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APX GROUP HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[August 08, 2014]

APX GROUP HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(Edgar Glimpses Via Acquire Media NewsEdge) Introduction The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2013. 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 Quarterly Report. Actual results may differ materially from those contained in any forward-looking statements. Unless the context otherwise requires, references to "we", "us", "our", and "the Company" are intended to mean the business and operations of APX Group Holdings, Inc. and its consolidated subsidiaries.



Non-GAAP Financial Measures This Quarterly Report on Form 10-Q includes Adjusted EBITDA, which is a supplemental measure that is not required by, or presented in accordance with, accounting principles generally accepted in the United States ("GAAP"). It is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income or any other measure derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. We define "Adjusted EBITDA" 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 and certain unusual, non-cash, non-recurring and other items permitted in certain covenant calculations under the indentures governing our existing senior secured notes and our existing senior unsecured notes and the credit agreement governing our revolving credit facility. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner. We believe that Adjusted EBITDA provides useful information about flexibility under our covenants to investors, lenders, financial analysts and rating agencies since these groups have historically used EBITDA-related measures in our industry, along with other measures, to estimate the value of a company, to make informed investment decisions, and to evaluate a company's ability to meet its debt service requirements. Adjusted EBITDA eliminates the effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting. Adjusted EBITDA also eliminates the effects of interest rates and changes in capitalization which management believes may not necessarily be indicative of a company's underlying operating performance. Adjusted EBITDA is also used by us to measure covenant compliance under the indentures governing our existing senior secured notes and our existing senior unsecured notes and the credit agreement governing our revolving credit facility.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Financial Resources" for a reconciliation of Adjusted EBITDA to net loss, as we believe net loss is the most comparable financial measure calculated in accordance with GAAP. Adjusted EBITDA should be considered in addition to and not as a substitute for, or superior to, financial measures presented in accordance with GAAP.


Business Overview We are one of the largest residential security solutions companies and one of the largest and fastest-growing home automation services providers in North America. In February 2013, we were recognized by Forbes magazine as one of America's Most Promising Companies. Our fully integrated and remotely accessible residential services platform offers subscribers a suite of products and services that includes interactive security, life-safety, energy management and home automation. We utilize a scalable direct-to-home sales model to originate a majority of our new subscribers, which allows us control over our net subscriber acquisition costs. We have built a high-quality subscriber portfolio, with an average credit score of 717, as of June 30, 2014, through our underwriting criteria and compensation structure. Unlike many of our competitors, who generally focus on either subscriber origination or servicing, we originate, install, service and monitor our entire subscriber base, which allows us to control the overall subscriber experience. We seek to deliver a quality subscriber experience with a combination of innovative development of new products and services and a commitment to customer service, which together with our focus on originating high-quality new subscribers, has enabled us to achieve attrition rates that we believe are historically at or below industry averages.

Utilizing this model, we have built a portfolio of approximately 851,000 subscribers, as of June 30, 2014. Approximately 96% and 95% of our revenues during the three months ended June 30, 2014 and 2013, respectively, and 96% and 88% during the six months ended June 30, 2014 and 2013, respectively, consisted of contractually committed recurring revenues, which have historically resulted in consistent and predictable operating results.

30 Recent Transactions On April 1, 2013, we completed the sale of 2GIG Technologies, Inc. and its subsidiary ("2GIG") to Nortek, Inc. (the "2GIG Sale"). Pursuant to the terms of the 2GIG Sale, Nortek acquired all of the outstanding common stock of 2GIG for aggregate cash consideration of approximately $148.9 million. In connection with the 2GIG Sale, we retained sole ownership of the intellectual property and exclusive rights with respect to the next generation of our control panels and certain peripheral equipment. We expect this proprietary equipment will be a critical component of our future service offerings. In addition, we entered into a five-year supply agreement with 2GIG, pursuant to which they will be the exclusive provider of our control panel requirements, subject to certain exceptions as provided in the supply agreement. A portion of the net proceeds from the 2GIG Sale were used to temporarily repay $44.0 million of outstanding borrowings under our revolving credit facility. The terms of the indentures governing the notes and the credit agreement governing our revolving credit facility permit us, subject to certain conditions, to distribute all or a portion of the net proceeds from the 2GIG Sale to our stockholders. In May 2013, we distributed $60.0 million of such proceeds to our stockholders. Subject to the applicable conditions, we may distribute the remaining proceeds in the future. Our results of operations include the results of 2GIG through the date of the 2GIG Sale.

In May and December 2013, we issued and sold an additional $200.0 million and $250.0 million, respectively, aggregate principal amount of 8.75% senior notes due 2020. On July 1, 2014, we issued and sold an additional $100.0 million aggregate principal amount of 8.75% senior notes due 2020.

Basis of Presentation The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013, respectively, present the financial position and results of operations of APX Group Holdings, Inc. and its wholly-owned subsidiaries. We have historically conducted business through our Vivint and 2GIG operating segments. On April 1, 2013, we completed the sale of 2GIG to Nortek. See "-Recent Transactions." Therefore, 2GIG is excluded from our operating results, beginning on the date of the 2GIG Sale. The results of our 2GIG operating segment include the results of 2GIG Technologies, Inc., which was our consolidated subsidiary until its sale to Nortek.

Historically, a substantial majority of 2GIG's revenues were generated from Vivint through (i) sales of its security systems; and (ii) fees billed to Vivint associated with a third-party monitoring platform. Sales to Vivint represented approximately 71% of 2GIG's revenues on a stand-alone basis from January 1, 2013 through the date of the 2GIG Sale. The results of 2GIG's operations discussed in this Quarterly Report on Form 10-Q exclude intercompany activity with Vivint, as these transactions were eliminated in consolidation.

The term "attrition" as used in this quarterly report on Form 10-Q refers to the aggregate number of cancelled subscribers during a period divided by the monthly weighted average number of total subscribers for such period. Subscribers are considered cancelled when they terminate in accordance with the terms of their contract, are terminated by us or if payment from such subscribers is deemed uncollectible (120 days past due). Sales of contracts to third parties and certain subscriber residential moves are excluded from the attrition calculation. The term "net subscriber acquisition costs" as used in this quarterly report on Form 10-Q refers to the gross costs to generate and install a subscriber net of any fees collected at the time of the contract signing. The term "RMR" is the recurring monthly revenue billed to a subscriber. The term "total RMR" is the aggregate RMR billed to all subscribers. The term "total subscribers" is the aggregate number of our active subscribers at the end of a given period. The term "average RMR per subscriber" is the total RMR divided by the total subscribers. This is also commonly referred to as Average Revenue per User, or "ARPU." The term "average RMR per new subscriber" is the aggregate RMR for new subscribers originated during a period divided by the number of new subscribers originated during such period.

Key Factors Affecting Operating Results Our business is driven through the generation of new subscribers and servicing and maintaining our existing subscriber base. The generation of new subscribers requires significant upfront investment, which in turn provides predictable contractual recurring monthly revenue generated from our monitoring and additional services. We market our service offerings through two sales channels, direct-to-home and inside sales. Historically, most of our new subscriber accounts were generated through direct-to-home sales, primarily from April through August. New subscribers generated through inside sales was approximately 21% of total new subscriber additions in the twelve months ended June 30, 2014, as compared to 23% of total new subscribers in the twelve months ended June 30, 2013. Although new subscribers generated through inside sales decreased as a percentage of our total new subscriber additions during the twelve months ended June 30, 2014 compared to the same period ended June 30, 2013, over time we expect the number of subscribers originated through inside sales to increase, resulting from increased advertising and expansion of our direct-sales calling centers.

31 Our operating results are impacted by the following key factors: number of subscriber additions, net subscriber acquisition costs, average RMR per subscriber, subscriber adoption rate of additional services beyond our Advanced Home Security package, subscriber attrition, the costs to monitor and service our subscribers, the level of general and administrative expenses and the availability and cost of capital required to generate new subscribers. We focus our investment decisions on generating new subscribers and servicing our existing subscribers in the most cost-effective manner, while maintaining a high level of customer service to minimize subscriber attrition. These decisions are based on the projected cash flows and associated margins generated over the expected life of the subscriber relationship. Attrition is defined as the aggregate number of cancelled subscribers during a period divided by the monthly weighted average number of total subscribers for such period. Subscribers are considered cancelled when they terminate in accordance with the terms of their contract, are terminated by us, or if payment from such subscribers is deemed uncollectible (120 days past due). Sales of contracts to third parties and certain subscriber moves are excluded from the attrition calculation.

Our ability to increase subscribers depends on a number of factors, both external and internal. External factors include the overall macroeconomic environment and competition from other companies in the geographies we serve, particularly in those markets where our direct-to-home sales representatives are present. Some of our current competitors have longer operating histories, greater name recognition and substantially greater financial and marketing resources than us. In the future, other companies may also choose to begin offering services similar to ours. In addition, because such a large percentage of our new subscribers are generated through direct-to-home sales, any actions limiting this sales channel could negatively affect our ability to grow our subscriber base. We are continually evaluating ways to improve the effectiveness of our subscriber acquisition activities in both our direct-to-home and inside sales channels. For example, during 2014 we introduced alternative awareness and demand generation strategies using broad media sources in a limited number of markets throughout the U.S. in an effort to reach additional consumers and increase sales leads.

Internal factors include our ability to recruit, train and retain personnel, along with the level of investment in sales and marketing efforts. We believe maintaining competitive compensation structures, differentiated product offerings and establishing a strong brand are critical to attracting and retaining high-quality personnel and competing effectively in the markets we serve. As a result, we expect to increase our investment in advertising in the markets we serve, in an effort to generate greater awareness of the Vivint brand. Successfully growing our revenue per subscriber depends on our ability to continue expanding our technology platform by offering additional value added services demanded by the market. Therefore, we continually evaluate the viability of additional service packages that could further leverage our existing technology platform and sales channels. As evidence of this focus on new services, since 2010, we have successfully expanded our service packages from residential security into energy management, security plus and home automation, which allows us to charge higher RMR for these additional service packages. During 2013, we began offering high-speed wireless internet to a limited number of residential customers and in 2014, we began offering identity protection services. These service offerings leverage our existing direct-to-home selling model for the generation of new subscribers. During the six months ended June 30, 2014, approximately 68% of our new subscribers contracted for one of our additional service packages. Due to the high rate of adoption for these additional service packages, our average RMR per new subscriber has increased from $44.50 in 2009 to $61.60 for the six months ended June 30, 2014, an increase of 38%.

We focus on managing the costs associated with monitoring and service without jeopardizing our award-winning service quality. We believe our ability to retain subscribers over the long-term starts with our underwriting criteria and is enhanced by maintaining our consistent quality service levels.

Subscriber attrition has a direct impact on the number of subscribers who we monitor and service and on our financial results, including revenues, operating income and cash flows. 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 relocation, cost, switching to a competitor's service or service issues. If a subscriber relocates but continues their service, we do not consider this as a cancellation. If a subscriber discontinues their service and transfers the original subscriber's contract to a new subscriber continuing the revenue stream, we also do not consider this as a cancellation. We analyze our attrition by tracking the number of subscribers who cancel as a percentage of the average number of subscribers at the end of each twelve month period. We caution investors that not all companies, investors and analysts in our industry define attrition in the same manner.

32 The table below presents subscriber data for Vivint for the twelve months ended June 30, 2014 and year the ended December 31, 2013: Twelve Months Year Ended Ended June 30, December 31, 2014 2013 Beginning balance of subscribers 754,304 671,818 Net new additions 208,447 219,034 Subscriber contracts sold (2,185 ) - Attrition (109,437 ) (95,352 ) Ending balance of subscribers 851,129 795,500 Monthly average subscribers 799,989 743,544 Attrition rate 13.7 % 12.8 % 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.

Increases in attrition in the twelve months ended June 30, 2014, reflect the effect of the 2008 60-month and the 2010 42-month pools reaching the end of their initial contract terms. We believe this trend in cancellation at the end of the initial contract term is comparable to other companies within our industry.

How We Generate Revenue Vivint Our primary source of revenue is generated through monitoring services provided to our subscribers in accordance with their subscriber contracts. The remainder of our revenue is generated through additional services, activation fees, upgrades and maintenance and repair fees. Monitoring revenues accounted for 96% and 95% of total revenues for the three months ended June 30, 2014 and 2013, respectively, and 96% and 95% for the six months ended June 30, 2014 and 2013, respectively.

Monitoring revenue. Monitoring services for our subscriber contracts are billed in advance, generally monthly, pursuant to the terms of subscriber contracts and recognized ratably over the service period. The amount of RMR billed is dependent upon which of our service packages the subscriber contracts for. We generally realize higher RMR for our Home Automation, Energy Management and Security Plus service packages than our Home Security service package.

Historically, we have generally offered contracts to subscribers that range in length from 36 to 60 months that are subject to automatic annual or monthly renewal after the expiration of the initial term. At the end of each monthly period, the portion of monitoring fees related to services not yet provided are deferred and recognized as these services are provided.

Service and other sales revenue. Our service and other sales revenue is primarily comprised of amounts charged for selling additional equipment, and maintenance and repair. These amounts are billed, and the associated revenue recognized, at the time of installation or when the services are performed.

Service and other sales revenue also includes contract fulfillment revenue, which relates to amounts paid by subscribers who cancel their monitoring contract in-term and for which we have no future service obligation to them. We recognize this revenue upon receipt of payment from the subscriber.

Activation fees. Activation fees represent upfront one-time charges billed to subscribers at the time of installation. The revenue associated with these fees is deferred and recognized using a 150% declining balance method over 12 years and converts to a straight-line methodology when the resulting revenue recognition is greater than that from the accelerated method for the remaining estimated life.

2GIG 2GIG's primary source of revenue was generated through the sale of electronic home security and automation products to dealers and distributors throughout North America. The remainder of the revenue was earned from monthly recurring service fees. System sales, which are included in service and other sales revenue on our consolidated statements of operations, accounted for approximately 14% of total consolidated revenues from January 1, 2013 through the date of the 2GIG Sale. Product sales accounted for approximately 92% of 2GIG's total revenues on a stand-alone basis from January 1, 2013 through the date of the 2GIG Sale.

33 Service and other sales revenue. Net sales revenue from distribution of the 2GIG products was recognized when title to the products transferred to the customer, which occurred upon shipment from our third-party logistics provider's facility to the customer. Invoicing occurred at the time of shipment and in certain cases, included freight costs based on specific vendor contracts.

Recurring services revenue. Net recurring services revenue was based on back-end services for all panels sold to distributors and direct-sell dealers and subsequently placed in service in end-user locations. The back-end services are provided by Alarm.com, an independent platform services provider. 2GIG received a fixed monthly amount from Alarm.com for each of our systems installed with customers that used the Alarm.com platform.

Costs and Expenses Vivint Operating expenses. Operating expenses primarily consists of labor associated with monitoring and servicing subscribers and labor and equipment expenses related to field service. In addition, a portion of general and administrative expenses, comprised of certain human resources, facilities and information technologies costs are allocated to operating expenses. This allocation is primarily based on employee headcount and facility square footage occupied.

Because our field service technicians perform most subscriber installations generated through our inside sales channels, the costs incurred by the field service associated with these installations are allocated to capitalized subscriber acquisition costs.

Selling expenses. Selling expenses are primarily comprised of costs associated with housing for our direct-to-home sales representatives, advertising and lead generation, marketing and recruiting, certain portions of sales commissions, overhead (including allocation of certain general and administrative expenses) and other costs not directly tied to a specific subscriber origination. These costs are expensed as incurred.

General and administrative expenses.General and administrative expenses consist largely of finance, legal, research and development, human resources, information technology 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 approximately one-third of our gross general and administrative expenses, excluding the provision for doubtful accounts, into operating and selling expenses in order to reflect the overall costs of those components of the business. In addition, in connection with a sublease agreement, we sublease corporate office space and provide certain other administrative services to Vivint Solar, Inc. ("Solar") and charge Solar the costs associated with this sublease agreement (See Note 4).

Depreciation and amortization.Depreciation and amortization consists of depreciation from property and equipment, amortization of equipment leased under capital leases, capitalized subscriber acquisition costs and intangible assets.

2GIG Operating expenses. 2GIG did not directly manufacture, assemble, warehouse or ship any of the products it sold. Its products were produced by contract manufacturers, and warehoused and fulfilled through third-party logistics providers. Operating expenses primarily consisted of cost of goods sold, freight charges, royalty fees on licensed technology, warehouse expenses, and fulfillment service fees charged by its logistics providers.

General and administrative expenses.General and administrative expenses consisted largely of finance, research and development ("R&D"), including third-party engineering costs, legal, operations, sales commissions, and executive management costs. 2GIG's personnel-related costs were included in general and administrative expense.

Depreciation and amortization.Depreciation and amortization consisted of depreciation of property and equipment.

Key Operating Metrics In evaluating our results, we review the key performance measures discussed below. We believe that the presentation of key performance measures is useful to investors and lenders because they are used to measure the value of companies such as ours with recurring revenue streams.

Total Subscribers Total subscribers is the aggregate number of our active subscribers at the end of a given period.

34 Total Recurring Monthly Revenue Total RMR is the aggregate RMR billed to all subscribers. This revenue is earned for Home Automation, Energy Management, Security Plus and Home Security service offerings.

Average RMR per Subscriber Average RMR per subscriber is the total RMR divided by the total subscribers.

This is also commonly referred to as Average Revenue per User, or ARPU.

35 Results of operations Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands) Revenue Vivint $ 134,199 $ 114,252 $ 264,353 $ 221,187 2GIG - - - 17,507 Total revenue 134,199 114,252 264,353 238,694 Costs and expenses Vivint 164,645 137,981 307,028 251,129 2GIG - - - 19,286 Total costs and expenses 164,645 137,981 307,028 270,415 Loss from continuing operations Vivint (30,446 ) (23,729 ) (42,675 ) (29,942 ) 2GIG - - - (1,779 ) Total loss from continuing operations (30,446 ) (23,729) (42,675 ) (31,721 ) Other expenses (income) 35,088 (19,691 ) 69,931 6,252 Loss before taxes (65,534 ) (4,038 ) (112,606 ) (37,973 ) Income tax expense 737 17,489 945 14,463 Net loss $ (66,271 ) $ (21,527 ) $ (113,551 ) $ (52,436 ) Key operating metrics (1) Total Subscribers, as of June 30 (thousands) 851.1 754.3Total RMR (thousands) (end of period) $ 45,826 $ 39,314 Average RMR per Subscriber $ 53.84 $ 52.12 (1) Reflects Vivint metrics only, excluding the wireless internet business, as of the end of the periods presented Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 - Vivint Revenues The following table provides the significant components of our revenue for the three month period ended June 30, 2014 and the three month period ended June 30, 2013: Three Months Ended June 30, 2014 2013 % Change Monitoring revenue $ 128,602 $ 108,646 18 %Service and other sales revenue 4,719 5,322 (11 ) Activation fees 878 284 NM Total revenues $ 134,199 $ 114,252 17 % Total revenues increased $20.0 million, or 17%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily due to the growth in monitoring revenue, which increased $20.0 million, or 18%. This increase resulted from $16.4 million of fees from the net addition of approximately 97,000 subscribers at June 30, 2014 compared to June 30, 2013 and a $5.3 million increase from continued growth in the percentage of our subscribers contracting for new products and service packages, partially offset by a $1.8 million increase in refunds and credits during the period.

36 Service and other sales revenue decreased $0.6 million, or 11%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.

This decrease was primarily due to a decrease in upgrade revenue of $1.2 million related to subscriber service upgrades and purchases of additional equipment, offset in part by an increase in other revenue of $0.7 million.

The revenue associated with activation fees is deferred upon billing and recognized over the estimated life of the subscriber relationship. There was deemed to be no fair value associated with deferred activation fee revenues at the time of our acquisition by an investor group led by affiliates of our sponsor, The Blackstone Group L.P. (the "Sponsor") on November 16, 2012 (the "Acquisition"). Thus, revenues recognized related to activation fees increased $0.6 million, or 209%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily due to the increase in the number of subscribers from whom we have collected activation fees since thedate of the Acquisition.

Costs and Expenses Three Months Ended June 30, 2014 2013 % Change Operating expenses $ 47,216 $ 38,435 23 % Selling expenses 28,739 28,298 2 General and administrative 35,326 24,910 42 Depreciation and amortization 53,364 46,338 15 Total costs and expenses $ 164,645 $ 137,981 19 % Operating expenses increased $8.9 million, or 23%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily to support the growth in our subscriber base. This increase was principally comprised of $6.3 million in personnel costs within our monitoring, customer support and field service functions and a $2.9 million increase in cellular communications fees related to our monitoring services.

Selling expenses, excluding amortization of capitalized subscriber acquisition costs, increased $0.4 million, or 2%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily due to a $2.4 million increase in facility, administrative and information technology costs, offset by a $0.6 million decrease in advertising costs and a $1.7 million decrease in personnel costs.

General and administrative expenses increased $10.4 million, or 42%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, partly due to a $2.9 million increase in personnel costs, primarily related to information technologies, research and development and management staffing to support the expected growth of the business and our wireless internet initiative. The increase was also due to a $1.8 million increase in the provision for doubtful accounts, primarily related to the growth in our accounts receivable, a $1.5 million increase in advertising costs, a $1.0 million increase in information technology costs, $0.9 million increase in other third-party contracted services, and a $0.4 million increase in facility costs, all to support the growth in our business. In addition, in connection with the facility fire described in Note 10 of the accompanying condensed consolidated financial statements, we incurred an estimated $1.0 million of fire related losses, net of probable insurance recoveries.

Depreciation and amortization increased $7.0 million, or 15%, for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.

The increase was primarily due to increased amortization of subscriber contract costs.

37 Other Expenses, net Three Months Ended June 30, 2014 2013 % Change Interest expense $ 35,712 $ 27,381 30 % Interest income (572 ) (396 ) 44 Other income, net (52 ) (33 ) 58 Gain on 2GIG Sale - (46,643 ) (100 ) Total other expenses, net $ 35,088 $ (19,691 ) (278 )% Interest expense increased $8.3 million, or 30%, for the three months ended June, 2014, as compared with the three months ended June, 2013, due to a higher principal balance on our debt. During the three months ended June 30, 2013, we realized a gain of $46.6 million as a result of the 2GIG Sale. See Note 3 of our unaudited Condensed Consolidated Financial Statements for additional information.

Income Taxes Three Months Ended June 30, 2014 2013 % Change Income tax expense $ 737 $ 17,489 (96 )% Income tax expense decreased $16.8 million, or 96%, for the three months ended June 30, 2014 as compared with the three months ended June 30, 2013. After the 2GIG Sale on April 1, 2013, we were in a net deferred tax asset position, which required the application of a full valuation allowance against this deferred tax asset, resulting in income tax expense for the three months ended June 30, 2013.

Our tax expense during the three months ended June 30, 2014 was primarily due to an increase in tax expense associated with our Canadian operations.

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 - Vivint Revenues The following table provides the significant components of our revenue for the six month period ended June 30, 2014 and the six month period ended June 30, 2013: Six Months Ended June 30, 2014 2013 % Change Monitoring revenue $ 253,156 $ 210,566 20 %Service and other sales revenue 9,553 10,257 (7 ) Activation fees 1,644 364 352 Total revenues $ 264,353 $ 221,187 20 % Total revenues increased $43.2 million, or 20%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily due to the growth in monitoring revenue, which increased $42.6 million, or 20%. This increase resulted from $34.7 million of fees from the net addition of approximately 97,000 subscribers at June 30, 2014 compared to June 30, 2013 and a $10.7 million increase from continued growth in the percentage of our subscribers contracting for new products and service packages, partially offset by a $2.9 million increase in refunds and credits during the period.

38 Service and other sales revenue decreased $0.7 million, or 7%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

This decrease was primarily due to a decrease in upgrade revenue related to subscriber service upgrades and purchases of additional equipment.

The revenue associated with activation fees is deferred upon billing and recognized over the estimated life of the subscriber relationship. There was deemed to be no fair value associated with deferred activation fee revenues at the time of the Acquisition. Thus, revenues recognized related to activation fees increased $1.3 million, or 352%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily due to the increase in the number of subscribers from whom we have collected activation fees sincethe date of the Acquisition.

Costs and Expenses Six Months Ended June 30, 2014 2013 % Change Operating expenses $ 88,533 $ 72,461 22 % Selling expenses 54,318 48,906 11 General and administrative 60,461 39,768 52Depreciation and amortization 103,716 89,994 15 Total costs and expenses $ 307,028 $ 251,129 22 % Operating expenses increased $16.1 million, or 22%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily to support the growth in our subscriber base. This increase was principally comprised of $10.5 million in personnel costs within our monitoring, customer support and field service functions and a $3.8 million increase in cellular communications fees related to our monitoring services. In addition, we recognized a loss on impairment of $1.4 million associated with our CMS technology (See Note 8 to our accompanying unaudited condensed consolidated financial statements).

Selling expenses, excluding amortization of capitalized subscriber acquisition costs, increased $5.4 million, or 11%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, primarily due to a $4.4 million increase in facility, administrative and information technology costs and a $0.9 million increase in advertising costs, all to support the expected increase in our subscriber contract originations.

General and administrative expenses increased $20.7 million, or 52%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, partly due to a $11.6 million increase in personnel costs, primarily related to information technologies, research and development and management staffing to support the expected growth of the business and our wireless internet initiative. The increase was also due to a $1.9 million increase in the provision for doubtful accounts, primarily related to the growth in our accounts receivable, a $1.6 million increase in advertising costs, a $0.9 million increase in facility costs, a $0.7 million increase in insurance premiums and property taxes, and a $0.5 million increase in other third-party contracted services, all to support the growth in our business. In addition, in connection with the facility fire described in Note 10 of the accompanying condensed consolidated financial statements, we incurred an estimated $2.6 million of fire related losses, net of probable insurance recoveries.

Depreciation and amortization increased $13.7 million, or 15%, for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

The increase was primarily due to increased amortization of subscriber contract costs.

39 Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 - 2GIG All intercompany revenue and expenses between Vivint and 2GIG have been eliminated in consolidation and from the amounts presented below.

Six Months Ended June 30, 2014 2013 % Change Total revenue $ - $ 17,507 NM Operating expenses - 11,667 NMGeneral and administrative - 5,481 NM Other expenses - 2,138 NM Loss from operations $ - $ (1,779 ) NM 2GIG is no longer included in our results of operations, from the date of the 2GIG Sale.

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 - Consolidated Other Expenses, net Six Months Ended June 30, 2014 2013 % Change Interest expense $ 71,352 $ 53,254 34 % Interest income (1,124 ) (676 ) 66 Other (income) expenses, net (297 ) 317 (194 ) Gain on 2GIG Sale - (46,643 ) (100 ) Total other expenses, net $ 69,931 $ 6,252 1,019 % Interest expense increased $18.1 million, or 34%, for the six months ended June 30, 2014, as compared with the six months ended June 30, 2013, due to a higher principal balance on our debt. Other income for the six months ended June 30, 2014 was $0.3 million, primarily attributable to gains on the sale and disposal of assets. Other expense of $0.3 million for the six months ended June 30, 2013, was primarily due to losses on the sale and disposal of assets. During the six months ended June 30, 2013, we realized a gain of $46.6 million as a result of the 2GIG Sale. See Note 3 of our unaudited Condensed Consolidated Financial Statements for additional information.

Income Taxes Six Months Ended June 30, 2014 2013 % Change Income tax expense $ 945 $ 14,463 (93 )% Income tax expense decreased $13.5 million, or 93%, for the six months ended June 30, 2014 as compared with the six months ended June 30, 2013. After the 2GIG Sale on April 1, 2013, we were in a net deferred tax asset position, which required the application of a full valuation allowance against this deferred tax asset, resulting in income tax expense for the six months ended June 30, 2013.

Our tax expense during the six months ended June 30, 2014 was primarily due to an increase in tax expense associated with our Canadian operations.

40 Liquidity and Capital Resources Our primary source of liquidity has historically been cash from operations, proceeds from the issuance of debt securities and borrowing availability under our revolving credit facility. As of June 30, 2014, we had $37.0 million of cash, $60.1 million of short-term investments maturing in July 2014 and $197.0 million of availability under our revolving credit facility (after giving effect to $3.0 million of letters of credit outstanding). On July 1, 2014, we issued and sold an additional $100.0 million of 8.75% senior notes due 2020.

Cash Flow and Liquidity Analysis Significant factors influencing our liquidity position include cash flows generated from monitoring and other fees received from the subscribers we service and the level of investment in capitalized subscriber acquisition costs.

Our cash flows provided by operating activities include cash received from RMR, along with upfront activation fees, upgrade and other maintenance and repair fees. Cash used in operating activities includes the cash costs to monitor and service those subscribers, and certain costs, principally marketing and the portion of subscriber acquisition costs that are expensed and general and administrative costs. We have historically generated, and expect to continue generating, positive cash flows from operating activities. 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 and contract sales to third parties.

The direct-to-home sales are seasonal in nature. We make investments in the recruitment of our direct-to-home sales force and the inventory for the April through August sales period prior to each sales season. We experience increases in subscriber acquisition costs, as well as costs to support the sales force throughout North America, during this time period.

The following table provides a summary of cash flow data (dollars in thousands): Six Months Ended June 30, 2014 2013 % ChangeNet cash provided by operating activities $ 35,091 $ 43,073 (19 )% Net cash used in investing activities (259,286 ) (27,184 ) 854 Net cash (used in) provided by financing activities (1,207 ) 106,870 (101 ) Cash Flows from Operating Activities We generally reinvest the cash flows from operating activities into our business, primarily to maintain and grow our subscriber base and to expand our infrastructure to support this growth and enhance our existing, and develop new, service offerings. These investments are focused on generating new subscribers, increasing the revenue from our existing subscriber base, enhancing the overall quality of service provided to our subscribers, increasing the productivity and efficiency of our workforce and back-office functions necessary to scale our business.

For the six months ended June 30, 2014, net cash provided by operating activities was $35.1 million. This cash was primarily generated from a net loss of $113.6 million, adjusted for $109.2 million in non-cash amortization, depreciation and stock-based compensation, a $37.6 million increase in accrued expenses and other liabilities, primarily related to an increase in accrued payroll and commissions, and a $57.8 million increase in accounts payable, primarily related to purchases of inventory. This was partially offset by a $52.2 million increase in inventories due to the seasonality of our inventory purchases and usage related to our direct-to-home sales channel.

For the six months ended June 30, 2013, net cash provided by operating activities was $43.1 million. This cash was primarily generated from a net loss of $52.4 million, adjusted for $97.0 million in non-cash amortization, depreciation and stock-based compensation expenses, a $45.0 million increase in accrued expenses and other liabilities and a $16.3 million increase in fees paid by subscribers in advance of when the associated revenue is recognized. This was partially offset by a $25.9 million increase in inventories due to the seasonality of our inventory purchases and usage.

41 Cash Flows from Investing Activities Historically, our investing activities have primarily consisted of capitalized subscriber acquisition costs, capital expenditures, business combinations and technology acquisitions. Capital expenditures primarily consist of periodic additions to property and equipment to support the growth in our business.

For the six months ended June 30, 2014 and 2013, net cash used in investing activities was $259.3 million and $27.2 million, respectively. For the six months ended June 30, 2014, our cash used in investing activities primarily consisted of capitalized subscriber acquisition costs of $174.6 million, investments in certificates of deposit of $60.0 million, capital expenditures of $12.1 million, and the acquisition of certain patents and other intangible assets of $6.1 million. For the six months ended June 30, 2013, cash used in investing activities primarily consisted of $156.7 million of capitalized subscriber acquisition costs, partially offset by $143.3 million of proceeds from the 2GIG Sale.

Cash Flows from Financing Activities Historically, our cash flows from financing activities were primarily to fund the portion of upfront costs associated with generating new subscribers that are not covered through our operating cash flows.

For the six months ended June 30, 2014, net cash used in financing activities was $1.2 million, consisting primarily of $3.1 million of repayments under our capital lease obligations, partially offset by $2.3 million of proceeds from contract sales. For the six months ended June 30, 2013, our net cash provided by financing activities was from the issuance of $203.5 million of senior unsecured notes payable, $22.5 million of borrowings from our revolving line of credit, partially offset by $60.0 million of payments of dividends and $50.5 million of repayments of our revolving line of credit.

Long-Term Debt We are a highly leveraged company with significant debt service requirements. As of June 30, 2014, we had approximately $1.8 billion of total debt outstanding, consisting of $925.0 million of 6.375% senior secured notes due 2019 (the "outstanding 2019 notes"), $830.0 million of 8.75% senior notes due 2020 (the "outstanding 2020 notes") and no borrowings under the revolving credit facility.

On July 1, 2014, we issued and sold an additional $100.0 million of 8.75% senior notes due 2020.

Revolving Credit Facility On November 16, 2012, we entered into a $200.0 million senior secured revolving credit facility, with a five year maturity, of which $197.0 million was undrawn and available as of June 30, 2014 (after giving effect to $3.0 million of outstanding letters of credit). In addition, we may request one or more term loan facilities, increased commitments under the revolving credit facility or new revolving credit commitments, in an aggregate amount not to exceed $225.0 million. Availability of such incremental facilities and/or increased or new commitments will be subject to certain customary conditions.

On June 28, 2013, we amended and restated the credit agreement to provide for a new repriced tranche of revolving credit commitments with a lower interest rate.

Nearly all of the existing tranches of revolving credit commitments was terminated and converted into the repriced tranche, with the unterminated portion of the existing tranche continuing to accrue interest at the original higher rate.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at our option, either (1) the base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A. and (c) the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined by reference to the London interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based borrowings (1)(a) under the repriced tranche is currently 2.0% per annum and (b) under the former tranche is currently 3.0% and (2)(a) the applicable margin for LIBOR rate-based borrowings (a) under the repriced tranche is currently 3.0% per annum and (b) under the former tranche is currently 4.0%. The applicable margin for borrowings under the revolving credit facility is subject to one step-down of 25 basis points based on our consolidated first lien net leverage ratio at the end of each fiscal quarter, commencing with delivery of our consolidated financial statements for the first full fiscal quarter ending after the closing date.

In addition to paying interest on outstanding principal under the revolving credit facility, we are required to pay a quarterly commitment fee (which will be subject to one step-down based on our consolidated first lien net leverage ratio) to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. We also pay customary letter of credit and agency fees.

42 2019 Notes On November 16, 2012, we issued $925.0 million of the 2019 notes. Interest on the 2019 notes is payable semi-annually in arrears on each June 1 and December 1, commencing June 1, 2013.

We may, at our option, redeem at any time and from time to time prior to December 1, 2015, some or all of the 2019 notes at 100% of their principal amount thereof plus accrued and unpaid interest to the redemption date plus a "make-whole premium." Prior to December 1, 2015, 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 issued 2019 notes at a price equal to 103% of the principal amount thereof, plus accrued and unpaid interest. From and after December 1, 2015, we may, at our option, redeem at any time and from time to time some or all of the 2019 notes at 104.781%, declining ratably on each anniversary thereafter to par from and after December 1, 2018, in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior to December 1, 2015, we may, at our option, redeem up to 35% of the aggregate principal amount of the 2019 notes with the proceeds from certain equity offerings at 106.37%, plus accrued and unpaid interest to the date of redemption.

2020 Notes On November 16, 2012, we issued $380.0 million of outstanding 2020 notes.

Interest on the outstanding 2020 notes is payable semi-annually in arrears on each June 1 and December 1, commencing June 1, 2013. During the year ended December 31, 2013, we issued an additional $450.0 million of outstanding 2020 notes under the indenture dated as of November 16, 2012. In July 2014, we issued an additional $100.0 million of 8.75% senior notes due 2020.

We may, at our option, redeem at any time and from time to time prior to December 1, 2015, some or all of the 2020 notes at 100% of their principal amount thereof plus accrued and unpaid interest to the redemption date plus a "make-whole premium." From and after December 1, 2015, we may, at our option, redeem at any time and from time to time some or all of the 2020 notes at 106.563%, declining ratably on each anniversary thereafter to par from and after December 1, 2018, in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior to December 1, 2015, we may, at our option, redeem up to 35% of the aggregate principal amount of the 2020 notes with the proceeds from certain equity offerings at 108.75%, plus accrued and unpaid interest to the date of redemption.

Guarantees and Security All of our obligations under the revolving credit facility, the 2019 notes and the 2020 notes are guaranteed by APX Group Holdings, Inc. ("Parent Guarantor") and each of our existing and future material wholly-owned U.S. restricted subsidiaries to the extent such entities guarantee indebtedness under the revolving credit facility or our other indebtedness. See Note 16 of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional financial information regarding guarantors and non-guarantors.

The obligations under the revolving credit facility and the 2019 notes are secured by a security interest in (i) substantially all of the present and future tangible and intangible assets of APX Group, Inc., exclusive of its subsidiaries (the "Issuer"), and the guarantors, including without limitation equipment, subscriber contracts and communication paths, intellectual property, fee-owned real property, general intangibles, investment property, material intercompany notes and proceeds of the foregoing, subject to permitted liens and other customary exceptions, (ii) substantially all personal property of the Issuer and the guarantors consisting of accounts receivable arising from the sale of inventory and other goods and services (including related contracts and contract rights, inventory, cash, deposit accounts, other bank accounts and securities accounts), inventory and intangible assets to the extent attached to the foregoing books and records of the Issuer and the guarantors, and the proceeds thereof, subject to permitted liens and other customary exceptions, in each case held by the Issuer and the guarantors and (iii) a pledge of all of the Capital Stock of the Issuer, each of its subsidiary guarantors and each restricted subsidiary of the Issuer and its subsidiary guarantors, in each case other than excluded assets and subject to the limitations and exclusions provided in the applicable collateral documents.

Under the terms of the applicable security documents and intercreditor agreement, the proceeds of any collection or other realization of collateral received in connection with the exercise of remedies will be applied first to repay amounts due under the revolving credit facility, and up to an additional $150.0 million of "superpriority" obligations that we may incur in the future, before the holders of the 2019 notes receive any such proceeds.

43 Debt Covenants The credit agreement governing the revolving credit facility and the indentures governing the notes contain a number of covenants that, among other things, restrict, subject to certain exceptions, our and our restricted subsidiaries' ability to: • incur or guarantee additional debt or issue disqualified stock or preferred stock; • pay dividends and make other distributions on, or redeem or repurchase, capital stock; • make certain investments; • incur certain liens; • enter into transactions with affiliates; • merge or consolidate; • enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments to the Issuer; • designate restricted subsidiaries as unrestricted subsidiaries; and • transfer or sell assets.

The credit agreement governing the revolving credit facility and the indentures governing the notes contain change of control provisions and certain customary affirmative covenants and events of default. As of June 30, 2014, we were in compliance with all restrictive covenants related to our long-term obligations.

Subject to certain exceptions, the credit agreement governing the revolving credit facility and the indentures governing the notes permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.

Our future liquidity requirements will be significant, primarily due to debt service requirements. The actual amounts of borrowings under the revolving credit facility will fluctuate from time to time. We believe that amounts available through our revolving credit facility and incremental facilities will be sufficient to meet our operating needs for the next twelve months, including working capital requirements, capital expenditures, debt repayment obligations and potential new acquisitions.

As market conditions warrant, we and our major equity holders, including the Sponsor and its affiliates, may from time to time, seek to repurchase debt securities that we have issued or loans that we have borrowed, including the notes and borrowings under our revolving credit facility, in privately negotiated or open market transactions, by tender offer or otherwise.

Covenant Compliance Under the indentures governing our notes and the credit agreement governing our revolving credit facility, our 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 Adjusted EBITDA.

"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 and certain unusual, non-cash, non-recurring and other items permitted in certain covenant calculations under the indentures governing our notes and the credit agreement governing our revolving credit facility.

We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants in the indentures governing our notes and the credit agreement governing our revolving credit facility. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers, because not all issuers and analysts calculate Adjusted EBITDA in the same manner.

Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (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.

44 The following table sets forth a reconciliation of net loss before non-controlling interests to Adjusted EBITDA (in thousands): Three Months Twelve Months Ended June 30, Six Months Ended Ended June 30, 2014 June 30, 2014 2014 Net loss $ (66,271 ) $ (113,551 ) $ (185,628 ) Interest expense, net 35,140 70,228 130,633 Other income, net (52 ) (297 ) (913 )Income tax expense (benefit) 737 945 (9,926 ) Depreciation and amortization (1) 40,445 80,477 166,503 Amortization of capitalized creation costs 12,919 23,238 40,586 Non-capitalized subscriber acquisition costs (2) 33,855 60,731 109,173 Non-cash compensation (3) 458 903 2,129 Other adjustments (4) 11,403 23,858 51,551 Adjusted EBITDA $ 68,634 $ 146,532 $ 304,108 (1) Excludes loan amortization costs that are included in interest expense.

(2) Reflects subscriber acquisition costs that are expensed as incurred because they are not directly related to the acquisition of specific subscribers.

Certain other industry participants purchase subscribers through subscriber contract purchases, and as a result, may capitalize the full cost to purchase these subscriber contracts, as compared to our organic generation of new subscribers, which requires us to expense a portion of our subscriber acquisition costs under GAAP.

(3) Reflects non-cash compensation costs related to employee and director stock and stock option plans.

(4) Other adjustments represent primarily the following items (in thousands): Three Months Twelve Months Ended June 30, Six Months Ended June 30, 2014 Ended June 30, 2014 2014 Product development (a) $ 3,150 $ 6,988 $ 14,460 Purchase accounting deferred revenue fair value adjustment (b) 1,352 2,757 5,783 Subcontracted monitoring agreement (c) 1,100 2,225 3,303 Non-operating legal and professional fees 1,085 1,119 2,908 Fire related losses, net of probable insurance recoveries (d) 1,001 2,659 2,659 Information technology implementation (e) 824 2,134 3,364 Monitoring fee (f) 770 1,445 2,795 Start-up of new strategic initiatives (g) 465 832 3,493 CMS technology impairment loss (h) - 1,351 1,351 Non-cash contingent liabilities - - 6,500 All other adjustments 1,656 2,348 4,935 Total other adjustments $ 11,403 $ 23,858 $ 51,551 (a) Costs related to the development of future products and services, including associated software.

(b) Add back revenue reduction directly related to purchase accounting deferred revenue adjustments.

(c) Run-rate savings from committed future reductions in subcontract monitoring fees.

(d) Fire relates losses, net of insurance recoveries of $3.0 million considered probable at June 30, 2014. (See Note 10 to the accompanying unaudited condensed consolidated financial statements).

(e) Costs related to the implementation of new information technologies.

(f) Blackstone Management Partners L.L.C monitoring fee (See Note 14 to the accompanying unaudited condensed consolidated financial statements).

(g) Costs related to the start-up of potential new service offerings and sales channels.

(h) CMS technology impairment loss (See Note 8 to the accompanying unaudited condensed consolidated financial statements).

45 Other Factors Affecting Liquidity and Capital Resources Vehicle Leases. Since 2010, we have leased, and expect to continue leasing, vehicles primarily for use by our field service technicians. For the most part, these leases have 36 month durations and we account for them as capital leases.

At the end of the lease term for each vehicle we have the option to either (i) purchase it for the estimated end-of-lease fair market value established at the beginning of the lease term; or (ii) return the vehicle to the lessor to be sold by them and in the event the sale price is less than the estimated end-of-lease fair market value we are responsible for such deficiency. As of June 30, 2014, our total capital lease obligations were $12.2 million, of which $4.3 million is due within the next 12 months.

Aircraft Lease. In December 2012, we entered into an aircraft lease agreement for the use of a corporate aircraft, which is accounted for as an operating lease. Upon execution of the lease, we paid a $5.9 million security deposit which is refundable at the end of the lease term. Beginning January 2013, we are required to make 156 monthly rental payments of approximately $83,000 each. We also have the option to extend the lease for an additional 36 months upon expiration of the initial term. The lease agreement also provides us the option to purchase the aircraft on certain specified dates for a stated dollar amount, which represents the current estimated fair value as of the purchase date.Off-Balance Sheet Arrangements Currently we do not engage in off-balance sheet financing arrangements.

Critical Accounting Estimates In preparing our unaudited Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, income (loss) from operations and net loss, as well as on the value of certain assets and liabilities on our unaudited Condensed Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. We believe that the assumptions, judgments and estimates involved in the accounting for income taxes, allowance for doubtful accounts, valuation of intangible assets, and fair value have the greatest potential impact on our unaudited Condensed Consolidated Financial Statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 1 to our unaudited Condensed Consolidated Financial Statements.

Revenue Recognition We recognize revenue principally on three types of transactions: (i) monitoring, which includes RMR, (ii) service and other sales, which includes non-recurring service fees charged to our subscribers provided on contracts, contract fulfillment revenues and sales of products that are not part of our service offerings, and (iii) activation fees on the subscriber contracts, which are amortized over the estimated life of the subscriber relationship.

Monitoring services for our subscriber contracts are billed in advance, generally monthly, pursuant to the terms of subscriber contracts and recognized ratably over the service period. RMR is recognized monthly as services are provided in accordance with the rates set forth in our subscriber contracts.

Costs of providing ongoing monitoring services are expensed in the period incurred.

Any services included in service and other sales revenue are recognized upon provision of the applicable services. Revenue from 2GIG product sales was recognized when title passed to the customer, which was generally upon shipment from the warehouse of our third-party logistics provider. Revenue generated by Vivint from the sale of products that are not part of the service offerings is recognized upon installation. Contract fulfillment revenue represents fees received from subscribers at the time of, or subsequent to, the in-term termination of their contract. This revenue is recognized when payment is received from the subscriber.

Activation fees are typically charged upon the generation of a new subscriber.

This revenue is deferred and recognized over a pattern that reflects the estimated life of a subscriber relationship.

Revenue from the sale of subscriber contracts to third parties is recognized when ownership of the contracts has transferred to the purchaser. Any unamortized deferred revenue and costs related to contract sales are recognized at that time of the sale.

46 Subscriber Acquisition Costs A portion of the direct costs of acquiring new subscribers, primarily sales commissions, equipment, and installation costs, are deferred and recognized over a pattern that reflects the estimated life of the subscriber relationships. We amortize these costs using a 150% declining balance method over 12 years and convert to a straight-line methodology when the resulting amortization charge is greater than that from the accelerated method for the remaining estimated life.

We evaluate attrition on a periodic basis, utilizing observed attrition rates for our subscriber contracts and industry information and, when necessary, make adjustments to the estimated life of the subscriber relationship and amortization method.

Subscriber acquisition costs represent the costs related to the origination of new subscribers. A portion of subscriber acquisition costs is expensed as incurred, which includes costs associated with the direct-to-home sale housing, marketing and recruiting, certain portions of sales commissions (residuals), overhead and other costs, considered not directly and specifically tied to the origination of a particular subscriber. The remaining portion of the costs is considered to be directly tied to subscriber acquisition and consist primarily of certain portions of sales commissions, equipment, and installation costs.

These costs are deferred and recognized in a pattern that reflects the estimated life of the subscriber relationships. Subscriber acquisition costs are largely correlated to the number of new subscribers originated.

Accounts Receivable Accounts receivables consist primarily of amounts due from subscribers for RMR services. Accounts receivable are recorded at invoiced amounts and are non-interest bearing. The gross amount of accounts receivable has been reduced by an allowance for doubtful accounts of approximately $4.5 million and $1.9 million at June 30, 2014 and December 31, 2013, respectively. We estimate this allowance based on historical collection rates, attrition rates, and contractual obligations underlying the sale of the subscriber contracts to third parties. As of June 30, 2014 and December 31, 2013, no accounts receivable were classified as held for sale. Provision for doubtful accounts recognized and included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations totaled $4.8 million and $3.0 million for the three months ended June 30, 2014 and 2013, respectively, and $7.3 million and $5.4 million for the six months ended June 30, 2014 and 2013, respectively.

Loss Contingencies We record accruals for various contingencies including legal proceedings and other claims 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. 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 matters include the merits of a particular matter, the nature of the litigation, 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 accepting an amount in this range. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.

Goodwill and Intangible Assets Purchase accounting requires that all assets and liabilities acquired in a transaction be recorded at fair value on the acquisition date, including identifiable intangible assets separate from goodwill. For significant acquisitions, we obtain independent appraisals and valuations of the intangible (and certain tangible) assets acquired and certain assumed obligations as well as equity. Identifiable intangible assets include customer relationships, trade names and trademarks and developed technology, which equaled $772.7 million at June 30, 2014. Goodwill represents the excess of cost over the fair value of net assets acquired and was $836.7 million at June 30, 2014.

The estimated fair values and useful lives of identified intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, estimates of cost avoidance, the nature of the business acquired, the specific characteristics of the identified intangible assets and our historical experience and that of the acquired business. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including product demand, market conditions, regulations affecting the business model of our operations, technological developments, economic conditions and competition. The carrying values and useful lives for amortization of identified intangible assets are reviewed annually during our fourth fiscal quarter and as necessary if changes in facts and circumstances indicate that the carrying value may not be recoverable and any resulting changes in estimates could have a material adverse effect on our financial results.

When we determine that the carrying value of intangible assets, goodwill and long-lived assets may not be recoverable, an impairment charge is recorded.

Impairment is generally measured based on valuation techniques considered most appropriate under the circumstances, including a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model or prevailing market rates of investment securities, if available.

47 We conduct a goodwill impairment analysis annually in our fourth fiscal quarter, and as necessary if changes in facts and circumstances indicate that the fair value of our reporting units may be less than their carrying amount. Under applicable accounting guidance, we are permitted to use a qualitative approach to evaluating goodwill impairment when no indicators of impairment exist and if certain accounting criteria are met. To the extent that indicators exist or the criteria are not met, we use a quantitative approach to evaluate goodwill impairment. Such quantitative impairment assessment is performed using a two-step, fair value based test. The first step requires that we compare the estimated fair value of our reporting units to the carrying value of the reporting unit's net assets, including goodwill. If the fair value of the reporting unit is greater than the carrying value of its net assets, goodwill is not considered to be impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value of its net assets, we would be required to complete the second step of the test by analyzing the fair value of its goodwill. If the carrying value of the goodwill exceeds its fair value, an impairment charge is recorded.

Property and Equipment Property and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Amortization expense associated with leased assets is included with depreciation expense. Routine repairs and maintenance are charged to expense as incurred. We periodically assess potential impairment of our property and equipment and perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Income Taxes We account for income taxes based on the asset and liability method. Under the asset and liability method, deferred tax assets and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards.

Valuation allowances are established when necessary to reduce deferred tax assets when it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

We recognize the effect of an uncertain income tax position on the income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Our policy for recording interest and penalties is to record such items as a component of the provision for income taxes.

Recent Accounting Pronouncements In May 2014, the FASB issued authoritative guidance which clarifies the principles used to recognize revenue for all entities. The new guidance requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. The guidance is effective for annual and interim periods beginning after December 15, 2016. The guidance allows for either a "full retrospective" adoption or a "modified retrospective" adoption, however early adoption is not permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.

In February 2013, the FASB issued authoritative guidance which expands the disclosure requirements for amounts reclassified out of accumulated other comprehensive income ("AOCI"). The guidance requires an entity to provide information about the amounts reclassified out of AOCI by component and present, either on the face of the income statement or in the notes to financial statements, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period.

For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This guidance does not change the current requirements for reporting net income or OCI in financial statements. The guidance became effective for us in the first quarter of fiscal year 2014. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

In July 2013, the FASB issued authoritative guidance which amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss carryforward whenever the net operating loss carryforward or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This guidance became effective for us for annual and interim periods beginning in fiscal year 2014. The adoption of this guidance did not have a material impact on our financial position, results of operations orcash flows.

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