents.
Debt Covenants
The Credit Agreement and the debt agreements governing the Notes contain a
number of covenants that, among other things, restrict, subject to certain
exceptions,
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends and make other distributions on, or redeem or repurchase, capital stock;
•make certain investments; •incur certain liens;
•enter into transactions with affiliates;
•merge or consolidate;
•materially change the nature of their business;
•enter into agreements that restrict the ability of restricted subsidiaries to
make dividends or other payments to
•designate restricted subsidiaries as unrestricted subsidiaries;
•amend, prepay, redeem or purchase certain subordinated debt; and
•transfer or sell certain assets.
The Credit Agreement and the debt agreements governing the Notes contain change of control provisions and certain customary affirmative covenants and events of default. As ofDecember 31, 2022 ,APX Group, Inc. was in compliance with all covenants related to its long-term obligations.
Subject to certain exceptions, the Credit Agreement and the debt agreements
governing the Notes permit
Our future liquidity requirements will be significant, primarily due to debt service requirements. The actual amounts of borrowings under the Revolving Credit Facility will fluctuate from time to time.
Our liquidity and our ability to fund our capital requirements is dependent on
our future financial performance, which is subject to general economic,
financial and other factors that are beyond our control and many of which are
described under "Part I. Item 1A-Risk Factors". If those factors significantly
change or other unexpected factors adversely affect us, our business may not
generate sufficient cash flow from operations or we may not be able to obtain
future financings to meet our liquidity needs. We anticipate that to the extent
additional liquidity is necessary to fund our
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operations, it would be funded through borrowings under the Revolving Credit Facility, incurring other indebtedness, additional equity or other financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.
Covenant Compliance
Under the Credit Agreement and the debt agreements governing the Notes, our subsidiary,APX Group's ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Covenant Adjusted EBITDA (which measure is defined as "Consolidated EBITDA" in the Credit Agreement and "EBITDA" in the debt agreements governing the existing notes) for the applicable four-quarter period. Such tests include an incurrence-based maximum consolidated secured debt ratio and first lien secured debt ratio of 4.25 to 1.0, a consolidated total debt ratio of 5.50 to 1.0, an incurrence-based minimum fixed charge coverage ratio of 2.00 to 1.0, and, solely in the case of the Revolving Credit Facility, a quarterly maintenance-based maximum consolidated first lien secured debt ratio of 4.99 to 1.0 (subject to certain conditions set forth in the Credit Agreement being satisfied), each as determined in accordance with the Credit Agreement and the debt agreements governing the Notes, as applicable. Non-compliance with these covenants could restrict our ability to undertake certain activities or result in a default under the Credit Agreement and the debt agreements governing the Notes. "Covenant Adjusted EBITDA" is defined as net income (loss) before interest expense (net of interest income), income and franchise taxes and depreciation and amortization (including amortization of capitalized subscriber acquisition costs), further adjusted to exclude the effects of certain contract sales to third parties, non-capitalized subscriber acquisition costs, stock based compensation, changes in the fair value of the derivative liability associated with our public and private warrants and certain unusual, non-cash, non-recurring and other items permitted in certain covenant calculations under the agreements governing our Notes and the Credit Agreement. We believe that the presentation of Covenant Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants contained in the agreements governing the Notes and the Credit Agreement governing the Revolving Credit Facility and the Term Loan Facility. We caution investors that amounts presented in accordance with our definition of Covenant Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Covenant Adjusted EBITDA in the same manner. Covenant Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net loss or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. The following table sets forth a reconciliation of net loss to Covenant Adjusted EBITDA (in thousands): Year ended December 31, 2022 2021 2020 Net loss$ (51,734) $ (305,552) $ (603,331) Interest expense, net 165,317 184,461 220,467 Non-capitalized subscriber acquisition costs (1) 387,368 343,138 268,541
Amortization of capitalized subscriber acquisition costs
556,550 524,980 481,213
Depreciation and amortization (2) 65,272 76,472 89,618
Other expense (income) (23,057) 14,489 10,473
Non-cash compensation (3) 78,734 166,428 198,213
Restructuring and asset impairment charge (4) - - 20,941
Income tax expense 2,350 2,471 1,083
Change in fair value of warrant derivative liabilities
(5) (21,332) (50,107) 109,250
Other adjustments (6) 100,603 93,958 95,293
Covenant Adjusted EBITDA $ 1,260,071 $ 1,050,738 $ 891,761
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(1)Reflects subscriber acquisition costs that are expensed as incurred because
they are not directly related to the acquisition of specific subscribers.
Certain other industry participants purchase subscribers through subscriber
contract purchases, and as a result, may capitalize the full cost to purchase
these subscriber contracts, as compared to our organic generation of new
subscribers, which requires us to expense a portion of our subscriber
acquisition costs under GAAP.
(2)Excludes loan amortization costs that are included in interest expense.
(3)Reflects non-cash compensation costs related to employee and director stock
and stock option plans. Excludes non-cash compensation costs included in
non-capitalized subscriber acquisition costs.
(4)Restructuring employee severance and termination benefits expenses. (See Note
11 to the accompanying consolidated financial statements).
(5)Reflects the change in fair value of our derivative liability associated with
our public warrants and private placement warrants.
(6)Other adjustments represent primarily the following items (in thousands):
Year ended December 31,
2022 2021 2020
Product development (a) $ 19,359 $ 16,550 $ 15,222
Consumer financing fees (b) 56,835 43,573 27,591
Hiring and termination payments (c) 850 19,223 3,482
Certain legal and professional fees (d) 13,008 8,083 5,492
Monitoring fee (e) (62) 5,747 8,077
Loss contingency (f) 10,800 - 23,200
Projected run-rate restructuring cost savings (g) - - 11,609
All other adjustments (h) (187) 782 620
Total other adjustments $ 100,603 $ 93,958 $ 95,293
(a)Costs related to the development of control panels, including associated
software and peripheral devices.
(b)Reflects the reduction to revenue related to the amortization of certain
financing fees incurred under the Vivint Flex Pay program.
(c)Expenses associated with retention bonus, relocation and severance payments
to management.
(d)Legal and professional fees associated with strategic initiatives and
financing transactions.
(e)Blackstone Management Partners L.L.C. monitoring fee (See Note 16 to the
accompanying consolidated financial statements).
(f)Reflects an increase to the loss contingency accrual relating to legal and
regulatory matters (See Note 14 to the accompanying consolidated financial
statements).
(g)Projected run-rate savings related to March 2020 reduction-in-force.
(h)Other adjustments primarily reflect costs associated with various strategic,
legal and financing activities.
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Other Factors Affecting Liquidity and Capital Resources
Vivint Flex Pay. Vivint Flex Pay became our primary equipment financing model beginning inMarch 2017 . Under Vivint Flex Pay, customers pay separately for Products through the CFP. Under the CFP, qualified customers are eligible for Loans originated by Financing Providers of between$150 and$6,000 . The terms of most loans are determined based on the customer's credit quality. The annual percentage rates on these Loans is either 0% or 9.99%, depending on the customer's credit quality, and are either installment or revolving loans with repayment terms ranging from 6- to 60-months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Consumer Financing Program" for further details. For certain Financing Provider Loans, we pay a monthly fee based on either the average daily outstanding balance of the loans or the number of outstanding Loans, depending on the third-party financing provider. For certain Loans, we incur fees at the time of the Loan origination and receive proceeds that are net of these fees. Additionally, we share in the liability for credit losses depending on the credit quality of the customer, with our Company being responsible for between 2.6% to 100% of lost principal balances, depending on factors specified in the agreement with such provider. Because of the nature of these provisions, we record a derivative liability at its fair value when the Financing Provider originates Loans to customers, which reduces the amount of estimated revenue recognized on the provision of the services. The derivative liability represents the estimated remaining amounts to be paid to the Financing Provider by us related to outstanding Loans, including the monthly fees based on either the outstanding Loan balances or the number of outstanding Loans, shared liabilities for credit losses and customer payment processing fees. The derivative liability is reduced as payments are made by us to the Financing Provider. Subsequent changes to the fair value of the derivative liability are realized through other expenses (income), net in the Consolidated Statement of Operations. As ofDecember 31, 2022 and 2021, the fair value of this derivative liability was$125.8 million and$216.8 million , respectively. For other Financing Provider Loans, we receive net proceeds (net of fees and expected losses) for which we have no further obligation to the third-party. We record these net proceeds to deferred revenue. Vehicle Leases. Since 2010, we have leased, and expect to continue leasing, vehicles primarily for use by our Smart Home Pros. For the most part, these leases have 36 to 48-month durations and we account for them as finance leases. At the end of the lease term for each vehicle we have the option to either (i) purchase it for the estimated end-of-lease fair market value established at the beginning of the lease term; or (ii) return the vehicle to the lessor to be sold by them and in the event the sale price is less than the estimated end-of-lease fair market value we are responsible for such deficiency. As ofDecember 31, 2022 , our total finance lease obligations were$7.9 million . Operating Leases. We have operating lease commitments for corporate offices, warehouse facilities, research and development and other operating facilities and other operating assets. As ofDecember 31, 2022 we had$50.0 million of total future operating lease payments.
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