Table of Contents
UNITED
STATES
SECURITIES
AND
EXCHANGE
COMMISSION
Washington,
D.C.
20549
FORM
10-K
(Mark
One)
☒
ANNUAL
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACT
OF
1934
FOR
THE
FISCAL
YEAR
ENDED
DECEMBER
31,
2016
OR
☐ TRANSITION
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACT
OF
1934
For
the
transition
period
from
to
Commission
file
number:
333-191132-02
APX
Group
Holdings,
Inc.
(Exact
name
of
registrant
as
specified
in
its
charter)
Delaware
(State
or
other
jurisdiction
of
incorporation
or
organization)
4931
North
300
West
Provo,
UT
(Address
of
principal
executive
offices)
46-1304852
(I.R.S.
Employer
Identification
No.)
84604
(Zip
Code)
Registrant’s
telephone
number,
including
area
code:
(801)
377-9111
Securities
registered
pursuant
to
Section
12(b)
of
the
Act:
None
Securities
registered
pursuant
to
Section
12(g)
of
the
Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☐ No ☒
(Note: From January 1, 2016 until the effectiveness of the registrant’s Registration Statement on Form S-4 (File No. 333-212390) on July 8, 2016 the registrant
was, and from January 1, 2017 the registrant has been, a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act; as a
voluntary filer not subject to the filing requirements of Section 13 or Section 15(d) of the Exchange Act, the registrant filed all reports pursuant to Section 13 or
15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer
☒ (Do not check if a smaller reporting company)
Accelerated filer
☐
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2015, the last business day of the registrant’s most
recently completed second fiscal quarter was zero.
As of March 2, 2017 , there were 100 shares of the registrant’s common stock par value $0.01 per share, issued and outstanding.
Table of Contents
TABLE
OF
CONTENTS
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART
I
PART
II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Signatures
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART
III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART
IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Page
6
15
30
30
30
30
30
30
33
55
56
100
100
102
103
107
127
128
132
135
140
Table of Contents
CAUTIONARY
NOTE
REGARDING
FORWARD-LOOKING
STATEMENTS
This annual report on Form 10-K includes forward-looking statements regarding, among other things, our plans, strategies and prospects, both business and
financial. These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected
in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements
concerning our possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be
preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,”
“anticipates” or “intends” or similar expressions.
Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date
hereof. You should understand that the following important factors, in addition to those discussed in “Risk Factors” and elsewhere in this annual report on Form
10-K, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking
statements:
•
•
•
•
•
•
•
•
risks of the smart home and security industry, including risks of and publicity surrounding the sales, subscriber origination and
retention process;
the highly competitive nature of the smart home and security industry and product introductions and promotional activity by our
competitors;
litigation, complaints or adverse publicity;
the impact of changes in consumer spending patterns, consumer preferences, local, regional, and national economic conditions,
crime, weather, demographic trends and employee availability;
adverse publicity and product liability claims;
increases and/or decreases in utility and other energy costs, increased costs related to utility or governmental requirements;
cost increases or shortages in smart home and security technology products or components; and
the impact to our business, results of operations, financial condition, regulatory compliance and customer experience of the
Vivint Flex Pay plan.
In addition, the origination and retention of new subscribers will depend on various factors, including, but not limited to, market availability, subscriber
interest, the availability of suitable components, the negotiation of acceptable contract terms with subscribers, local permitting, licensing and regulatory
compliance, and our ability to manage anticipated expansion and to hire, train and retain personnel, the financial viability of subscribers and general economic
conditions.
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this annual report on Form 10-K are
more fully described in the “Risk Factors” section of this annual report on Form 10-K. The risks described in “Risk Factors” are not exhaustive. Other sections of
this annual report on Form 10-K describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors
emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the
extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All
forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We
undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as
required by law.
WEBSITE
AND
SOCIAL
MEDIA
DISCLOSURE
We use our website (www.vivint.com), our company blog (blog.vivint.com), corporate Twitter and Instagram accounts (@VivintHome), and our
corporate Facebook account (VivintHome) as channels of distribution of company information. The information we post through these channels may be deemed
material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts.
In addition, you may automatically receive e-mail alerts and other information about the Company when you enroll your e-mail address by
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visiting the “Email Alerts” section of our website at www.investors.vivint.com . The contents of our website and social media channels are not, however, a part of
this report.
BASIS
OF
PRESENTATION
On November 16, 2012, APX Group, Inc. (“APX”) and two of its historical affiliates, V Solar Holdings, Inc. (“Solar”) and 2GIG Technologies, Inc.
(“2GIG”), were acquired by an investor group (collectively, the “Investors”) comprised of certain investment funds affiliated with Blackstone Capital Partners VI
L.P. (“Blackstone” or the “Sponsor”), and certain co-investors and management investors. This acquisition was accomplished through certain mergers and related
reorganization transactions (collectively, the “Merger” and, together with certain related financing transactions, the “Transactions”) pursuant to which each of APX
Group, Inc., Solar and 2GIG became indirect wholly-owned subsidiaries of 313 Acquisition LLC (“Acquisition LLC” or "313"), an entity wholly-owned by the
Investors. Upon the consummation of the Merger, APX Group, Inc. and 2GIG became consolidated subsidiaries of APX Group Holdings, Inc. (“Holdings”,
“Parent Guarantor” or “Parent”), which in turn is wholly-owned by APX Parent Holdco, Inc., which in turn is owned by Acquisition LLC, and Solar became a
direct wholly-owned subsidiary of Acquisition LLC. Acquisition LLC, APX Parent Holdco, Inc. and Parent Guarantor have no independent operations and were
formed for the purpose of facilitating the Merger.
Unless the context suggests otherwise, references in this annual report on Form 10-K to “Vivint ® ,” the “Company,” “we,” “us” and “our” refer to the
Parent Guarantor and its subsidiaries. References to the “Issuer” refer to APX Group, Inc., exclusive of its subsidiaries. References to “Parent Guarantor” refer to
Holdings, exclusive of its subsidiaries.
On April 1, 2013 we completed the sale of 2GIG and its subsidiary (the “2GIG Sale”) to Nortek, Inc. (“Nortek”). In connection with the 2GIG Sale, 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. 2GIG does not and will not provide any credit support for any of our indebtedness, including indebtedness
incurred under our revolving credit facility, our 6.375% Senior Secured Notes due 2019 (the “2019 notes”), 8.75% Senior Notes due 2020 (the “2020 notes”), our
8.875% Senior Secured Notes due 2022 (the “2022 private placement notes”) or our 7.875% Senior Secured Notes due 2022 (the "2022 notes" and, together with
the 2019 notes, 2020 notes and 2022 private placement notes, the “notes”).
The term “attrition” as used in this annual report on Form 10-K refers to the aggregate number of canceled smart home and security subscribers during a
period divided by the monthly weighted average number of total smart home and security subscribers for such 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). Sales of contracts to third parties, certain moves and takeovers are excluded from the attrition calculation.
The term “net subscriber acquisition costs” as used in this annual report on Form 10-K refers to the direct and indirect costs to create a new smart home and
security subscriber. These include commissions, equipment, installation, marketing and other allocations (general and administrative and overhead); less activation
fees, installation fees and upsell revenue. These costs exclude residuals and long-term equity expenses associated with the direct-to-home sales channel.
The term Monthly Revenue per User (“RPU”) is the recurring monthly revenue billed to a smart home and security subscriber.
The term “total RPU” is the aggregate RPU billed to all smart home and security subscribers.
The term “total subscribers” is the aggregate number of active smart home and security subscribers at the end of a given period.
The term Average RPU ("ARPU") is the total RPU divided by total subscribers.
The term Average Revenue per New User ("ARPNU") is the aggregate RPU for new subscribers originated during a period divided by the number of new
subscribers originated during such period.
The term “net subscriber acquisition multiple” means total net subscriber acquisition costs, divided by the number of new subscribers originated, and then
divided by the ARPNU.
The term “net service cost per subscriber” means total service costs for the period, including monitoring, customer service, field service and other allocations
(general and administrative and overhead) costs, less total service revenue for the period divided by total subscribers.
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The term “net service margin” means the ARPU for the period less net service costs divided by the ARPU for the period.
The term “IRR” means the unlevered internal rate of return per subscriber calculated based on our estimates and assumptions related to net subscriber
acquisition cost per subscriber, net servicing cost per subscriber, ARPNU and attrition.
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Unless specified otherwise, amounts in this annual report on Form 10-K are presented in United States (“U.S.”) dollars. Defined terms in the financial
statements have the meanings ascribed to them in the financial statements.
ITEM
1.
BUSINESS
Company
Overview
PART
I
We are one of the largest companies in North America focused on delivering smart home and security products and services. Our fully integrated smart home
platform offers subscribers a comprehensive suite of products and services to remotely control, monitor and manage their homes using any Internet-connected
smart device. Unlike many other smart home companies that focus only on selling equipment and software, subscriber origination or servicing, we are a vertically
integrated smart home company, owning the entire customer lifecycle including sales, professional installation, service, monitoring, billing and customer support.
We believe that with our proven business model, along with 17 years of experience installing integrated solutions, we are well positioned to continue to lead the
large and growing smart home market. We offer homeowners a customized smart home that integrates a wide variety of smart home and security products. We
seek to deliver a quality subscriber experience through a combination of innovative 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 we believe are historically at industry averages, while
continuing to increase RPU as a result of increased adoption of smart home products and services. Through our established underwriting criteria and compensation
structure, we have built a portfolio of approximately 1,147,000 subscribers in North America, with an average credit score of 714 , as of December 31, 2016 . Over
95% of our revenues during the years ended December 31, 2016 , 2015 and 2014 , respectively, consisted of contractually committed revenues, which have
historically resulted in predictable and consistent operating results.
We generate new subscribers through two primary sales channels: our “direct-to-home” and “inside sales” channels. We believe our sales model gives us
control over our net subscriber acquisition costs and achieve a high adoption rate of subscriber contracts that include smart home services. For example, the
percentage of our new subscribers contracting for smart home services in addition to our traditional security services grew from 58% in 2012 to 86% in 2016 . We
generate the majority of our new subscribers through our direct-to-home sales channel, which uses teams of trained seasonal sales representatives. For the year
ended December 31, 2016 , we generated approximately 64% of our new subscribers through our direct-to-home sales channel. In this channel we have historically
employed between 2,000 and 2,500 sales representatives and approximately 1,100 installation technicians, who are largely commission-based and deployed in
targeted geographical locations. This results in a highly variable cost structure, subscriber density and the ability to complete same-day installations. We also
originate a portion of our new subscribers through our inside sales channel, which includes our inside sales team, digital marketing, advertising, and third-party
lead generators. For the year ended December 31, 2016 , we generated approximately 36% of our new subscribers through inside sales. Over time, we expect the
number of new subscriber contracts generated through inside sales to continue to grow.
Our focus on creating a high-quality subscriber portfolio produces an attractive return profile with an unlevered IRR in the low to mid 20% range, depending
on contractual terms and mix of product and service offerings. As of December 31, 2016 , based on FICO score at the time of contract origination, approximately
93% of our subscribers had a FICO score of 625 or greater, and the average FICO score of our portfolio was 714 . In addition, for the year ended December 31,
2016 , over 69% of our new subscribers paid activation fees and, as of December 31, 2016 , approximately 91% of our total subscribers are set up on an automatic
payment method. We believe that originating high-quality subscribers and our commitment to customer service increases retention, which leads to predictable cash
flows.
Our business generates positive cash flows from ongoing monitoring and service revenues, which we choose to invest in new subscriber acquisitions and
development of additional products and services. During the year ended December 31, 2016 and 2015 , respectively, we generated $757.9 million and $653.7
million in total revenue, including $724.5 million and $625.0 million , respectively, in recurring revenue. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources.”
The
Smart
Home
and
Security
Industries
According to Strategy Analytics, total consumer spending for smart home solutions in the U.S. reached $30.7 billion in 2016 and they project it will grow to
nearly $57.9 billion by 2021.
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ABI Research estimates the total number of new smart homes in North America will grow from approximately 19.7 million in 2016 to approximately 68.9
million in 2020. New smart homes are defined as residences where a smart home device or system is being purchased for the first time.
According to Barnes Associates estimates, the U.S. market for monitoring and related residential electronic security services was over $27 billion in revenue
in 2016 and has grown every year for the past 10 years. This market is characterized by stable revenues from contractually committed recurring monthly payments
and has proven to be recession-resistant through the last two economic downturns.
Products
and
Services
Our portfolio of integrated smart home products and services allow subscribers to remotely control, monitor and manage their homes from any smart device.
Subscribers can create a customized Vivint smart home that includes smart locks, thermostats, indoor and outdoor cameras, lighting controls, garage door
controllers, doorbell cameras, cloud data storage and playback, voice control, a panic pendant, small appliance/lamp control modules and an array of sensors
including smoke, motion, carbon monoxide, door, window, flood, freezer and glass break.
The Vivint Smart Home Cloud is our proprietary, integrated smart home platform. Seamless interaction between the platform and all our devices eliminates
many of the usability, interoperability and support issues for consumers caused by the fragmented, stand-alone solutions offered by other smart home companies.
The Vivint Smart Home Cloud also integrates with leading third-party smart home products, including Kwikset smart locks, Amazon Echo ® and the Nest
Learning Thermostat ® (“Nest”) which allows us to offer a comprehensive, voice-controlled smart home. Over time, we may integrate other smart home products
and technologies into our platform.
With a Vivint smart home, subscribers can arm and disarm their security system; receive alerts and notifications regarding activity in their home; control
smart home products such as thermostats, door locks, lighting controls; and view live and recorded video, either through their panel or remotely through the Vivint
Smart Home app or any Internet-connected smart device.
We offer several customized smart home and security products and services, all of which include 24x7x365 security monitoring, including our proprietary
Vivint SkyControl panel with a 7-inch touchscreen and two-way voice communication, smoke detector, three door and window sensors, motion detector, a key fob,
customer support, our mobile app, event notifications and severe weather alerts. For a $198 activation fee, subscribers receive a professionally installed custom
smart home system with a monthly service fee and a service agreement ranging from 42 to 60 months. During 2016 , the monthly service fees generally ranged
from $49.99 to $69.99, depending on the service offerings included in a specific subscriber contract. New subscribers may also order additional products, which
are typically billed to the subscriber through increased RPU. We also offer wireless Internet services, the revenues of which were not material to our overall
business or operating results for the year ended December 31, 2016 .
Existing subscribers may order additional products or upgrade their current services. When they do this, a local smart home professional (“SHP”) performs
the installation at the subscriber’s home, which may result in additional service charges. In addition, the subscriber is typically billed for the cost of the equipment
installed and their RPU increases for the additional service offerings.
In order to provide the integrated products and services requested by our subscribers, we continually review our product and service offerings, and as a result
we expect to modify these offerings in the future.
On January 3, 2017, we announced the introduction of the “Vivint Flex Pay” plan. Under the Vivint Flex Pay plan, we (i) will launch a program (the
“Consumer Financing Program”) in the first quarter of 2017, pursuant to which we will offer to qualified customers in the United States an opportunity to finance
the purchase of products (the “Products”) used in connection with our smart home and security services through a third party financing provider and (ii) have
begun to offer retail installment contracts (“RICs”) with respect to the purchase of Products to certain customers who do not qualify to participate in the Consumer
Financing Program, but qualify under our historical underwriting criteria. We may also establish credit programs either directly or through an affiliate or pursuant
to an agreement with a third party to provide installment loans or similar products to customers that do not qualify to participate in the Consumer Financing
Program. Alternatively, customers may purchase the Products with cash or credit card.
Operations
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Our management team has a proven record of strong growth and operational excellence and, as a result of their leadership, we have successfully grown
revenue and total RPU every year since 2006. Our CEO Todd Pedersen, a visionary leader who encourages a highly entrepreneurial culture that fosters innovation,
founded the Company in 1999. Our senior management team averages over 18 years of experience in high growth or large public companies.
We are one of a few smart home service companies in North America that generates nearly all of its revenue organically from a fully integrated model that
encompasses all aspects of the subscriber experience, including sales, professional installation, servicing and monitoring. This approach allows us to deliver a
consistent, quality subscriber experience. We believe this contributes to a strong adoption rate for service offerings beyond traditional security and attrition rates at
or below industry average. During the year ended December 31, 2016 , 86% of new subscriber contracts included smart home service offerings. We also enhance
the quality of our subscribers’ experience through proven operational performance. During the year ended December 31, 2016 , our average response time to
alarms was approximately 11 seconds from the time the signal was received at our monitoring stations. We believe the enhanced functionality of our offerings,
along with the introduction of innovative new products and services, results in increased subscriber usage. An average of 82% of our surveyed subscribers
indicated use of their system at least once per week during the year ended December 31, 2016 . We believe increased subscriber usage contributes to higher
customer satisfaction and may lead to lower attrition.
Our integrated subscriber experience allows our sales representatives, customer service representatives and installation technicians to work closely together
to provide the subscriber with a seamless process from contract origination to daily use. We believe our SHPs and customer service representatives deliver a
quality customer service experience that enhances our brand and improves customer satisfaction. Customer service representatives generally resolve a majority of
maintenance and service related questions over the telephone or through remote-access to the subscriber’s system. By successfully scaling operations as our
business continues to grow, our net service margins have remained at approximately 74% for the years ended December 31, 2016 and December 31, 2015 , despite
the continued increase in complexity of our product and service offerings.
Field Service
We employ full-time SHPs throughout North America, who reside in their service territories, to provide prompt service to our subscribers. SHPs undergo
comprehensive training on all of our product and service offerings. The SHPs typically focus on maintenance and service issues, but also install products and
services for a portion of our new subscribers, primarily those originated through inside sales. In addition, we contract with third-party field service professionals to
perform a portion of our field service calls.
We provide SHPs with supplies of products and materials, which are replenished frequently through shipments from our central warehouse, forward storage
locations and third-party logistics sites. We also provide our SHPs with a company-branded service vehicle.
We utilize software to schedule appointments, route technicians and follow-up with subscribers to ensure that the service was performed to the subscriber’s
satisfaction. All of our full-time SHPs receive updates via a smartphone or tablet detailing their next service appointment or installation through our custom
software that connects to several back-end systems, including our customer relationship management system (“CRM”), our inventory management software and
our workforce management systems.
Customer Service and Alarm Monitoring
Our customer service centers are located in Utah. Our two central monitoring facilities are located in Utah and Minnesota and are fully redundant. Both our
customer service centers and our central monitoring facilities are open 24 hours a day, 7 days a week, and 365 days a year. We have received industry awards for
our customer service and alarm monitoring operations.
All employees who work in customer service undergo training on billing related issues, as well as service offering questions. Customer service
representatives are required to pass background checks and, depending upon their job function, may require licensing by the state of Utah. All professionals who
work in our monitoring facilities undergo comprehensive training and are required to pass background checks and, in certain cases, licensing tests or other checks
to obtain the required licensing. Customer service representatives generally resolve a majority of maintenance and service related questions over the telephone or
through remote-access to the subscriber’s panel. Issues not resolved by customer service require a SHP to visit the subscriber’s home, which may result in an
additional charge to the subscriber.
Billing
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Our billing representatives are located in our Utah offices. We cross-train our billing representatives to also handle general customer service inquiries with
the goal of improving the subscriber experience and to increase personnel flexibility. Billing representatives are also required to pass background checks and,
depending upon their job function, may also require licensing by the state of Utah. A majority of our subscribers pay electronically either via ACH or credit card. A
subscriber who pays electronically is generally placed on a billing cycle based on their contract origination date and, in certain instances, the subscriber may
choose their billing date. Our customers billed via direct invoice can be billed on any day of the month, with payment due 25 days subsequent to the invoice date.
Subscribers are billed in advance for their monthly services based on the subscriber’s billing cycle and not calendar month.
From time to time, for various reasons we may issue a credit to a subscriber for a payment otherwise due, including addressing subscriber concerns or
obtaining the renewal of a subscriber contract. Any such credit decreases revenue and cash collected on the relevant subscriber contract in the amount of such
credit.
Key Systems
In 2014, we implemented an integrated customer relationship management and billing system software, based on a well-established enterprise-scale cloud
solution. This CRM allows us to scale our business, providing the flexibility to accommodate the multiple customer support and billing models resulting from the
continued expansion in our product and service offerings over time. The CRM replaced all of the functions previously performed by our internally developed
relationship management system (“CMS”), except for field service inventory tracking. The CRM enables one-call resolution and allows for operational efficiency
by not requiring the entry of data multiple times, thus improving data accuracy. Additionally, the data is replicated to both a reporting and a business intelligence
server to reduce processing time, as well as to an offsite server used for disaster recovery purposes.
In the first fiscal quarter of 2017, we implemented new enterprise resource planning software (“ERP”), primarily to manage financial accounting, inventory
and supply chain functions of our business. The ERP replaces CMS for field service inventory tracking and our legacy financial accounting and inventory
management systems. Similar to the CRM, the new ERP allows us to scale our operations to accommodate the continued expansion of our business models and
product and service offerings. The ERP also provides improved security and automated system controls.
Software Platform
Nearly 100% of our new subscribers installed in 2016 use our proprietary Vivint Smart Home Cloud platform, consisting of our SkyControl panel,
equipment, cloud software, mobile application and online interface. The SkyControl panel is connected to the Internet via cellular communication and mobile
devices through cloud software. We license certain intellectual property from Alarm.com to support the SkyControl panel. The Vivint Smart Home Cloud platform
enables subscribers using SkyControl to access their systems remotely either directly from the web or through our Vivint Smart Home app and it facilitates
communications between the panel and our monitoring stations. The Vivint Smart Home platform allows our subscribers the ability to remotely arm and disarm
their security system; receive alerts and notifications regarding activity in their home; control smart home products such as thermostats, door locks, lighting
controls; and view live and recorded video.
Go!Control was our primary panel installed in new subscribers’ homes prior to the launch of our Vivint Smart Home Cloud platform. We license certain
communications infrastructure, software and services to support the Go!Control panel from Alarm.com. The Go!Control panel is also connected to the Internet,
smart phones and tablet applications through Alarm.com’s hosted platform. Alarm.com also provides the web interface and technology to enable our subscribers
using Go!Control panels to access their systems remotely and it facilitates communication between the panel and monitoring stations through third party cellular
networks.
Subscriber Contracts – Smart Home and Security
We seek to ensure that our subscribers understand our product and service offerings, along with the key terms of their contracts by conducting two surveys
with every subscriber. The first survey is conducted live via telephone prior to the execution of the contract and installation, and the second survey is conducted on-
line after the installation is completed. These telephonic surveys are recorded and stored in our CRM, enabling easy access and review.
Term and Termination
Historically, we have offered contracts to subscribers that range in length from 36 to 60 months, subject to automatic monthly renewal after the expiration of
the initial term. Since the beginning of 2013, a significant portion of new subscribers have entered into 60 -month contracts. Subscribers have a right of rescission
period prescribed by applicable law during which
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such subscriber may cancel the contract without penalty or obligation. These rescission periods range from 3 to 15 days, depending on the jurisdiction in which a
subscriber resides. As a company policy we provide new subscribers 70 years of age and older a 30 -day right of rescission. Once the applicable rescission period
expires, ownership of the equipment transfers to the subscriber and the subscriber is responsible for the monthly services fees under the contract.
Upfront and Monthly Services Fees
Our subscribers typically pay an activation fee, as well as an installation fee for certain of our products, (unless either of these fees is waived by us) and the
first month’s service at the time of installation. Under the contract, we have the right to pass through to the subscriber any increase in third party costs such as
utility or governmental expenses. We have the right to increase the monthly service fees at the time of renewal with prior written notice.
Other Terms
We provide our subscribers with maintenance free of charge for the first 120 days. After 120 days, we will repair or replace defective equipment without
charge, but we typically bill the subscriber a charge for each service visit. If a utility or governmental agency requires a change to equipment or service after
installation of the system, the subscriber may be charged for the equipment and labor associated with the required change.
We do not provide insurance or warrant that the system will prevent a burglary, fire, hold-up or any such other event. Our contracts limit our liability to a
maximum of $2,000 per event and, where permissible, provide a one-year statute of limitations to file an action against us. We may cease or suspend monitoring
and repair service due to, among other things, work stoppages, weather, phone service interruption, government requirements, subscriber bankruptcy or non-
payment by subscribers after we have given notice that their service is being cancelled due to such non-payment.
Vivint Flex Pay
Beginning in the first quarter of 2017, under the Vivint Flex Pay plan, customers pay separately for the Products and Vivint’s smart home and security
services. We will begin offering customers an opportunity to finance the purchase of Products under the Consumer Financing Program, where qualified customers
will be eligible for zero-percent (0% APR) interest installment loans provided by a third party financing provider of up to $4,000 for either a 42 or 60 month term.
We are initially offering RICs for 42 or 60 month terms to certain customers, who qualify under our historical underwriting criteria, but do not qualify to
participate in the Consumer Financing Program and may establish credit programs either directly or through an affiliate or pursuant to an agreement with a third
party to provide installment loans or similar products to such customers. Along with the purchase of the Products, customers enter into a service agreement with
simple pricing of $39.99 per month for basic security or $49.99 per month for smart home services with the same term lengths as their installment loan agreements
or RICs.
Suppliers
We provide our services through a panel installed at the premises of our subscribers. As of December 31, 2016 , approximately 57% of our installed panels
were SkyControl panels, 40% were 2GIG Go!Control panels, and 3% were other panels. Since early 2014, our primary panel installed for new subscribers is the
SkyControl panel. The 2GIG Go!Control panel was our primary panel for subscribers from the beginning of 2010 through early 2014. In 2013, we completed the
2GIG Sale as described above under “—Basis of Presentation.” In connection with the 2GIG Sale, we retained sole ownership of the intellectual property and
exclusive rights with respect to the SkyControl Panel and certain peripheral equipment. This proprietary equipment is a critical component of our current smart
home and security offerings, and we expect it to remain a critical component of our future offerings as well. In addition, at the time of the 2GIG Sale we entered
into a five-year supply agreement with 2GIG, pursuant to which they will be the exclusive provider of our control panel requirements and certain peripheral
equipment, subject to certain exceptions.
We license certain communications infrastructure, software and services to support the Go!Control panel from Alarm.com. The Go!Control panel is also
connected to the Internet and smart devices through Alarm.com’s hosted platform. Alarm.com also provides the web interface and technology to enable our
subscribers using Go!Control panels to access their systems remotely and it facilitates communication between the panel and monitoring stations through third
party cellular networks.
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Generally, our third-party distributors maintain a safety stock of certain key products or equipment to cover any minor supply chain disruptions. Where
possible we also utilize dual sourcing methods to minimize the risk of a disruption from a single supplier.
Sales
and
Marketing
We have two primary sales channels: direct-to-home and inside sales. For the year ended December 31, 2016 , we generated approximately 64% of our new
subscribers through our direct-to-home sales channel and approximately 36% through inside sales. We believe our approach to managing our sales channels allows
us to achieve a higher adoption rate of new service offerings compared to our competitors, while managing subscriber acquisition costs. Our net subscriber
acquisition cost per subscriber in 2016 was in the $1,975 to $2,025 range, a substantial portion of which is variable. Our net subscriber acquisition cost per
subscriber represented approximately 30 times our ARPNU added in 2016 . We continually evaluate ways to improve the effectiveness of our subscriber
acquisition activities in our direct-to-home, inside sales and other sales channels.
Because we believe attrition is highly correlated with FICO scores and payment type, our compensation structure incentivizes quality subscriber generation
by tying compensation to these factors. We have enhanced our underwriting criteria over time, resulting in an average FICO score of our subscriber portfolio of
714 , with sub-600 FICO score subscribers representing only approximately 2% of our subscriber portfolio and approximately 93% of our subscribers having FICO
scores of 625 or greater, as of December 31, 2016 .
Direct-to-Home Sales
Our direct-to-home sales channel is typically comprised of between 2,000 and 2,500 sales representatives who benefit from our recruiting and training
programs designed to promote professionalism and sales productivity. Each year, between April and August, our sales teams travel to approximately 120 pre-
selected markets throughout North America to sell our product and service offerings. Markets are selected each year based on a number of factors, including
demographics, population density and our past experience selling in these markets. Because expenses associated with our direct-to-home sales channel are directly
correlated with new subscriber acquisition, we avoid a large fixed cost base and are able to deploy a flexible go-to-market strategy every year. A typical sales team
consists of approximately 25 sales representatives and a designated sales manager. Each sales team is supported by approximately 10 trained installation
technicians, including a manager for the technicians. There are also regional managers who generally oversee six to eight sales or installation teams.
In 2015, we introduced a new program whereby a limited number of direct-to-home sales representatives reside in certain select markets and sell in those
markets on a year round basis. While currently minimal, we expect the number of new subscriber contracts generated through this program to continue to increase
over time.
Inside Sales
Subscribers originated through our inside sales channel has grown as a percentage of our total originations from approximately 10% in 2009 to
approximately 36% for the year ended December 31, 2016 . Our inside sales channel utilizes both inbound and outbound leads provided by our marketing
department to sell to subscribers in the United States and Canada. The marketing department generates leads through multiple sources, both digital and traditional,
including leads generated through digital marketing sources such as paid, organic and local search and display advertising. Traditional lead sources include
television and radio advertising, shared mail, email remarketing and third-party lead generation affiliates. Upon receiving an inbound lead from a potential
subscriber requesting information on our products and service offerings, one of our inside sales representatives calls the potential subscriber. Additionally, our
inside sales channel includes third-party partners that both generate leads and complete sales on behalf of Vivint.
Sales and Origination Strategy and Compensation
Sales representatives receive compensation based on the number of qualifying sales during the annual sales period. Criteria for qualifying sales include, but are not
limited to, the amount of RPU, the number of points of protection, subscriber FICO score, etc. To motivate sales representatives and help align compensation with
subscriber quality, we have created a point system. The point system provides the sales representative flexibility to tailor the offering to the subscriber’s needs
while maintaining control through a direct link to the sales representative’s compensation. In addition, a significant portion of the direct-to-home sales
representative’s compensation is not paid until after the completion of the selling season and is paid only on those subscribers who satisfy certain criteria. In order
to retain our sales professionals, we pay ongoing residual commissions to sales management for active subscriber accounts generated through their organization.
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Strategy
Strong Platform for Growth
We have established a history of capitalizing on our business model and technology to offer new products and service offerings, as evidenced by the launch
of our smart home products and services in 2011 and the Vivint Smart Home Cloud platform and SkyControl panel in early 2014. Our innovative products and
service offerings have enabled us to increase ARPNU from $44.50 in 2009 to $66.81 for the year ended December 31, 2016 . Going forward, we intend to
capitalize on the low incremental costs inherent in our business model and existing technology to increase market penetration in our existing channels and expand
into new sales channels.
Innovation
We strive to bring easy-to-use technology to our subscribers, which allow them to use our products and services efficiently. As evidenced by the launch of
our proprietary Vivint Smart Home Cloud platform in early 2014, we have a reputation for developing and deploying products and services for the home that have
robust functionality and that are easy to install and use. Both our SkyControl and Go!Control panels provide a platform to introduce new products and service
offerings to our subscribers. Another example of our emphasis on providing innovative solutions to our subscribers is our acquisition of Space Monkey, Inc.
(“Space Monkey”) in August 2014, which provides a distributed cloud storage technology solution, including the Vivint Smart Drive that integrates with our
Vivint Smart Home Cloud platform. By focusing on innovation, and enhancing the functionality of our existing products and service offerings, we believe we can
increase new subscriber originations, subscriber usage and customer satisfaction, thereby potentially increasing RPU and lowering our attrition.
To enhance the functionality of the products and services included in our systems, we use various third-party manufacturers and service providers in addition
to our in-house development and design of certain products and services. We believe that developing, designing and selling our own products and services that are
differentiated from those of our competitors will be a critical driver of our future success. For example, in 2015 we introduced our award winning Vivint Doorbell
Camera, which allows homeowners to see, hear and speak to anyone on their doorstep, and which enables customers to decide whether to remotely unlock the door
for visitors or open the garage door for a package delivery, if they have those services. In 2016, we introduced the Vivint Ping indoor camera, a two-way talk
camera with one-touch callout. We expect to continue introducing new, innovative products and services, including panels and peripherals, along with integrated
cloud services. We own the design of these new products, and in certain circumstances leverage partnerships with third parties, particularly Original Design
Manufacturers for the manufacture of new products (e.g., video cameras, thermostats, door lock hardware). By vertically integrating the development and design of
our products and services with our existing sales and customer service activities, we believe we are able to more quickly respond to market needs, and better
understand our subscribers’ interactions and engagement with our products and services. This provides critical data enabling us to improve the power, usability and
intelligence of these products and services.
To further increase the value subscribers receive from our products and services, our Vivint Smart Home Cloud platform also integrates with leading third-
party smart home technologies, including Amazon Echo and the Nest Thermostat. Over time, we may integrate other smart home technologies into our platform.
Our innovation center is located in Lehi, Utah, which focuses on the research and development of new products and services, both within and beyond our
existing service offerings. Professionals and engineers at our innovation center have expertise in all aspects of the development process, including hardware
development, software development, design and quality assurance. During the years ended December 31, 2016 , 2015 and 2014 we spent approximately $24.2
million , $16.4 million and $17.4 million , respectively on associated research and development costs.
Competition
The smart home industry is highly competitive and fragmented. Our major competitors include security, telecommunications and cable companies that also
deliver smart home and security services, such as Protection One, Inc. and ADT Corporation (Protection One, Inc. merged with ADT Corporation in 2016); AT&T;
Comcast Corporation; Stanley Security Solutions, a subsidiary of Stanley Black and Decker; MONI, a subsidiary of Ascent Capital Group, Inc.; and Tyco
Integrated Security, a subsidiary of Tyco International Ltd.
We face increasing competition from competitors who are building their own smart home platforms, such as Amazon, Apple and Google, as well as from
companies that offer single-point smart home solutions. Having installed over 2.0 million smart home and security systems, we believe we are well positioned to
compete with them because we benefit from more than
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17 years of experience, our efficient direct-to-home sales channel, innovative products and our award-winning customer service.
We also compete with numerous smaller regional and local providers. We also face, or may in the future face, competition from other providers of
information and communication products and services, a number of which have significantly greater capital and other resources than we do.
Companies in our industry compete primarily on the basis of price in relation to the quality of the products and services they provide. The Company’s brand
and reputation, market visibility, service and product capabilities, quality, price, efficient direct-to-home sales channel, and the ability to identify and sell to
prospective customers, are all factors that contribute to competitive success in the smart home industry. We emphasize the quality of the service we provide, rather
than focusing primarily on price competition. We believe we compete effectively against other national, regional and local companies offering smart home and
security alarm monitoring services by offering our subscribers an integrated smart home, along with an attractive value proposition, and our proven, award-winning
customer service.
Intellectual
Property
Patents, trademarks, copyrights, trade secrets, and other proprietary rights are important to our business and we continuously refine our intellectual property
strategy to maintain and improve our competitive position. We seek to protect new intellectual property to safeguard our ongoing technological innovations and
strengthen our brand, and we believe we take appropriate action against infringements or misappropriations of our intellectual property rights by others. We review
third-party intellectual property rights to help avoid infringement, and to identify strategic opportunities. We typically enter into confidentiality agreements to
further protect our intellectual property.
We own a portfolio of issued U.S. patents and pending U.S. and foreign patent applications that relate to a variety of smart home, security and wireless
Internet technologies utilized in our business. We also own a portfolio of trademarks, including domestic and foreign registrations for Vivint ® , and are a licensee
of various patents, from our third-party suppliers and technology partners. Because of the importance that customers place on reputation and trust when making a
decision on a smart home and security provider, our brand is critical to our business. Patents related to individual products or technologies extend for varying
periods dependent on the date of patent filing or grant and the legal term for patents in the various countries where we have sought patent protection. Trademark
rights may potentially extend for longer periods of time and are dependent upon national laws and use of the marks.
Government
Regulations
United States
We are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities.
We are also required to obtain various licenses and permits from state and local authorities in connection with the operation of our businesses. The majority
of states regulate in some manner the sale, installation, servicing, monitoring or maintenance of smart home and electronic security systems. In the states that do
regulate such activity, our company and our employees are typically required to obtain and maintain licenses, certifications or similar permits from the state as a
condition to engaging in the smart home and security services business.
In addition, a number of local governmental authorities have adopted ordinances regulating the activities of security service companies, typically in an effort
to reduce the number of false alarms in their jurisdictions. These ordinances attempt to reduce false alarms by, among other things, requiring permits for individual
electronic security systems, imposing fines (on either the subscriber or the company) for false alarms, discontinuing police response to notification of an alarm
activation after a subscriber has had a certain number of false alarms, and requiring various types of verification prior to dispatching authorities.
Our sales and marketing practices are regulated by the federal, state and local agencies. These laws and regulations typically place restrictions on the manner
in which products and services can be advertised and sold, and to provide residential purchasers with certain rescission rights. In certain circumstances, consumer
protection laws also require the disclosure of certain information in the contract with our subscriber and, in addition, may prohibit the inclusion of certain terms or
conditions of sale in such contracts.
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Canada
Companies operating in the smart home and electronic security service industry in Canada are subject to provincial regulation of their business activities,
including the regulation of direct-to-home sales activities and contract terms and the sale, installation and maintenance of smart home and electronic security
systems. Most provinces in Canada regulate direct-to-home sales activities and contract terms and require that salespeople and the company on whose behalf the
salesperson is selling obtain licenses to carry on business in that province. Consumer protection laws in Canada also require that certain terms and conditions be
included in the contract between the service provider and the subscriber.
A number of Canadian municipalities require subscribers to obtain licenses to use electronic security alarms within their jurisdiction. Municipalities also
commonly require entities engaged in direct-to-home sales within their municipality to obtain business licenses.
Customers
Our business is not dependent on any single customer or a few customers, the loss of which would have a material adverse effect on the respective market or
on us as a whole. No individual customer accounted for more than 10% of our consolidated 2016 revenue.
Seasonality
Our direct-to-home sales are seasonal in nature with a substantial majority of our new subscriber originations occurring during a sales season from April
through August. We make investments in the recruitment of our direct-to-home sales force and the inventory prior to each sales season. We experience increases in
net subscriber acquisition costs during these time periods.
The management of our sales channels has historically resulted in a consistent sales pattern that enables us to more accurately forecast subscriber
originations. The chart below depicts the percentage of new subscribers originated through our direct-to-home sales channel each week of the April through August
sales season from 2012 through 2016 .
Segment
Information
We conduct business through one segment, Vivint. Historically, we primarily operated in three geographic regions: United States, Canada and New Zealand.
During the year ended December 31, 2016, we sold all of our New Zealand subscriber contracts and ceased operations in the geographical region. Historically, our
operations in New Zealand were considered immaterial and reported in conjunction with the United States. See Note 15 in the accompanying consolidated
financial statements for more information about our business and geographic segments.
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Employees
As of December 31, 2016 , we had approximately 4,300 full-time employees, excluding our seasonal direct-to-home installation technicians, sales
representatives and certain other support professionals. None of our employees are currently represented by labor unions or trade councils. We believe that we
generally have good relationships with our employees. The majority of our employees are located in the Salt Lake City metropolitan area. Employees located
outside of the Salt Lake City metropolitan area are comprised primarily of our SHPs, who service our subscribers and are located in all states in the United States
except Maine and Vermont and all Canadian provinces except Quebec, and the monitoring professionals located at our monitoring station in Minnesota.
Corporate
Information
APX Group Holdings, Inc. was incorporated under the laws of the state of Delaware on October 26, 2012. Our principal executive offices are located at 4931
North 300 West, Provo, Utah 84604 and our telephone number is (801) 377-9111.
ITEM
1A.
RISK
FACTORS
You should carefully consider the following risk factors and all other information contained in this annual report on Form 10-K. The risks and uncertainties
described below are not the only risks facing us. Additional risks and uncertainties that we are unaware of, or those we currently deem immaterial, also may
become important factors that affect us. The following risks could materially and adversely affect our business, financial condition, cash flows or results of
operations.
Risks
Related
To
Our
Business
Our industry is highly competitive.
We operate in a highly competitive industry. We face competition from large residential security companies that have or may have greater capital and other
resources than us. We also face, and may in the future face, competition from other providers of information and communication products and services, including
cable and telecommunications companies, Internet service providers, large technology companies and others, that may have greater capital and resources than us.
Competitors that are larger in scale and have greater resources may benefit from greater economies of scale and other lower costs that permit them to offer more
favorable terms to consumers (including lower service costs) than we offer, causing such consumers to choose to enter into contracts with such competitors. For
instance, cable and telecommunications companies are expanding into the smart home and security industries and are bundling their existing offerings with
automation and monitored security services. In some instances, it appears that certain components of such bundled offerings are significantly underpriced and, in
effect, subsidized by the rates charged for the other product or services offered by these companies. These pricing alternatives may influence subscribers’ desire to
subscribe to our services at rates and fees we consider appropriate. These competitors may also benefit from greater name recognition and superior advertising,
marketing, promotional and other resources. To the extent that such competitors utilize any competitive advantages in markets where our business is more highly
concentrated, the negative impact on our business may increase over time. In addition to potentially reducing the number of new subscribers we are able to
originate, increased competition could also result in increased subscriber acquisition costs and higher attrition rates that would negatively impact us over time. The
benefit offered to larger competitors from economies of scale and other lower costs may be magnified by an economic downturn in which subscribers put a greater
emphasis on lower cost products or services. In addition, we face competition from regional competitors that concentrate their capital and other resources in
targeting local markets.
We also face potential competition from improvements in do-it-yourself (“DIY”) systems, which enable consumers to install their own systems and monitor
and control their home environment through the Internet, text messages, emails or similar communications, without third-party involvement or the need for a
subscription agreement. Continued pricing pressure or improvements in technology and shifts in consumer preferences towards DIY systems could adversely
impact our subscriber base or pricing structure and have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Cable and telecommunications companies actively targeting the smart home market and expanding into the monitored security space, and large technology
companies expanding into the smart home market could result in pricing pressure, a shift in customer preferences towards the services of these companies and a
reduction in our market share. Continued pricing pressure from these competitors or failure to achieve pricing based on the competitive advantages previously
identified above could prevent us from maintaining competitive price points for our products and services resulting in lost customers or in our
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inability to attract new customers and have an adverse effect on our business, financial condition, results of operations and cash flows.
We rely on long-term retention of subscribers and subscriber attrition can have a material adverse effect on our results.
We incur significant upfront costs to originate new subscribers. Accordingly, our long-term performance is dependent on our subscribers remaining with us
for several years after the initial 36 to 60 month term of their contracts. A significant reason for attrition occurs when subscribers move and do not reconnect.
Subscriber moves are impacted by changes in the housing market. See “—Our business is subject to macroeconomic and demographic factors that may negatively
impact our results of operations.” Some other factors that can increase subscriber attrition include problems experienced with the quality of our products or
services, unfavorable general economic conditions, adverse publicity and the preference for lower pricing of competitors’ products and services. If we fail to retain
our subscribers for a sufficient period of time, our profitability, business, financial condition, results of operations and cash flows could be materially and adversely
affected. Our inability to retain subscribers for a long term could materially and adversely affect our business, financial condition, cash flows or results of
operations.
In addition, we amortize or depreciate our capitalized subscriber acquisition costs based on the estimated life of the subscriber relationship. If attrition rates
rise significantly, we may be required to accelerate the amortization of expenses or the depreciation of assets related to such subscribers or to impair such assets,
which could adversely impact our reported GAAP financial results.
Litigation, complaints or adverse publicity could negatively impact our business, financial condition and results of operations.
From time to time, we engage in the defense of, and may in the future be subject to, certain investigations, claims and lawsuits arising in the ordinary course
of our business. For example, we have been named as defendants in putative class actions alleging violations of wage and hour laws, the Telephone Consumer
Protection Act, common law privacy and consumer protection laws. From time to time our subscribers have communicated and may in the future communicate
complaints to organizations such as the Better Business Bureau, regulators, law enforcement or the media. Any resulting actions or negative subscriber sentiment
or publicity could reduce the volume of our new subscriber originations or increase attrition of existing subscribers. Any of the foregoing may materially and
adversely affect our business, financial condition, cash flows or results of operations.
Given our relationship with Vivint Solar and the fact that Vivint Solar uses our registered trademark, “Vivint”, in its name pursuant to a licensing agreement,
our subscribers and potential subscribers may associate us with any problems experienced with Vivint Solar or adverse publicity related to Vivint Solar’s business.
Because we have no control over Vivint Solar, we may not be able to take remedial action to cure any issues Vivint Solar has with its customers, and our
trademark, brand and reputation may be adversely affected.
We are highly dependent on our ability to attract, train and retain an effective sales force and other key personnel.
Our business is highly dependent on our ability to attract, train and retain an effective sales force, especially for our peak April through August sales season.
In addition, because sales representatives become more productive as they gain experience, retaining those individuals is very important for our success. If we are
unable to attract, train and retain an effective sales force, our business, financial condition, cash flows or results of operations could be adversely affected. In
addition, our business is dependent on our ability to attract and retain other key personnel in other critical areas of our business. If we are unable to attract and
retain key personnel in our business, it could adversely affect our business, financial condition, cash flows and results of operations.
Our operations depend upon telecommunication services providers to transmit signals to and from our subscribers.
Our operations depend upon third-party cellular and other telecommunications providers to communicate signals to and from our subscribers in a timely,
cost-efficient and consistent manner. The failure of one or more of these providers to transmit and communicate signals in a timely manner could affect our ability
to provide services to our subscribers. There can be no assurance that third-party telecommunications providers and signal-processing centers will continue to
transmit and communicate signals to or from our third-party providers and the monitoring stations without disruption. Any such disruption, particularly one of a
prolonged duration, could have a material adverse effect on our business. In addition, failure to renew contracts with existing providers or to contract with other
providers on commercially acceptable terms or at all may adversely impact our business.
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Certain elements of our operating model have historically relied on our subscribers’ continued selection and use of traditional landline telecommunications to
transmit signals to and from our subscribers. There is a growing trend for consumers to switch to the exclusive use of cellular, satellite or Internet communication
technology in their homes, and telecommunication providers may discontinue their landline services in the future. In addition, many of our subscribers who use
cellular communication technology for their systems use products that rely on older 2G technology, and certain telecommunication providers have discontinued 2G
services in certain markets, and these and other telecommunication providers are expected to discontinue 2G services in other markets in the future. The
discontinuation of landline, 2G and any other services by telecommunications providers in the future would require our subscriber’s system to be upgraded to
alternative, and potentially more expensive, technologies. This could increase our subscriber attrition rates and slow our new subscriber originations. To maintain
our subscriber base that uses components that are or could become obsolete, we may be required to upgrade or implement new technologies, including by offering
to subsidize the replacement of subscribers’ outdated systems at our expense. Any such upgrades or implementations could require significant capital expenditures
and also divert management’s attention and other important resources away from our customer service and new subscriber origination efforts.
Our interactive services are accessed through the Internet and our security monitoring services are increasingly delivered using Internet technologies. In
addition, our distributed cloud storage solution, including the Vivint Smart Drive, is dependent upon Internet services for shared storage. Some providers of
broadband access may take measures that affect their customers’ ability to use these products and services, such as degrading the quality of the data packets we
transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge
their customers more for using our services or terminating the customer’s contract. There continues to be some uncertainty regarding whether suppliers of
broadband Internet access in the U.S. have a legal obligation to allow their customers to access services such as ours without interference. In addition, the Federal
Communications Commission (“FCC”) recently adopted net neutrality rules that may impact some aspects of our business. Because these rules are new, we do not
yet know the impact they may have on our business. Interference with our services or higher charges to customers by broadband service providers for using our
products and services could cause us to lose existing subscribers, impair our ability to attract new subscribers and materially and adversely affect our business,
financial condition, results of operations and cash flows.
In addition, telecommunication service providers are subject to extensive regulation in the markets where we operate or may expand in the future. Changes in
the applicable laws or regulations affecting telecommunication services could require us to change the way we operate, which could increase costs or otherwise
disrupt our operations, which in turn could adversely affect our business, financial condition, cash flows or results of operations.
We must successfully upgrade and maintain our information technology systems.
We rely on various information technology systems to manage our operations. We are currently implementing modifications and upgrades to these systems,
and have replaced certain of our legacy systems with successor systems with new functionality.
There are inherent costs and risks associated with modifying or changing these systems and implementing new systems, including potential disruption of our
internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to
implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to new systems or of
integrating new systems into our current systems. For example, we encountered issues associated with the implementation of our integrated CRM system in 2014,
which resulted in an immaterial error in our financial statements for the quarter ended June 30, 2014. This error was corrected during the quarter ended
September 30, 2014. As a result of the issues encountered associated with the CRM implementation, we also issued a significant number of billing-related
subscriber credits during the year ended December 31, 2014, which reduced our revenue. While management makes efforts to identify and remediate issues, we
can provide no assurance that our remediation efforts will be successful or that we will not encounter additional issues as we complete the implementation of these
and other systems. In addition, our information technology system implementations may not result in productivity improvements at a level that outweighs the costs
of implementation, or at all. The implementation of new information technology systems may also cause disruptions in our business operations and have an
adverse effect on our business, cash flows and operations.
Privacy and data protection laws, privacy or data breaches, or the loss of data could have a material adverse effect on our business.
In the course of our operations, we gather, process, transmit and store subscriber information, including personal, payment, credit and other confidential and
private information. We use some of this information for operational and marketing
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purposes in accordance with our privacy and data protection policies. We also rely on proprietary and commercially available systems, software, tools and
monitoring to protect against unauthorized use or access of such information.
Our collection, retention, transfer and use of this information are regulated by privacy and data protection laws and regulations, industry standards and
protocols. Our compliance with these various requirements increases our operating costs, and additional laws, regulations, standards or protocols (or new
interpretations of existing laws and regulations) in these areas may further increase our operating costs and adversely affect our ability to effectively market our
products and services. Our failure to comply with any of these laws, regulations, standards or protocols could result in a loss of subscriber data, fines, sanctions and
other liabilities and additional restrictions on our collection, transfer or use of subscriber data. In addition, our failure to comply with any of these laws, regulations,
standards or protocols could result in a material adverse effect on our reputation, subscriber attrition, new subscriber origination, financial condition, cash flows or
results of operations.
Criminals and other nefarious actors are using increasingly sophisticated methods, including cyber-attacks, to capture or alter various types of information
relating to subscribers, to engage in illegal activities such as fraud and identity theft, and to expose and exploit potential security and privacy vulnerabilities in
corporate systems and web sites. Unauthorized intrusion into the portions of our systems and data storage devices that process and store subscriber confidential and
private information, or the loss of such information, may result in negative consequences. In addition, third parties, including our partners and vendors, could also
be a source of security risk to us in the event of a failure of their own security systems and infrastructure. Moreover, we cannot be certain that advances in criminal
capabilities, new discoveries in the field of cryptography or other developments will not compromise or breach the technology protecting the networks that access
our products and services. Any such compromises or breaches to the systems or loss of data, whether by us, our partners and vendors, or other third parties or as a
result of employee error or malfeasance or otherwise, could cause interruptions in operations and damage to our reputation, subject us to costs and liabilities and
materially and adversely affect sales, revenues and profits, which in turn could have a material adverse impact on our business, financial condition, cash flows or
results of operations.
We are subject to payment related risks.
We accept payments using a variety of methods, including credit card, debit card, direct debit from customer’s bank account, and consumer invoicing. For
existing and future payment options we offer to our customers, we may become subject to additional regulations, compliance requirements, and fraud. For certain
payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower
profitability. We rely on third parties to provide payment-processing services, including the processing of credit cards, debit cards, and electronic checks, and it
could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association
operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to
make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised,
we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our
customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected. See
“—Privacy and data protection laws, privacy or data breaches, or the loss of data could have a material adverse effect on our business.”
We may fail to obtain or maintain necessary licenses or otherwise fail to comply with applicable laws and regulations.
Our business is subject to a variety of laws, regulations and licensing requirements and may become subject to additional such requirements in the future. In
certain jurisdictions, we are also required to obtain licenses or permits to comply with standards governing installation or servicing of subscribers, monitoring
station employee selection and training and to meet certain standards in the conduct of our business. Although we believe we are in material compliance with all
applicable laws, regulations, and licensing requirements, in the event that these laws, regulations or licensing requirements change, we may be required to modify
our operations or to utilize resources to maintain compliance with such laws and regulations. Our failure to comply with such laws, regulations or licensing
requirements as may be in effect from time to time could have a material adverse effect on us.
If we expand the scope of our products or services, or our operations in new markets, we may be required to obtain additional licenses and otherwise
maintain compliance with additional laws, regulations or licensing requirements.
New laws, regulations or licensing requirements may be enacted that could have an adverse effect on us. For example, certain U.S. municipalities have
adopted, or are considering adopting, laws, regulations or policies aimed at reducing the number of false alarms, including: (i) subjecting companies to fines or
penalties for transmitting false alarms, (ii) imposing fines on subscribers for false alarms, or (iii) imposing limitations on law enforcement response. These
measures could
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adversely affect our future operations and business by increasing our costs, reducing customer satisfaction or affecting the public perception of the effectiveness of
our products and services. In addition, federal, state and local governmental authorities have considered, and may in the future consider, implementing consumer
protection rules and regulations, which could impose significant constraints on our sales channels.
Regulations have been issued by the Federal Trade Commission (“FTC”), FCC, and Canadian Radio-Television and Telecommunications Commission
(“CRTC”) that place restrictions on direct-to-home marketing, telemarketing, email marketing and general sales practices. These restrictions include, but are not
limited to, limitations on methods of communication, requirements to maintain a “do not call” list, cancellation rights and required training for personnel to comply
with these restrictions. The CRTC has enforcement authority under the Canadian Anti-Spam Law (“CASL”), which prohibits the sending of commercial emails
without prior consent of the consumer or an existing business relationship and sets forth rules governing the sending of commercial emails. CASL allows for a
private right of action for the recovery of damages or provides for enforcement by CRTC permitting the recovery of significant civil penalties, costs and attorneys’
fees in the event that regulations are violated. Changes in regulations or the interpretation of such regulations could have a material adverse effect on our business,
financial condition, cash flows or results of operations.
Increased adoption of laws purporting to characterize certain charges in our subscriber contracts as unlawful, may adversely affect our operations.
If a subscriber cancels prior to the end of the initial term of the contract, other than in accordance with the contract, we may, under the terms of the
subscriber contract, charge the subscriber the amount that would have been paid over the remaining term of the contract. Several states have adopted, or are
considering adopting, laws restricting the charges that can be imposed upon contract cancellation prior to the end of the initial contract term. Such initiatives could
negatively impact our business and have a material adverse effect on our business, financial condition, cash flows or results of operations. Adverse rulings
regarding these matters could increase legal exposure to subscribers against whom such charges have been imposed and the risk that certain subscribers may seek
to recover such charges from us through litigation or otherwise. In addition, the costs of defending such litigation and enforcement actions could have an adverse
effect on our business, financial condition, cash flows or results of operations.
Our new products and services may not be successful.
We launched our smart home products and services in April 2011. We launched our wireless Internet service on a limited basis during 2013 and our
proprietary Vivint Smart Home Cloud solution and new SkyControl panel in early 2014. In 2014, we also began offering a distributed cloud storage solution,
including the Vivint Smart Drive, on a limited basis. In 2015, we launched our doorbell camera. We anticipate launching additional products and services in the
future. These products and services and the new products and services we may launch in the future may not be well-received by our subscribers, may not help us to
generate new subscribers, may adversely affect the attrition rate of existing subscribers, increase our subscriber acquisition costs and increase the costs to service
our subscribers. For example, during the year ended December 31, 2015 we recorded restructuring and asset impairment charges for our Wireless Internet business
totaling $59.2 million, which included $53.2 million of asset impairment charges related to write downs of our network assets, subscriber acquisition costs, certain
intellectual property and goodwill and $6.0 million in restructuring charges related to employee severance and termination benefits as well as write offs of certain
vendor contracts. Any profits we may generate from these or other new products or services may be lower than profits generated from our other products and
services and may not be sufficient for us to recoup our development or subscriber acquisition costs incurred. New products and services may also have lower gross
margins, particularly to the extent that they do not fully utilize our existing infrastructure. In addition, new products and services may require increased operational
expenses or subscriber acquisition costs and present new and difficult technological and intellectual property challenges that may subject us to claims or
complaints if subscribers experience service disruptions or failures or other quality issues. To the extent our new products and services are not successful, it could
have a material adverse effect on our business, financial condition, cash flows or results of operations.
Our recently announced Vivint Flex Pay plan is a new business model that may subject us to additional risks.
In January, 2017, we announced the introduction of the “Vivint Flex Pay” plan. Under this plan, we (i) will launch the Consumer Financing Program
pursuant to which we will offer to our qualified customers an opportunity to finance the purchase of Products used in connection with our smart home and security
services and (ii) have begun to offer RICs with respect to the purchase of Products to certain of our customers who will not qualify for the Consumer Financing
Program. Under the Vivint Flex Pay plan, customers pay separately for the Products and Vivint’s smart home and security services. We began offering RICs in the
first quarter of fiscal 2017. Alternatively, customers are able to purchase the Products with cash or credit card.
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There can be no assurance that the Vivint Flex Pay plan will be successful. If this plan is not favorably received by customers or is otherwise not performing
as intended by us, it could have an adverse effect on our business, subscriber growth rate, financial condition and results of operations. In addition, reductions in
consumer lending and/or the availability of consumer credit under the Vivint Flex Pay plan could limit the number of customers with the financial means to
purchase the Products and thus limit the number of customers who are able to subscribe to our smart home and security services. There is no assurance that our
exclusive provider of installment loans, Citizens Bank, N.A. ("Citizens"), or other companies will continue to provide customers with access to credit or that credit
limits under such arrangements will be sufficient. Such restrictions or limitations on the availability of consumer credit or unfavorable reception of the Vivint Flex
Pay plan by potential customers could have a material adverse impact on our business, results of operations, financial condition and cash flows.
In addition, the Vivint Flex Pay plan subjects us to additional regulatory requirements and compliance obligations. We may face the risk of increased
consumer complaints, potential supervision, examinations or enforcement actions by federal and state licensing and regulatory agencies and/or penalties for
violation of financial services, consumer protections and other applicable laws and regulations. We will also offer RICs to our Canadian customers, and as a result
will be subject to additional regulatory requirements in Canada. In the future, we may elect to offer installment loans and other financial services products similar
to the Consumer Financing Program directly to qualified customers. If we elect to offer such financial services directly, this may further expand our regulatory and
compliance obligations.
The technology we employ may become obsolete, which could require significant capital expenditures.
Our industry is subject to continual technological innovation. Our products and services interact with the hardware and software technology of systems and
devices located at our subscribers’ property. We may be required to implement new technologies or adapt existing technologies in response to changing market
conditions, subscriber preferences, industry standards or inability to secure necessary intellectual property licenses, which could require significant capital
expenditures. It is also possible that one or more of our competitors could develop a significant technical advantage that allows them to provide additional or
superior products or services, or to lower their price for similar products or services, that could put us at a competitive disadvantage. Our inability to adapt to
changing technologies, market conditions or subscriber preferences in a timely manner could have a material adverse effect on our business, financial condition,
cash flows or results of operations.
Our future operating and financial results are uncertain.
Prior growth rates in revenues and other operating and financial results should not be considered indicative of our future performance. Our future
performance and operating results depend on, among other things: (i) our ability to renew and/or upgrade contracts with existing subscribers and maintain customer
satisfaction with existing subscribers; (ii) our ability to generate new subscribers, including our ability to scale the number of new subscribers generated through
inside sales and other channels; (iii) our ability to increase the density of our subscriber base for existing service locations or continue to expand into new
geographic markets; (iv) our ability to successfully develop and market new and innovative products and services; (v) the level of product, service and price
competition; (vi) the degree of saturation in, and our ability to further penetrate, existing markets; (vii) our ability to manage growth, revenues, origination or
acquisition costs of new subscribers and attrition rates, the cost of servicing our existing subscribers and general and administrative costs; and (viii) our ability to
attract, train and retain qualified employees. If our future operating and financial results suffer as a result of any of the other reasons mentioned above, or any other
reasons, there could be a material adverse effect on our business, financial condition, cash flows or results of operations.
Our business is subject to macroeconomic, microeconomic and demographic factors that may negatively impact our results of operations.
Our business is generally dependent on national, regional and local economic conditions. Historically, both the U.S. and worldwide economies have
experienced cyclical economic downturns, some of which have been prolonged and severe. These economic downturns have generally coincided with, and
contributed to, increased energy costs, concerns about inflation, slower economic activity, decreased consumer confidence and spending, reduced corporate profits
and capital spending, adverse business conditions and liquidity concerns. These conditions and concerns result in a decline in business and consumer confidence
and increased unemployment.
Where disposable income available for discretionary spending is reduced (due to, for example, higher housing, energy, interest or other costs or where the
perceived wealth of subscribers has decreased) and disruptions in the financial markets adversely impact the availability and cost of credit, our business may
experience increased attrition rates, a reduced ability to originate new subscribers and reduced consumer demand.
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For instance, recoveries in the housing market increase the occurrence of relocations which may lead to subscribers disconnecting service and not contracting
with us in their new homes. We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent economic recovery,
worldwide, or in the specific markets where our subscribers are located.
Furthermore, any deterioration in new construction and sales of existing single-family homes could reduce opportunities to originate new subscribers and
increase attrition among our existing subscribers. Such downturns in the economy in general, and the housing market in particular may negatively affect our
business.
In addition, unfavorable shifts in population and other demographic factors may cause us to lose subscribers as people migrate to markets where we have
little or no presence, or if the general population shifts into a less desirable age, geographic or other demographic group from our business perspective.
Our inside sales channel depends on third parties and other sources that we do not control to generate leads that we then convert into subscribers. If our third
party partners and lead generators are not successful in generating leads for our inside sales channel, if the quality of those leads deteriorates, or if we are unable to
generate leads through other sources that are cost effective and successfully convert into customers, it could have a material adverse effect on our financial
condition, cash flows or and results of operations.
Also, our subscribers consist largely of homeowners, who are subject to economic, credit, financial and other risks, as applicable. These risks could
materially and adversely affect a subscriber’s ability to make required payments to us on a timely basis. Any such decrease or delay in subscriber payments may
have a material adverse effect on us. As a result of financial distress, subscribers may apply for relief under bankruptcy and other laws relating to creditors’ rights.
In addition, subscribers may be subject to involuntary application of such bankruptcy and other laws relating to creditors’ rights. The bankruptcy of a subscriber
could adversely affect our ability to collect payments, to protect our rights, and otherwise realize the value of our contract with the subscriber. This may occur as a
result of, among other things, application of the automatic stay, delays and uncertainty in the bankruptcy process and potential rejection of such subscriber
contracts. Our subscribers’ inability to pay, whether as a result of economic or credit issues, bankruptcy or otherwise, could have a material adverse effect on our
financial condition, cash flows or and results of operations.
The outcome of the U.S. presidential election and the policies of the incoming administration may impact our business, financial condition and results of
operations.
On January 20, 2017, Donald J. Trump became president of the United States. While it is uncertain at this time how the results of the U.S. 2016 presidential
and other elections could affect our business, President Trump has questioned certain existing and proposed trade agreements, such as the North American Free
Trade Agreement, and withdrawn from others such as the Trans-Pacific Partnership. President Trump has also raised the possibility of greater restrictions on trade
generally and significant increases on tariffs on goods imported into the United States, particularly from China.
Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and
investment could adversely affect our business. For example, the imposition of tariffs or other trade barriers with other countries, particularly with China, could
increase our costs and reduce the competitiveness of our product and service offerings. In addition, according to publicly released statements, a top legislative
priority of the Trump administration and the next Congress may be significant reform of the Internal Revenue Code of 1986, as amended, including significant
changes to taxation of business entities and the deductibility of interest expense.
While there is currently a substantial lack of clarity around the likelihood, timing and details of any such policies and reforms, such policies and reforms may
materially and adversely affect our business, financial condition and results of operations and the value of its securities.
We depend on a limited number of suppliers to provide our products and services. Our product suppliers, in turn, rely on a limited number of suppliers to
provide significant components and materials used in our products. A change in our existing preferred supply arrangements or a material interruption in
supply of products or third party services could increase our costs or prevent or limit our ability to accept and fill orders for our products and services.
We provide our services through a panel installed at the premises of our subscribers. As of December 31, 2016 , approximately 57% of our installed panels
were SkyControl panels, 40% were 2GIG Go!Control panels, and 3% were other panels. Since early 2014, our primary panel installed is the SkyControl panel. The
2GIG Go!Control panel was our primary panel for subscribers from 2010 through early 2014. In fiscal 2013, we completed the 2GIG Sale. In connection with the
2GIG
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Sale, we retained sole ownership of the intellectual property and exclusive rights with respect to the SkyControl panel and certain peripheral equipment. The
proprietary equipment is a critical component of our current product and service offerings and we expect it to remain a critical component of our future service
offerings. In addition, we entered into a five-year supply agreement with 2GIG, pursuant to which they are the exclusive provider of our control panel
requirements, subject to certain exceptions. Upon the expiration or earlier termination of the initial term of this supply agreement, there can be no assurance that
we will be able to renew our supply arrangements with 2GIG on commercially reasonable terms or at all. Any adverse change in, or the cessation of, the
relationship between us and 2GIG could expose us to a significant increase in equipment costs.
In addition to 2GIG, we obtain important components of our systems from several other suppliers. Should 2GIG or such other suppliers cease to manufacture
the products we purchase from them or become unable to timely deliver these products in accordance with our requirements, or should such other suppliers choose
not to do business with us, we may be required to locate alternative suppliers. In addition, any financial or other difficulties our suppliers face may have negative
effects on our business. We may be unable to locate alternate suppliers on a timely basis or to negotiate the purchase of control panels or other equipment on
favorable terms, if at all. In addition, our equipment suppliers, in turn, depend upon a limited number of outside unaffiliated suppliers for key components and
materials used in our control panels and other equipment. If any of these suppliers cease to or are unable to provide components and materials in sufficient quantity
and of the requisite quality, especially during our summer selling season when a large percentage of our new subscriber originations occur, and if there are not
adequate alternative sources of supply, we could experience significant delays in the supply of control panels and other equipment. Any such delay in the supply of
control panels and other equipment of the requisite quality could adversely affect our ability to originate subscribers and cause our subscribers not to continue,
renew or upgrade their contracts or to choose not to purchase such products or services from us. This would result in delays in or loss of future revenues and could
have a material adverse effect on our business, financial condition, cash flows or results of operations. Also, if previously installed components and materials were
found to be defective, we might not be able to recover the costs associated with the recall, repair or replacement of such products, across our installed customer
base, and the diversion of personnel and other resources to address such issues could have a material adverse effect on our financial condition, cash flows or results
of operations.
Currency fluctuations could materially and adversely affect us and we have not hedged this risk.
Historically, a portion of our revenue has been denominated in Canadian Dollars. For the year ended December 31, 2016 , before intercompany eliminations,
approximately $57.4 million , or 8% of our revenues were denominated in Canadian Dollars and as of December 31, 2016 , before intercompany eliminations,
$139.4 million , or 5% of our total assets and $96.9 million , or 3% of our total liabilities were denominated in Canadian Dollars. In the future, we expect to
continue generating revenue denominated in Canadian Dollars, and other foreign currencies. Accordingly, we may be materially and adversely affected by
currency fluctuations in the U.S. Dollar versus these currencies. Weaker foreign currencies relative to the U.S. Dollar may result in lower levels of reported
revenues with respect to foreign currency-denominated subscriber contracts, net income, assets, liabilities and accumulated other comprehensive income on our
U.S. Dollar-denominated financial statements. We have not historically hedged against this exposure. Foreign exchange rates are influenced by many factors
outside of our control, including but not limited to: changing supply and demand for a particular currency, monetary policies of governments (including exchange-
control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other
countries), changes in balances of payments and trade, trade restrictions and currency devaluations and revaluations. Also, governments may from time to time
intervene in the currency markets, directly and by regulation, to influence prices directly. As such, these events and actions are unpredictable. The resulting
volatility in the exchange rates for the other currencies could have a material adverse effect on our financial condition and results of operations.
We rely on certain third-party providers of licensed software and services integral to the operations of our business.
Certain aspects of the operation of our business depend on third-party software and service providers. We rely on certain software technology that we license
from third parties and use in our products and services to perform key functions and provide critical functionality. For example, our subscribers with Go!Control
panels utilize technology hosted by Alarm.com to access their systems remotely through a smart phone application or through web interface. With regard to
licensed software technology, we are, to a certain extent, dependent upon the ability of third parties to maintain, enhance or develop their software and services on
a timely and cost-effective basis, to meet industry technological standards and innovations to deliver software and services that are free of defects or security
vulnerabilities, and to ensure their software and services are free from disruptions or interruptions. Further, these third-party services and software licenses may not
always be available to us on commercially reasonable terms or at all.
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If our agreements with third-party software or services vendors are not renewed or the third-party software or services become obsolete, fail to function
properly, are incompatible with future versions of our products or services, are defective or otherwise fail to address our needs, there is no assurance that we would
be able to replace the functionality provided by the third-party software or services with software or services from alternative providers. Furthermore, even if we
obtain licenses to alternative software or services that provide the functionality we need, we may be required to replace hardware installed at our monitoring
stations and at our subscribers’ homes, including security system control panels and peripherals, to affect our integration of or migration to alternative software
products. Any of these factors could have a material adverse effect on our financial condition, cash flows or results of operations.
We are highly dependent on the proper and efficient functioning of our computer, data back-up, information technology, telecom and processing systems,
platform and our redundant monitoring stations.
Our ability to keep our business operating is highly dependent on the proper and efficient operation of our computer systems, information technology
systems, telecom systems, data-processing systems, and subscriber software platform. Although we have redundant central monitoring facilities, back-up computer
and power systems and disaster recovery tests, if there is a catastrophic event, natural disaster, security breach, negligent or intentional act by an employee or other
extraordinary event, we may be unable to provide our subscribers with uninterrupted services. Furthermore, because computer and data back-up and processing
systems are susceptible to malfunctions and interruptions, we cannot guarantee that we will not experience service failures in the future. A significant or large-scale
malfunction or interruption of any computer or data back-up and processing system could adversely affect our ability to keep our operations running efficiently and
respond to alarm system signals. We do not have a backup system for our subscriber software platform. If a malfunction results in a wider or sustained disruption,
it could have a material adverse effect on our reputation, business, financial condition, cash flows or results of operations.
We are subject to unionization and labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
Currently, none of our employees are represented by a union. Attempts may be made to organize all or part of our employee base. As we continue to grow,
and enter different regions, unions may make further attempts to organize all or part of our employee base. If some or all of our workforce were to become
unionized, and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our
costs and adversely impact our profitability. Additionally, responding to such organization attempts could distract our management and result in increased legal
and other professional fees; and, potential labor union contracts could put us at increased risk of labor strikes and disruption of our operations.
Our business is subject to a variety of employment laws and regulations and may become subject to additional such requirements in the future. Although we
believe we are in material compliance with applicable employment laws and regulations, in the event of a change in requirements, we may be required to modify
our operations or to utilize resources to maintain compliance with such laws and regulations. Moreover, we may be subject to various employment-related claims,
such as individual or class actions or government enforcement actions relating to alleged employment discrimination, employee classification and related
withholding, wage-hour, labor standards or healthcare and benefit issues. Our failure to comply with applicable employment laws and regulations and related legal
actions against us, may affect our ability to compete or have a material adverse effect on our business, financial condition, cash flows or results of operations.
The loss of our senior management could disrupt our business.
Our senior management is important to the success of our business because there is significant competition for executive personnel with experience in the
smart home and security industry and our sales channels. As a result of this need and the competition for a limited pool of industry-based executive experience, we
may not be able to retain our existing senior management. In addition, we may not be able to fill new positions or vacancies created by expansion or turnover.
Moreover, with the exception of our Chief Executive Officer, we do not and do not currently expect to have in the future “key person” insurance on the lives of any
other member of our senior management. The loss of any member of our senior management team without retaining a suitable replacement (either from inside or
outside our existing management team) could have a material adverse effect on our business, financial condition, cash flows or results of operations.
If we are unable to acquire necessary intellectual property or adequately protect our intellectual property, we could be competitively disadvantaged.
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Our intellectual property, including our patents, trademarks, copyrights, trade secrets, and other proprietary rights, constitutes a significant part of our value.
Our success depends, in part, on our ability to protect our intellectual property against dilution, infringement and competitive pressure by defending our intellectual
property rights. To protect our intellectual property rights, we rely on a combination of patent, trademark, copyright and trade secret laws of the U.S., Canada and
other countries, as well as contract provisions. In addition, we make efforts to acquire rights to intellectual property necessary for our operations. However, there
can be no assurance that these measures will be successful in any given case, particularly in those countries where the laws do not protect our proprietary rights as
fully as in the U.S.
If we fail to acquire necessary intellectual property rights or adequately protect or assert our intellectual property rights, competitors may dilute our brands or
manufacture and market similar products and services or convert our subscribers, which could adversely affect our market share and results of operations. We may
not receive patents or trademarks for all our pending patent and trademark applications, and existing or future patents or licenses may not provide competitive
advantages for our products and services. Our competitors may challenge, invalidate or avoid the application of our existing or future intellectual property rights
that we receive or license. In addition, patent rights may not prevent our competitors from developing, using or selling products or services that are similar to or
address the same market as our products and services. The loss of protection for our intellectual property rights could reduce the market value of our brands and
our products and services, reduce new subscriber originations or upgrade sales to existing subscribers, lower our profits, and could have a material adverse effect
on our business, financial condition, cash flows or results of operations.
From time to time, we are subject to claims for infringing the intellectual property rights of others, and will be subject to such claims in the future, which
could have an adverse effect on our business and operations.
We cannot be certain that our products and services or those of third parties that we incorporate into our offerings do not and will not infringe the intellectual
property rights of others. We have been in the past, and may be in the future, subject to claims based on allegations of infringement or other violations of the
intellectual property rights of others, including litigation brought by special purpose or so-called “non-practicing” entities that focus solely on extracting royalties
and settlements by enforcing intellectual property rights. Regardless of their merits, intellectual property claims divert the attention of our personnel and are often
time-consuming and expensive. In addition, to the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue or
modify certain products or services that are found to infringe another party’s rights or enter into licensing agreements with costly royalty payments. We have in the
past and will continue in the future to seek one or more licenses to continue offering certain products or services, which could have a material adverse effect on our
business, financial condition, cash flows or results of operations.
In the past, we have identified material weaknesses in our internal control over financial reporting. If we fail to maintain effective internal control over
financial reporting at a reasonable assurance level, we may not be able to accurately report our financial results, which could have a material adverse effect on
our operations, investor confidence in our business and the trading prices of our securities.
In connection with the preparation and audit of our consolidated financial statements for the year ended December 31, 2014, we along with our independent
registered public accounting firm identified a material weakness in the internal control over our financial reporting. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s
annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness we identified related to deficiencies in the completeness and effectiveness of our Information Technology General Control (“ITGC”)
environment and the controls associated with our year end financial close process, including review of the classification of items within the statement of cash
flows. The deficiencies with our year end financial close process, included insufficient reviews of account reconciliations and journal entries, resulting in a number
of audit adjustments, primarily in the areas of (1) capitalized subscriber acquisition costs, (2) inventory and (3) accrued expenses. The deficiencies also resulted in
a restatement of our consolidated statements of cash flows for the years ended December 31, 2014 and 2013 and the periods from November 17, 2012 through
December 31, 2012 (“Successor”) and January 1, 2011 through November 16, 2012 (“Predecessor”).
We believe we have fully remediated this material weakness related to the controls in our financial statement close process. The remediation included, but
was not limited to, expanding technical accounting skill sets, enhancing reconciliation and review procedures, and adding additional information technology
system related controls.
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If additional material weaknesses in our internal controls are discovered in the future, they may adversely affect our ability to record, process, summarize and
report financial information timely and accurately and, as a result, our financial statements may contain material misstatements or omissions.
In addition, it is possible that control deficiencies could be identified by our management or by our independent registered public accounting firm in the
future or may occur without being identified. Such a failure could result in regulatory scrutiny, and cause investors to lose confidence in our reported financial
condition, lead to a default under our indebtedness and otherwise have a material adverse effect on our business, financial condition, cash flow or results of
operations.
Product or service defects or shortfalls in customer service could have an adverse effect on us.
Our inability to provide products, services or customer service in a timely manner or defects with our products or services, including products and services of
third parties that we incorporate into our offerings, could adversely affect our reputation and subject us to claims or litigation. In addition, our inability to meet
subscribers’ expectations with respect to our products, services or customer service could increase attrition rates or affect our ability to generate new subscribers
and thereby have a material adverse effect on our business, financial condition, cash flow or results of operations.
We are exposed to greater risk of liability for employee acts or omissions or system failure, than may be inherent in other businesses
The nature of the products and services we provide potentially exposes us to greater risks of liability for employee acts or omissions or system failures than
may be inherent in other businesses. If subscribers believe that they incurred losses as a result of our action or inaction, the subscribers (or their insurers) have and
could in the future bring claims against us. Although our service contracts contain provisions limiting our liability for such claims, no assurance can be given that
these limitations will be enforced, and the costs of such litigation or the related settlements or judgments could have a material adverse effect on our financial
condition. In addition, there can be no assurance that we are adequately insured for these risks. Certain of our insurance policies and the laws of some states may
limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence. If significant uninsured damages are
assessed against us, the resulting liability could have a material adverse effect on our business, financial condition, cash flows or results of operations.
Future transactions could pose risks.
We frequently evaluate strategic opportunities both within and outside our existing lines of business. We expect from time-to-time to pursue additional
business opportunities and may decide to eliminate or acquire certain businesses, products or services. For example, in August 2014, we acquired Space Monkey, a
distributed cloud storage technology solution company. Such acquisitions or dispositions could be material. There are various risks and uncertainties associated
with potential acquisitions and divestitures, including: (i) availability of financing; (ii) difficulties related to integrating previously separate businesses into a single
unit, including product and service offerings, distribution and operational capabilities and business cultures; (iii) general business disruption; (iv) managing the
integration process; (v) diversion of management’s attention from day-to-day operations; (vi) assumption of costs and liabilities of an acquired business, including
unforeseen or contingent liabilities or liabilities in excess of the amounts estimated; (vii) failure to realize anticipated benefits and synergies, such as cost savings
and revenue enhancements; (viii) potentially substantial costs and expenses associated with acquisitions and dispositions; (ix) failure to retain and motivate key
employees; and (x) difficulties in applying our internal control over financial reporting and disclosure controls and procedures to an acquired business. Any or all
of these risks and uncertainties, individually or collectively, could have material adverse effect on our business, financial condition, cash flow or results of
operations. We can offer no assurance that any such strategic opportunities will prove to be successful. Among other negative effects, our pursuit of such
opportunities could cause our cost of investment in new subscribers to grow at a faster rate than our recurring revenue and fees collected at the time of installation.
Additionally, any new product or service offerings could require developmental investments or have higher cost structures than our current arrangements, which
could reduce operating margins and require more working capital
Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible
assets.
As of December 31, 2016 , we had approximately $1.3 billion of goodwill and identifiable intangible assets, excluding deferred financing costs. Goodwill
and other identifiable intangible assets are recorded at fair value on the date of acquisition. In addition, as of December 31, 2016 , we had $1,052.4 million of
subscriber acquisition costs, net. We review such assets for impairment at least annually. Impairment may result from, among other things, deterioration in
performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the
25
Table of Contents
products and services we offer, challenges to the validity of certain intellectual property, reduced sales of certain products or services incorporating intellectual
property, increased attrition and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of
operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of
impairment of goodwill or other identifiable intangible assets could have a material adverse effect on our financial position and results of operations.
Insurance policies may not cover all of our operating risks and a casualty loss beyond the limits of our coverage could negatively impact our business.
We are subject to all of the operating hazards and risks normally incidental to the provision of our products and services and business operations. In addition
to contractual provisions limiting our liability to subscribers and third parties, we maintain insurance policies in such amounts and with such coverage and
deductibles as required by law and that we believe are reasonable and prudent. See “—We are exposed to greater risk of liability for employee acts or omissions or
system failure, than may be inherent in other businesses.” Nevertheless, such insurance may not be adequate to protect us from all the liabilities and expenses that
may arise from claims for personal injury, death or property damage arising in the ordinary course of our business and current levels of insurance may not be able
to be maintained or available at economical prices. If a significant liability claim is brought against us that is not covered by insurance, then we may have to pay
the claim with our own funds, which could have a material adverse effect on our business, financial condition, cash flows or results of operations.
Our business is concentrated in certain markets.
Our business is concentrated in certain markets. As of December 31, 2016 , subscribers in Texas and California represented approximately 18% and 8% ,
respectively, of our total subscriber base. Accordingly, our business and results of operations are particularly susceptible to adverse economic, weather and other
conditions in such markets and in other markets that may become similarly concentrated.
Catastrophic events may disrupt our business.
Unforeseen events, or the prospect of such events, including war, terrorism and other international conflicts, public health issues including health epidemics
or pandemics and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the U.S.,
Canada or elsewhere, could disrupt our operations, disrupt the operations of suppliers or subscribers or result in political or economic instability. These events
could reduce demand for our products and services, make it difficult or impossible to receive equipment from suppliers or impair our ability to deliver products and
services to customers on a timely basis. Any such disruption could damage our reputation and cause subscriber attrition. We could be subject to claims or litigation
with respect to losses caused by such disruptions. Our property and business interruption insurance may not cover a particular event at all or be sufficient to fully
cover our losses.
If the insurance industry changes its practice of providing incentives to homeowners for the use of residential electronic security services, we may
experience a reduction in new subscriber growth or an increase in our subscriber attrition rate.
Some insurers provide a reduction in premium rates for insurance policies written on homes that have monitored electronic security systems. There can be no
assurance that insurance companies will continue to offer these rate reductions. If these incentives were reduced or eliminated, homeowners who otherwise may
not feel the need for our products or services would be removed from our potential subscriber pool, which could hinder the growth of our business, and existing
subscribers may choose to cancel or not renew their contracts, which could increase our attrition rates. In either case, our results of operations and growth prospects
could be adversely affected.
The Issuer is a holding company and its principal asset is its ownership of the capital stock of its subsidiaries; accordingly, the Issuer is dependent upon
distributions from its subsidiaries to make payments in respect of the notes and to pay taxes and any other expenses.
The Issuer is a holding company and its principal asset is its ownership of the capital stock of its subsidiaries. The Issuer has no independent means of
generating revenue. The Issuer intends to cause its subsidiaries to make distributions to the Issuer following the consummation of the Transactions in amounts
sufficient to make payments in respect of the notes and the Issuer’s other outstanding indebtedness. To the extent that the Issuer needs funds and its subsidiaries are
unable or otherwise restricted from making such distributions under applicable law or regulation, the Issuer’s liquidity and financial condition would be adversely
affected and the Issuer may be unable to satisfy its obligations under the notes or under its other indebtedness.
26
Table of Contents
Affiliates of the Sponsor own substantially all of the equity interests in us and may have conflicts of interest with us or the holders of the notes in the future.
As a result of the Merger, the Sponsor owns a substantial majority of our capital stock and has the ability to elect a majority of our board of directors. As a
result, affiliates of the Sponsor have control over our decisions to enter into any corporate transaction and will have the ability to prevent any transaction that
requires the approval of stockholders regardless of whether holders of the notes believe that any such transactions are in their own best interests. For example,
affiliates of the Sponsor could cause us to make acquisitions that increase the amount of our indebtedness or to sell assets or businesses, or could cause us to issue
additional capital stock or declare dividends. So long as the Sponsor continues to indirectly own a significant amount of the outstanding shares of our common
stock, affiliates of the Sponsor will continue to be able to strongly influence or effectively control our decisions. Our existing debt agreements and the credit
agreement governing our revolving credit facility permit us to pay advisory and other fees, dividends and make other restricted payments to the Sponsor under
certain circumstances and the Sponsor or its affiliates may have an interest in our doing so. During the year ended December 31, 2016 , we made payments to
affiliates of the Sponsor of $0.9 million .
The Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly
or indirectly with us or that supply us with goods and services. The Sponsor may also pursue acquisition opportunities that may be complementary to our business
and, as a result, those acquisition opportunities may not be available to us. The holders of the notes should consider that the interests of the Sponsor and other
Investors may differ from their interests in material respects. See “Security Ownership of Certain Beneficial Owners and Management,” “Certain Relationships and
Related Party Transactions, and Director Independence,” “Description of the Notes” and “Description of Other Indebtedness.”
We have recorded net losses in the past and we may experience net losses in the future.
Although we have achieved profitability on an Adjusted EBITDA basis, we have recorded consolidated net losses in each of the previous three years ended
December 31, 2016 , and we may likely continue to record net losses in future periods.
The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory
environment affecting generally accepted accounting principles is uncertain. Significant changes in current principles could affect our financial statements
going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our
operating results.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board
("FASB"), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB
and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are being subject to
heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our
financial statements. For example, in May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with
Customers (Topic 606), as amended, which will supersede nearly all existing revenue recognition guidance. Although the new standard permits early adoption, the
effective date of the new revenue standard is our first quarter of fiscal 2018. We do not plan to early adopt, and accordingly, we will adopt the new standard
effective January 1, 2018. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or
(ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing
certain additional disclosures. We currently plan to adopt using the modified retrospective approach; however, a final decision regarding the adoption method has
not been made at this time. Our final determination will depend on a number of factors such as the significance of the impact of the new standard on our financial
results, system readiness and our ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as
necessary. While we continue to assess the potential impacts, under the new standards there is the potential for significant impacts to the accounting for recurring,
service and other sales and activation fee revenues and accounting for subscriber acquisition costs. The application of this new guidance may result in a change in
the timing and pattern of revenue recognition including the retrospective recognition of revenue in historical periods that may negatively affect our future revenue
trend, which, despite no change in associated cash flows, could have a material adverse effect on our net income. We cannot predict the impact of future changes to
accounting principles or our accounting policies on our financial statements going forward, which could have a significant effect on our reported financial results,
and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical accounting estimates,
including those related to the recognition of recurring revenue and other revenue sources, our operating results could be significantly affected.
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Risks
Relating
to
Our
Indebtedness
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.
Net cash interest paid for the years ended December 31, 2016 and 2015 related to our indebtedness (excluding capital leases) totaled $188.1 million and
$144.9 million , respectively. Our net cash used in operating activities for the years ended December 31, 2016 and 2015 , before these interest payments, was
$177.6 million and $110.4 million , respectively. Accordingly, our net cash provided by operating activities for the years ended December 31, 2016 and 2015 was
insufficient to cover these interest payments.
Under the terms of our existing indebtedness, we are not required to make principal payments prior to scheduled maturity. As of December 31, 2016 , we had
approximately $2.5 billion aggregate principal amount of debt outstanding, which requires significant interest and principal payments. Subject to the limits
contained in our existing debt agreements, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures,
investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase. Specifically, our high level of debt could
have important consequences, including the following:
•
•
•
•
•
•
•
•
•
making it more difficult for us to satisfy our obligations with respect to our debt;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other
general corporate requirements;
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby
reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate
purposes;
increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
Limiting our ability to grow our subscriber base or otherwise requiring us to limit or adjust our operating activities;
placing us at a disadvantage compared to other, less leveraged competitors; and
increasing our cost of borrowing.
Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate
the risks to our financial condition described above.
We may be able to incur significant additional indebtedness in the future. For example, on March 6, 2015, we amended and restated the credit agreement
governing our revolving credit facility to provide, among other things, for an increase in the aggregate commitments thereunder from $200.0 million to $289.4
million. Additionally, during 2016 and to-date in 2017 APX issued a total of $600.0 million and $300.0 million aggregate principal amount of the 2022 notes,
respectively. As of December 31, 2016 , we had $283.7 million of availability to incur secured indebtedness under the revolving credit facility (after giving effect
to $5.7 million of outstanding letters of credit and no borrowings). We will be permitted to add, in addition to the revolving credit facility, incremental facilities of
up to $225.0 million, subject to certain conditions being satisfied, of which up to $60.0 million may be incurred on the same “superpriority” basis as the revolving
credit facility. Moreover, although our existing debt agreements contain restrictions on the incurrence of additional indebtedness and entering into certain types of
other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these
restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as
defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the previous risk factor
would increase.
In addition, the exceptions to the restrictive covenants permit us to enter into certain other transactions. For example our existing debt agreements permitted
us, subject to certain conditions, to distribute or otherwise use for restricted payments any proceeds we realized from the 2GIG Sale. On May 14, 2013, we
distributed $60.0 million of such proceeds to our stockholders in reliance on these provisions. The remaining proceeds have been used to fund our business
activities or otherwise used for general corporate purposes, and we do not intend to make future dividends to our stockholders in reliance on these provisions.
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Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Borrowings under our revolving credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service
obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including
cash available for servicing our indebtedness, would correspondingly decrease.
We may be unable to service our indebtedness.
Our ability to make scheduled payments on and to refinance our indebtedness, depends on and is subject to our financial and operating performance, which
in turn is affected by general and regional economic, financial, competitive, business and other factors beyond our control, including the availability of financing in
the international banking and capital markets. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings
will be available to us in an amount sufficient to enable us to service our debt, to refinance our debt or to fund our other liquidity needs.
If we are unable to meet our debt service obligations or to fund our other liquidity needs, we will need to restructure or refinance all or a portion of our debt,
which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may
require us to comply with more onerous covenants that could further restrict our business operations.
Moreover, in the event of a default, the holders of our indebtedness, including the notes and borrowings under our revolving credit facility, could elect to
declare all the funds borrowed to be due and payable, together with accrued and unpaid interest. The lenders under our revolving credit facility could also elect to
terminate their commitments thereunder, cease making further loans, and institute foreclosure proceedings against their collateral, and we could be forced into
bankruptcy or liquidation. If we breach our covenants under our revolving credit facility, we would be in default under our revolving credit facility. The lenders
could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.
Our existing debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on
business opportunities.
Our existing debt agreements impose significant operating and financial restrictions on us. These restrictions limit our ability to, among other things:
•
•
•
•
•
•
•
•
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 us;
designate restricted subsidiaries as unrestricted subsidiaries; and
transfer or sell assets.
As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to
compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive
covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to
obtain waivers from the lenders and/or amend the covenants.
Our failure to comply with the restrictive covenants described above as well as other terms of our existing indebtedness and/or the terms of any future
indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings
before their due date. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and
financial condition could be adversely affected.
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Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an
event of default that could materially and adversely affect our results of operations and our financial condition.
If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts
outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flows would be sufficient to fully repay
borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our
indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or
declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments.
ITEM
1B.
UNRESOLVED
STAFF
COMMENTS
None.
ITEM
2.
PROPERTIES
Our headquarters, and one of our two monitoring facilities, are located in Provo, Utah. These premises are leased under leases expiring between December
2024 and June 2028. Additionally, we lease the premises for a separate monitoring station located in Eagan, Minnesota. We lease various other facilities
throughout the U.S. and Canada for offices, warehousing, recruiting, and training purposes and own a small recruiting and training facility in Idaho. We also have a
new sales recruiting, training, and call center facility under construction in Logan, UT which is scheduled to be completed in the first quarter of 2017. We believe
that these facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of
our operations.
ITEM
3.
LEGAL
PROCEEDINGS
We are engaged in the defense of certain claims and lawsuits arising out of the ordinary course and conduct of our business and have certain unresolved
claims pending, the outcomes of which are not determinable at this time. Our subscriber contracts include exculpatory provisions as described under “Business—
Subscriber Contracts—Other Terms” and other liability limitations. We also have insurance policies covering certain potential losses where such coverage is
available and cost effective. In our opinion, any liability that might be incurred by us upon the resolution of any claims or lawsuits will not, in the aggregate, have a
material adverse effect on our financial condition or results of operations. See Note 13 of our accompanying Consolidated Financial Statements included elsewhere
in this annual report on Form 10-K for additional information.
ITEM
4.
Not applicable.
MINE
SAFETY
DISCLOSURES
PART
II
ITEM
5.
MARKET
FOR
REGISTRANT’S
COMMON
EQUITY,
RELATED
STOCKHOLDER
MATTERS
AND
ISSUER
PURCHASES
OF
EQUITY
SECURITIES
We are a wholly owned subsidiary of APX Parent Holdco, Inc., which in turn is wholly owned through intermediate holding companies by the Investors.
Presently, there is no public trading market for our common stock.
ITEM
6.
SELECTED
FINANCIAL
DATA
30
Table of Contents
The following selected historical consolidated financial information and other data set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the related notes thereto
contained elsewhere in this annual report on Form 10-K.
As a result of the Merger, the selected historical consolidated financial information and other data set forth below are presented on two bases of accounting
and are not necessarily comparable: January 1, 2012 through November 16, 2012 (the “Predecessor Period” or “Predecessor” as context requires) and
November 17, 2012 through December 31, 2015 (the “Successor Period” or “Successor” as context requires), which relate to the period preceding the Merger and
the period succeeding the Merger, respectively. The selected historical consolidated financial information and other data set forth below for the Predecessor Period
are presented for APX Group, Inc. and its wholly-owned subsidiaries, including variable interest entities. The selected historical consolidated financial information
and other data set forth below for the Successor Period reflect the Merger presenting the financial position and results of operations of APX Group Holdings, Inc.
and its wholly-owned subsidiaries. The financial position and results of operations of the Successor are not comparable to the financial position and results of
operations of the Predecessor due to the Merger and the basis of presentation of purchase accounting as compared to historical cost in accordance with Accounting
Standards Codification (“ASC”) 805 Business Combinations.
The Successor and Predecessor Period include substantially the same operating entities except that Vivint Solar, Inc. and its subsidiaries (“Solar”) is not
included in the Successor Period since Solar is separately owned and is no longer a consolidated variable interest entity. The majority of the operations of
Successor Period entities are included within the operations of Vivint, Inc.
The selected historical consolidated financial information and other data presented below for the years ended December 31, 2016 , 2015 and 2014 and the
selected consolidated balance sheet data as of December 31, 2016 and 2015 have been derived from our audited consolidated financial statements included in this
annual report on Form 10-K. The selected historical consolidated financial information and other data presented below for the years ended December 31, 2014,
2013 and 2012 and the selected consolidated balance sheet data as of December 31, 2014, 2013 and 2012 (Successor) have been derived from our audited
consolidated financial statements which are not included in this annual report on Form 10-K. The selected historical consolidated financial information and other
data of the Predecessor are presented for the Issuer and its wholly-owned subsidiaries, as well as Solar, 2GIG and their respective subsidiaries. The selected
historical consolidated financial information and other data of the Successor Period from November 17, 2012 through December 31, 2012 reflect the Merger
presenting the financial position and results of operations of Parent Guarantor and wholly-owned subsidiaries. The financial position and results of the Successor
are not comparable to the financial position and results of the Predecessor due to the Merger and the application of purchase accounting in accordance with ASC
805 Business Combinations .
The historical financial information for the Predecessor Period from January 1, 2012 through November 16, 2012 included in this annual report on Form 10-
K includes the results of Solar, which commenced operations in early 2011. As a result of the Transactions, while Solar was a variable interest entity through the
date of Solar’s initial public offering in October 2014, we have not been its primary beneficiary since after the date of the Transactions. Accordingly, Solar has not
been required to be included in the consolidated financial statements of the Company in periods following the date of the Transactions. The historical financial
information included in this annual report on Form 10-K include the results of 2GIG up through April 1, 2013, which was the date we completed the 2GIG Sale to
Nortek. Solar and 2GIG do not, and will not, provide any credit support for any indebtedness of the Issuer, including indebtedness incurred under our revolving
credit facility or the notes.
31
Table of Contents
Statement
of
Operations
Data:
Total revenue
Total costs and expenses
Loss from operations
Other expenses:
Interest expense
Interest income
Gain on 2GIG Sale
Successor
December
31,
2016 December
31,
2015 December
31,
2014 December
31,
2013
(in
thousands)
Period
from
November
17,
through
December
31,
2012
Predecessor
Period
from
January
1,
through
November
16,
2012
$
757,907 $
653,721 $
563,677 $
500,908 $
57,606 $
829,009
(71,102)
762,396
(108,675)
657,546
(93,869)
555,788
(54,880)
85,799
(28,193)
397,570
440,563
(42,993)
(197,965)
(161,339)
(147,511)
(114,476)
(12,645)
(106,620)
432
—
90
—
1,455
—
1,779
1,493
46,866
76
4
—
(171)
61
—
(122)
Other (expenses) income
(7,255)
(8,832)
Loss from continuing operations before
income taxes
Income tax expense (benefit)
Net loss from continuing operations
Discontinued operations:
(275,890)
(278,756)
(238,146)
(120,921)
67
351
514
3,592
(275,957)
(279,107)
(238,660)
(124,513)
(41,005)
(10,903)
(30,102)
(149,674)
4,923
(154,597)
Loss from discontinued operations
—
—
—
—
—
(239)
Net loss
(275,957)
(279,107)
(238,660)
(124,513)
(30,102)
(154,836)
Net loss attributable to non-controlling
interests
Net loss attributable to APX Group
Holdings, Inc.
Net loss attributable to APX Group, Inc.
Balance
Sheet
Data
(at
period
end):
Cash
$
$
—
—
—
—
—
(1,319)
(275,957) $
(279,107) $
(238,660) $
(124,513) $
(30,102)
N/A
N/A
N/A
N/A
N/A
N/A $
(153,517)
43,520 $
2,559 $
10,807 $
261,905 $
8,090
(32,834)
Working capital (deficit)
(80,170)
(120,952)
(51,569)
187,781
Adjusted working capital (deficit)
(excluding cash and capital lease obligation)
Total assets
Total debt
(113,893)
2,547,662
2,486,700
(115,895)
2,303,644
2,138,112
(56,827)
2,255,586
1,835,068
(69,925)
2,370,544
1,708,159
(36,923)
2,104,926
1,282,578
Total shareholders’ (deficit) equity
$
(245,182) $
(76,993) $
224,486 $
490,243 $
679,279
Ratio of earnings to fixed charges (1)
NM
NM
NM
NM
NM
N/A
N/A
N/A
N/A
N/A
N/A
N/A
NM—Not meaningful.
N/A—Not applicable.
(1)
The ratio of earnings to fixed charges is calculated by dividing the sum of earnings (loss) from continuing operations before income taxes and fixed charges,
by fixed charges. Fixed charges include interest expense on all indebtedness, amortization of debt issuance fees and interest expense on operating
leases. Earnings were deficient in all periods presented to cover fixed charges by the following amounts:
December
31,
2016
December
31,
2015
December
31,
2014
December
31,
2013
Successor
Period
from
November
17,
through
December
31,
2012
Predecessor
Period
from
January
1,
through
November
16,
2012
$
(275,957) $
(278,756) $
(238,146) $
(120,921) $
(40,789) $
(149,668)
32
Table of Contents
ITEM
7.
MANAGEMENT’S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND
RESULTS
OF
OPERATIONS
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 “Selected Financial Data” and the consolidated financial
statements and notes thereto contained in this annual report on Form 10-K. 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
Overview
We are one of the largest companies in North America focused on delivering smart home products and services. Our integrated smart home platform offers
subscribers a comprehensive suite of products and services to remotely control, monitor and manage their homes using any smart device. Unlike many other smart
home companies, who generally focus only on selling equipment and software, subscriber origination or servicing, we are a vertically integrated smart home
company, owning the entire customer lifecycle including sales, professional installation, service, monitoring, billing and customer support. We believe that with
our proven business model, along with 17 years of experience installing integrated solutions, we are well positioned to continue to lead the large and growing smart
home market. We offer homeowners a customized smart home that integrates a wide variety of smart home and security devices. We seek to deliver a quality
subscriber experience through a combination of innovative 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. Through our
established underwriting criteria and compensation structure, we have built a portfolio of approximately 1,147,000 subscribers in North America, with an average
credit score of 714 , as of December 31, 2016 . Over 95% of our revenues during the years ended December 31, 2016 and 2015 , respectively, consisted of
contractually committed revenues, which have historically resulted in consistent and predictable operating results.
Key
2016
Events
In April 2016, Parent completed the first installment of an issuance and sale to certain investors of a series of preferred stock and contributed the net
proceeds from such issuance of $69.8 million to us as an equity contribution. In July 2016, Parent completed the final installment of the issuance and sale to certain
investors of such series of preferred stock and, in August 2016, contributed the net proceeds from such issuance of $30.6 million to us as an equity contribution.
Both issuances were private placements exempt from registration under the Securities Act.
In May 2016, APX issued $500.0 million aggregate principal amount of 2022 notes, pursuant to an indenture dated as of May 26, 2016 among APX, the
guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. The 2022 notes will mature on December 1, 2022, or on such
earlier date when any outstanding pari passu lien indebtedness matures as a result of the operation of any “Springing Maturity” provision set forth in the
agreements governing such pari passu lien indebtedness. The 2022 notes are secured, on a pari passu basis, by the collateral securing obligations under the 2019
notes and 2022 private placement notes and the revolving credit facilities, in all cases, subject to certain exceptions and permitted liens. APX used a portion of the
net proceeds from the issuance of the 2022 notes to repurchase approximately $235 million aggregate principal amount of the outstanding 2019 notes and 2022
private placement notes in privately negotiated transactions and repaid borrowings under the existing revolving credit facility. In August 2016, APX issued an
additional $100.0 million aggregate principal amount of the 2022 notes at a price of 104.00%.
On May 2, 2016, we and David Bywater, our former Chief Operating Officer, agreed that in connection with the appointment of Mr. Bywater as interim
Chief Executive Officer of Vivint Solar, Inc., Mr. Bywater would take a leave of absence from our company. On December 15, 2016, our Board of Directors (the
“Board”) appointed Scott Hardy to serve as our Chief Operating Officer effective December 15, 2016. Mr. Hardy will succeed David Bywater, who notified us on
December 15, 2016 of his intent to resign as our Chief Operating Officer.
In November 2016, we amended the Marketing and Customer Relations Agreement with Solar to update certain terms and conditions governing existing
cross-marketing initiatives and to implement new cross-marketing initiatives including a three-month pilot program with the purpose of exploring potential
opportunities for each company to offer, sell and integrate the other company’s respective products and services with its standard product offering.
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Recent
Developments
On January 3, 2017, we announced the introduction of the Vivint Flex Pay plan. Under the Vivint Flex Pay plan, we (i) will launch a Consumer Financing
Program in the first quarter of 2017, pursuant to which we will offer to qualified customers in the United States an opportunity to finance the purchase of Products
used in connection with our smart home and security services through a third party financing provider and (ii) have begun to offer RICs with respect to the
purchase of Products to certain customers who do not qualify to participate in the Consumer Financing Program, but qualify under our historical underwriting
criteria. We may also establish credit programs either directly or through an affiliate or pursuant to an agreement with a third party to provide installment loans or
similar products to customers that do not qualify to participate in the Consumer Financing Program. Alternatively, customers may purchase the Products with cash
or credit card.
Under the Vivint Flex Pay plan, customers pay separately for the Products and our smart home and security services. Under the Consumer Financing
Program, qualified customers will be eligible for installment loans provided by a third party financing provider of up to $4,000 for either 42 or 60 months. In
connection with the Consumer Financing Program, a subsidiary of ours entered into the CFP Agreement with Citizens pursuant to which Citizens will be the
exclusive provider of installment loans under the Consumer Financing Program for our customers who are eligible for such loans. Pursuant to the CFP Agreement,
we will pay a monthly fee to Citizens based on the average daily balance of the loans provided by Citizens outstanding and we will share with Citizens liability for
credit losses, with Vivint being responsible for approximately 5% to 100% of lost principal balances, depending on factors specified in the CFP Agreement. The
initial term of the CFP Agreement is five years, subject to automatic, one-year renewals unless terminated by either party in accordance with its terms. We are
initially offering RICs for 42 or 60 month terms to certain customers who do not qualify to participate in the Consumer Financing Program, but qualify under our
historical underwriting criteria, and may establish credit programs either directly or through an affiliate or pursuant to an agreement with a third party to provide
installment loans or similar products to such customers. Along with the purchase of the Products, customers enter into a service agreement with simple pricing of
$39.99 per month for basic security or $49.99 per month for smart home with the same term lengths as their installment loan agreements or RICs.
On February 1, 2017, APX issued an additional $300.0 million aggregate principal amount of the 2022 notes at a price of 108.250%. We used the net
proceeds from the offering of these 2022 notes to redeem $300.0 million aggregate principal amount of the existing 2019 notes and pay the related redemption
premium, and to pay all fees and expenses related thereto and will use any remaining proceeds for general corporate purposes.
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. Going forward, we expect the Vivint Flex Pay program to offset a portion of the upfront investment associated with the generation of new
subscribers. We generally market our service offerings through two sales channels, direct-to-home and inside sales. Historically, a majority 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
36% of total new subscriber additions in the year ended December 31, 2016 , as compared to 28% of total new subscribers in the year ended December 31, 2015 .
Over time we expect the number of subscribers originated through inside sales to continue to increase, resulting from increased advertising, new lead generation
sources, lead conversion and greater brand awareness.
Our operating results are impacted by the following key factors: number of subscriber additions, net subscriber acquisition costs, ARPU, subscriber adoption
rate of additional services beyond our base security offering, 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.
Our ability to increase subscribers depends on a number of factors, both external and internal. External factors include the overall macroeconomic
environment, the availability of additional capital, awareness of our brand 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
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ways to improve the effectiveness of our subscriber acquisition activities in both our direct-to-home and inside sales channels, and over time we intend to add other
sales models and channels to grow our subscriber base.
Internal factors include our ability to recruit, train and retain personnel, along with the level of investment in sales and marketing efforts. As a result, we
expect to increase our investment in advertising over time. 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. Successfully growing
our RPU 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 product and service offerings 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 offerings from residential security into smart home services, which
allows us to charge higher RPU for these additional service offerings. These offerings include our proprietary Vivint Smart Home Cloud, Vivint Smart Drive,
Vivint Doorbell Camera, Vivint Ping Camera and Vivint Element Thermostat. During the year ended December 31, 2016 , approximately 86% of our new
subscribers contracted for one of our smart home offerings. Due to the high rate of adoption of additional smart home product and service offerings, our ARPNU
has increased from $44.50 in 2009 to $66.81 for the year ended December 31, 2016 , an increase of 50% .
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, but not limited to, 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.
The table below presents our subscriber data for the years ended December 31, 2016 , 2015 and 2014 :
Beginning balance of subscribers
Net new additions
Subscriber contracts sold (1)
Attrition
Ending balance of subscribers
Monthly average subscribers
Attrition rate
Year
ended
December
31,
2016
2015
2014
1,013,917
277,241
(7,520)
(136,892)
1,146,746
1,082,694
894,175
236,562
—
(116,820)
1,013,917
953,923
795,500
204,464
—
(105,789)
894,175
849,454
12.6%
12.2%
12.5%
(1) Represents our New Zealand and Puerto Rico subscriber contracts sold during the year ended December 31, 2016.
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 period may be impacted by the number of subscriber contracts reaching the end of their initial term in such period. The increase in attrition in
the year ended December 30, 2016, reflects the effect of the 2012 and 2013 42-month pools reaching the end of their initial contract terms. We believe this trend in
cancellations at the end of the initial contract term is comparable to other companies within our industry.
Basis
of
Presentation
We conduct business through one operating segment, Vivint. Historically, we primarily operated in three geographic regions: United States, Canada and New
Zealand. During the year ended December 31, 2016 , we sold all our New Zealand and Puerto Rico subscriber contracts and ceased operations in these
geographical regions ("2016 Contract Sales"). Historically, our
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operations in both regions were considered immaterial and reported in conjunction with the United States. See Note 15 in the accompanying consolidated financial
statements for more information about our geographic segments.
How
We
Generate
Revenue
Our primary source of revenue is generated through recurring monthly services and wireless internet 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.
Recurring revenues accounted for over 95% of total revenues for the years ended December 31, 2016 , 2015 and 2014 , respectively.
Recurring revenue. Recurring 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 RPU billed is dependent upon which of our service offerings is included in the subscriber contracts. Our
smart home offerings generally provide higher RPU than our base security offering. 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 recurring 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 and are deferred. Effective April 1, 2016
these fees are recognized over 15 years using a 240% declining balance method, which converts to a straight-line methodology after approximately nine years
when the resulting amortization exceeds that from the accelerated method. We evaluate subscriber account attrition on a periodic basis, utilizing observed attrition
rates for our subscriber contracts and industry information and, when necessary, makes adjustments to the estimated subscriber relationship period and
amortization method.
Costs
and
Expenses
Operating expenses. Operating expenses primarily consists of labor associated with monitoring and servicing subscribers and labor and equipment expenses
related to upgrades and service repairs. We also incur equipment costs associated with excess and obsolete inventory and rework costs related to equipment
removed from subscriber’s homes. 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
SHPs 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 (“R&D”), 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 certain service agreements with Solar, we subleased corporate
office space to them through October 2014 and provide certain other administrative services to Solar. We charge Solar the costs associated with these service
agreements (See Note 14 in our accompanying consolidated financial statements).
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.
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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 active smart home and security subscribers at the end of a given period.
Monthly Revenue per User
Monthly Revenue per User ("RPU") is the recurring monthly revenue billed to a smart home and security subscriber.
Total Revenue per User
Total RPU is the aggregate RPU billed to all smart home and security subscribers.
Average RPU
Average RPU ("ARPU") is the total RPU divided by total subscribers.
Average Revenue per New User
Average Revenue per New User ("ARPNU") is the aggregate RPU for new subscribers originated during a period divided by the number of new subscribers
originated during such period.
Attrition
Attrition is the aggregate number of canceled smart home and security subscribers during a period divided by the monthly weighted average number of total
smart home and security subscribers for such 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). Sales of contracts to third
parties, certain moves and takeovers are excluded from the attrition calculation.
Net Subscriber Acquisition Costs
Net subscriber acquisition costs is the direct and indirect costs to create a new smart home and security subscriber. These include commissions, equipment,
installation, marketing and other allocations (general and administrative and overhead); less activation fees, installation fees and upsell revenue. These costs
exclude residuals and long-term equity expenses associated with the direct-to-home sales channel.
Net Subscriber Acquisition Multiple
Net subscriber acquisition multiple is the total net subscriber acquisition costs, divided by the number of new subscribers originated, and then divided by the
ARPNU.
Net Service Cost per Subscriber
Net service cost per subscriber is the total service costs for the period, including monitoring, customer service, field service and other allocations (general
and administrative and overhead) costs, less total service revenue for the period divided by total subscribers.
Net Service Margin
Net service margin is the ARPU for the period less net service costs divided by the ARPU for the period.
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Critical
Accounting
Policies
and
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 income taxes, allowance for doubtful accounts, valuation of intangible assets, and fair
value 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 our accompanying consolidated financial statements.
Change in Accounting Estimate
Effective April 1, 2016, we updated the estimated life of our subscriber relationships and the period used to amortize deferred activation fees and deferred
subscriber acquisition costs, to better approximate the related anticipated life of the customer. Prior to the change, we amortized deferred activation fees and
subscriber acquisition costs over 12 years using a 150% declining balance method, which converted to a straight-line methodology after approximately five years .
Subsequent to the change , we amortize deferred activation fees and subscriber acquisition costs over 15 years using a 240% declining balance method, which
converts to a straight-line methodology after approximately nine years when the resulting amortization exceeds that from the accelerated method. The effects of
this change in estimate were as follows (in thousands):
Increase in activation fee revenues
Increase in depreciation and amortization
Increase to loss from operations
Increase to net loss
Year
ended
December
31,
2016
1,400
$
21,413
20,013
19,621
All pertinent factors, including actual customer attrition data, demand, competition, and the estimated technological life of the installed equipment, will
continue to be reviewed by us to assess the continued appropriateness of methods and estimated subscriber relationship period.
Revenue Recognition
We recognize revenue principally on three types of transactions: (i) recurring revenue, which includes revenues for monitoring and other smart home
services of our subscriber contracts and recurring monthly revenue associated with Vivint Wireless Inc., (ii) service and other sales, which includes non-recurring
service fees charged to subscribers provided on contracts, contract fulfillment revenues and sales of products that are not part of our service offerings, and (iii)
activation fees on subscriber contracts, which are amortized over the expected life of the customer.
Recurring revenue for our subscriber contracts is billed in advance, generally monthly, pursuant to the terms of subscriber contracts and recognized ratably
over the service period. Costs of providing ongoing recurring services are expensed in the period incurred.
Service and other sales revenue is recognized as services are provided or when title to the products and equipment sold transfers to the customer. Contract
fulfillment revenue, included in service and other sales, is recognized when payment is received from customers who cancel their contract in-term. Revenue from
sales of products that are not part of the basic equipment offering is generally recognized upon delivery of products.
Activation fees represent upfront one-time charges billed to subscribers at the time of installation and are deferred and recognized over the expected
customer life. We evaluate subscriber account attrition on a periodic basis, utilizing observed attrition rates for our subscriber contracts and industry information
and, when necessary, makes adjustments to the estimated subscriber relationship period and amortization method.
Subscriber Acquisition Costs
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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 consists primarily of certain portions of sales commissions, equipment, and installation costs. These costs are
deferred and amortized over 15 years using a 240% declining balance method, which converts to a straight-line methodology after approximately nine years when
the resulting amortization exceeds that from the accelerated method. The Company evaluates subscriber account attrition on a periodic basis, utilizing observed
attrition rates for the Company’s subscriber contracts and industry information and, when necessary, makes adjustments to the estimated subscriber relationship
period and amortization method.
On the accompanying consolidated statement of cash flows, subscriber acquisition costs that are comprised of equipment and related installation costs
purchased for, or used in, subscriber contracts in which we retain ownership to the equipment are classified as investing activities and reported as “Subscriber
acquisition costs – company owned equipment.” All other subscriber acquisition costs are classified as operating activities and reported as “Subscriber acquisition
costs – deferred contract costs” on the condensed consolidated statements of cash flows as these assets represent deferred costs associated with customer contracts.
In conjunction with the Merger and in accordance with purchase accounting, the total purchase price was allocated to our net tangible and identifiable
intangible assets based on their estimated fair values as of November 16, 2012 (See Note 8 in our accompanying consolidated financial statements). We recorded
the value of Subscriber Acquisition Costs on the date of the Merger at fair value and classified it as an intangible asset, which is amortized over 10 years in a
pattern that is consistent with the amount of revenue expected to be generated from the related subscriber contracts.
Accounts Receivable
Accounts receivable consist primarily of amounts due from subscribers for recurring 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 $4.1 million and $3.5
million at December 31, 2016 and December 31, 2015 , respectively. We estimate this allowance based on historical collection and attrition rates. As of
December 31, 2016 and 2015 , no accounts receivable were classified as held for sale. Provision for doubtful accounts recognized and included in general and
administrative expenses in the accompanying audited consolidated statements of operations totaled $19.6 million , $14.9 million and $15.7 million for the year
ended December 31, 2016 , 2015 and 2014 , 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, spectrum licenses and other
purchased and internally developed technology, which totaled $475.4 million at December 31, 2016 . Goodwill represents the excess of cost over the fair value of
net assets acquired and was $835.2 million at December 31, 2016 .
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
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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.
We conduct a goodwill impairment analysis annually in our fourth fiscal quarter, as of October 1, 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 evaluate 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 based on estimated growth in our business and discount
rates. 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 originally issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which clarifies the principles used to recognize
revenue for all entities. This guidance requires companies to recognize revenue when they transfer goods or services to a customer in an amount that reflects the
consideration to which they expect to be entitled. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year to
be effective for annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08 to clarify the implementation
guidance on principal versus agent considerations as it relates to Topic 606. In June 2016, the FASB issued ASU 2016-10 to clarify the implementation guidance
on identifying performance obligations and licensing as it relates to Topic 606. This update reduces the complexity when applying the guidance for identifying
performance obligations and improves the operability and understandability of the license implementation guidance. In June 2016, the FASB issued ASU 2016-12
to clarify the implementation guidance on Topic 606, which amends the guidance on transition, collectability, non-cash consideration and the presentation of sales
and other similar taxes.
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We currently plan to adopt Topic 606 using the modified retrospective approach with the cumulative effect of initially applying the new standard recognized
at the date of initial application and providing certain additional disclosures. However, a final decision regarding the adoption method has not been made at this
time. Our final determination will depend on a number of factors, such as the significance of the impact of the new standard on our financial results, system
readiness, including our ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.
We are in the initial stages of our evaluation of the impact of the new standard on our accounting policies, processes, and system requirements. We have
assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. Furthermore, we have made and will continue
to make investments in systems to enable timely and accurate reporting under the new standard. We expect the standard to have an effect on the subscriber
acquisitions costs, net and deferred revenues included in our condensed consolidated balance sheets and the recognition of revenues and amortization of subscriber
acquisition costs on the consolidated statement of operations. We do not expect the standard to have a significant impact to the consolidated statements of changes
in equity or the consolidated statements of cash flows.
While we continue to assess the potential impacts of the new standard, including the areas described above, and anticipate this standard could have a material
impact on the consolidated financial statements, we do not know or cannot reasonably estimate quantitative information related to the impact of the new standard
on our financial statements at this time.
In March 2016, the FASB issued ASU 2016-09 to simplify accounting for employee share-based payments. This update involves several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and will be
applied prospectively and/or retrospectively, with early adoption permitted. We plan to adopt this update on the effective date and the adoption is not expected to
materially impact the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07 which eliminates the requirement to retroactively adopt the equity method of accounting when an
investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. This update is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2016 and must be applied prospectively, with early adoption permitted. We plan
to adopt this update on the effective date and the adoption is not expected to materially impact the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06 to clarify the assessment of contingent put and call options in debt instruments as it relates to Derivatives
and Hedging (Topic 815). The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the
payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this
update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This update is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2016 and must be applied using a modified retrospective approach, with early adoption permitted.
We plan to adopt this update on the effective date and the adoption is not expected to materially impact the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations as it relates to lease assets and lease
liabilities. The update requires that lease assets and lease liabilities be recognized on the balance sheet, and that key information about leasing arrangements be
disclosed. Prior to this update, GAAP did not require operating leases to be recognized as lease assets and lease liabilities on the balance sheet. This update is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and must be applied using a modified retrospective approach,
with early adoption permitted. We are evaluating the new guidance and plan to provide additional information about its expected impact at a future date.
In January 2016, the FASB issued ASU 2016-01 to address certain aspects of the recognition, measurement, presentation, and disclosure of financial
instruments. The main provisions of this update require equity investments to be measured at fair value with changes in fair value recognized in earnings, allows a
company to value equity investments without a readily determined fair value at cost, less any impairments, and simplifies the assessment of impairments of equity
investments without a readily determinable fair value by requiring a qualitative assessment. This update is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the
beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements)
should be applied prospectively to equity investments that exist as of the date of adoption of the Update. Early adoption is permitted. We
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are evaluating the new guidance and plan to provide additional information about its expected impact upon adoption at a future date.
Results
of
operations
Total revenues
Total costs and expenses
Loss from operations
Other expenses
Loss before taxes
Income tax expense
Net loss
Key
operating
metrics
Total Subscribers, as of December 31 (thousands)
Total RPU (thousands) (1)
ARPU (1)
Net Service Cost per Subscriber
Net Service Margin
Net Subscriber Acquisition Multiple
Year
ended
December
31,
2016
2015
(in thousands)
$
757,907
$
653,721
$
829,009
(71,102)
204,788
(275,890)
67
762,396
(108,675)
170,081
(278,756)
351
2014
563,677
657,546
(93,869)
144,277
(238,146)
514
$
$
$
$
(275,957)
$
(279,107)
$
(238,660)
1,146.7
65,633
57.23
14.72
$
$
$
74%
29.9x
1,013.9
55,689
54.92
14.33
$
$
$
74%
30.9x
894.2
48,732
54.50
15.65
71%
31.3x
(1) Total RPU and ARPU data are provided as of each period end.
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Revenues
The following table provides the significant components of our revenue for the years ended December 31, 2016 and 2015 :
Recurring revenue
Service and other sales revenue
Activation fees
Total revenues
Year
ended
December
31,
2016
2015
%
Change
$
$
(in thousands)
724,478 $
624,989
22,855
10,574
22,700
6,032
757,907 $
653,721
16%
1%
75%
16%
Total revenues increased $104.2 million , or 16% , for the year ended December 31, 2016 as compared to the year ended December 31, 2015 , primarily due
to the growth in recurring revenue, which increased $99.5 million , or 16% . $83.3 million of the increase in recurring revenue was due to an increase in Total
Subscribers and $15.5 million of the increase was due to increases in RPU. Recurring revenues associated with our wireless internet business increased $2.7
million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 . Currency translation negatively affected total revenues by $2.1
million , as computed on a constant currency basis.
Service and other sales revenue remained essentially flat for the year ended December 31, 2016 as compared to the year ended December 31, 2015 .
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, all activation fee revenue recognized in the years ended
December 31, 2016 and 2015 relate to contracts generated after the Acquisition. Revenues recognized related to activation fees increased $4.5 million , or 75% ,
for the year
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ended December 31, 2016 as compared to the year ended December 31, 2015 , primarily due to the increase in the number of subscribers from whom we have
collected activation fees since the date of the Acquisition and a change in the timing of recognizing deferred activation fees as a result of the estimate relating to
amortization.
Costs and Expenses
The following table provides the significant components of our costs and expenses for the years ended December 31, 2016 and 2015 :
Operating expenses
Selling expenses
General and administrative
Depreciation and amortization
Restructuring and asset impairment charges
Total costs and expenses
Year
ended
December
31,
2016
2015
%
Change
(in thousands)
$
264,865 $
131,421
143,168
288,542
1,013
$
829,009 $
228,315
122,948
107,212
244,724
59,197
762,396
16 %
7 %
34 %
18 %
(98)%
9 %
Operating expenses increased $36.6 million , or 16% , for the year ended December 31, 2016 as compared to the year ended December 31, 2015 , primarily
driven by an increase of $23.6 million in personnel and related costs, an increase of $7.9 million in facilities and IT infrastructure costs, an increase of $1.9 million
in monitoring costs from third-party cellular providers, and an increase of $1.3 million in banking fees. All of these cost increases related to supporting the 13.1%
growth in our subscriber base.
Selling expenses, excluding amortization of capitalized subscriber acquisition costs, increased $8.5 million , or 7% , for the year ended December 31, 2016
as compared to the year ended December 31, 2015 . This increase was principally comprised of $6.6 million in expenses associated with lead generation, primarily
related to the 53.4% growth in new subscribers generated through our inside sales channel and an increase of $4.1 million in facilities and IT infrastructure costs.
This increase was offset, in part, by a decrease in legal costs of $1.7 million .
General and administrative expenses increased $36.0 million , or 34% , for the year ended December 31, 2016 as compared to the year ended December 31,
2015 , primarily due to a non-cash gain of $12.2 million in connection with the settlement of the Merger-related escrow recorded during the year ended December
31, 2015, an increase of $10.8 million in personnel costs, which included a $2.2 million stock-based compensation expense related to an equity repurchase by 313
from one our executives, an increase of $4.8 million in legal costs, an increase in IT and contracted services of $3.5 million to support the growth in the business,
an increase of $2.7 million in research and development costs and an increase of $1.4 million in brand marketing.
Depreciation and amortization increased $43.8 million , or 18% , for the year ended December 31, 2016 as compared to the year ended December 31, 2015 .
The increase was primarily due to increased amortization of subscriber acquisition costs arising from the growth in our subscriber base and a change in the timing
of recognizing capitalized subscriber acquisition costs as a result of the estimate relating to amortization.
Restructuring and asset impairment charges for the year ended December 31, 2016 primarily related to net the net loss of $2.6 million associated with the
2016 Contract Sales, offset by $1.5 million of wireless restructuring and asset impairment recoveries. Restructuring and asset impairment charges for the year
ended December 31, 2015 relate to the transition in our Wireless Internet business from a 5Ghz to a 60Ghz-based network technology (See Note 11 to the
accompanying consolidated financial statements).
Other Expenses, net
The following table provides the significant components of our other expenses, net, for the years ended December 31, 2016 and 2015 :
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Interest expense
Interest income
Other loss, net
Total other expenses, net
Year
ended
December
31,
2016
2015
%
Change
$
$
(in thousands)
197,965 $
(432)
7,255
204,788 $
161,339
(90)
8,832
170,081
23 %
NM
(18)%
20 %
Interest expense increased $36.6 million , or 23% , for the year ended December 31, 2016 , as compared with the year ended December 31, 2015 , due to a
higher principal balance on our debt. See Note 5 to our accompanying Consolidated Financial Statements for further information on our long-term debt.
Other loss, net, decreased by $1.6 million , or 18% for the year ended December 31, 2016 , as compared with the year ended December 31, 2015 . The
decrease is due, in part, to the change in the foreign currency translation from a foreign currency exchange loss of $9.4 million during the year ended December 31,
2015 to a foreign currency exchange gain of $2.1 million during the year ended December 31, 2016 . This decrease was partially offset by losses and expenses
incurred of $10.1 million resulting from our debt modification and extinguishment (See Note 5 to the accompanying consolidated financial statements). During the
year ended December 31, 2015 we recorded $7.1 million currency translation losses as a result of a change in treatment of foreign currency exchange gains and
losses on intercompany balances. Prior to July 2015, we classified intercompany receivable balances with our foreign subsidiaries as long-term investments with
translation gains and losses recorded in other comprehensive income. Beginning in July 2015, as part of our cash management strategy we determined that
settlement of these intercompany balances were anticipated and therefore these balances are not considered to be long-term investments and any subsequent
translation gains or losses are recorded in income.
Income Taxes
The following table provides the significant components of our income tax expense for the years ended December 31, 2016 and 2015 :
Income tax expense
Year
ended
December
31,
2016
2015
%
Change
$
(in thousands)
67 $
351
NM
Income tax expense decreased $0.3 million for the year ended December 31, 2016 , as compared with the year ended December 31, 2015 . Our tax expense
for the years ended December 31, 2016 and 2015 resulted primarily from earnings in our Canadian subsidiary, as well as U.S. minimum state taxes.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Revenues
The following table provides the significant components of our revenue for the years ended December 31, 2015 and 2014 :
Recurring revenue
Service and other sales revenue
Activation fees
Total revenues
Year
ended
December
31,
2015
2014
%
Change
$
$
(in thousands)
624,989 $
537,695
22,700
6,032
21,980
4,002
653,721 $
563,677
16%
3%
51%
16%
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Total revenues increased $90.0 million, or 16%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily due to
the growth in recurring revenue, which increased $87.3 million, or 16%. $65.9 million of the increase in recurring revenue was due to an increase in Total
Subscribers and $22.4 million of the increase was due to increases in RPU. Recurring revenues associated with our wireless internet business increased $6.5
million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. Currency translation negatively affected total revenues by $8.0
million, as computed on a constant currency basis.
Service and other sales revenue increased $0.7 million, or 3%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014.
This increase was primarily due to an increase of $1.0 million of contract fulfillment revenue partially offset by a decrease in upgrade revenue of $0.7 million
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, all activation fee revenue recognized in the years ended
December 31, 2015 and 2014 relate to contracts generated after the Acquisition. Revenues recognized related to activation fees increased $2.0 million, or 51%, for
the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily due to the increase in the number of subscribers from whom we
have collected activation fees since the date of the Acquisition.
Costs and Expenses
The following table provides the significant components of our costs and expenses for the years ended December 31, 2015 and 2014 :
Operating expenses
Selling expenses
General and administrative
Depreciation and amortization
Restructuring and asset impairment charges
Total costs and expenses
Year
ended
December
31,
2015
2014
%
Change
$
$
(in thousands)
228,315 $
122,948
107,212
244,724
59,197
762,396 $
202,769
107,370
126,083
221,324
—
657,546
13 %
15 %
(15)%
11 %
NM
16 %
Operating expenses increased $25.5 million, or 13%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily to
support the growth in our subscriber base and our wireless internet business. This increase was primarily due to a $22.1 million increase in personnel costs related
to customer services, field services, and monitoring and a $4.6 million increase in equipment costs related to servicing our wireless internet business and
equipment costs related to subscriber upgrades. This increase was offset, in part, by a $2.9 million decrease in monitoring costs from third-party cellular providers
primarily resulting from the transition to our Vivint Smart Home Cloud platform.
Selling expenses, excluding amortization of capitalized subscriber acquisition costs, increased $15.6 million, or 15%, for the year ended December 31, 2015
as compared to the year ended December 31, 2014, primarily due to an increase in personnel costs of $9.4 million and a $5.4 million increase in expenses relating
to lead generation, all to support the increase in our subscriber contract originations.
General and administrative expenses decreased $18.9 million, or 15%, for the year ended December 31, 2015 as compared to the year ended December 31,
2014, partly due to a non-cash gain of $12.2 million in connection with the settlement of the Merger-related escrow (See Note 14 to the accompanying
consolidated financial statements), a $7.8 million decrease in brand recognition expenses and a decrease of $5.3 million in contracted information technology
services. These decreases were partially offset by a $3.0 million increase in personnel costs and an increase of $1.3 million in legal, audit and other professional
service fees.
Depreciation and amortization increased $23.4 million, or 11%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014.
The increase was primarily due to increased amortization of subscriber acquisition costs arising from the growth in our subscriber base.
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Restructuring and asset impairment charges for the year ended December 31, 2015 relate to the transition in our Wireless Internet business from a 5Ghz to a
60Ghz-based network technology (See Note 3 to the accompanying consolidated financial statements).
Other Expenses, net
The following table provides the significant components of our other expenses, net, for the years ended December 31, 2015 and 2014 :
Interest expense
Interest income
Other loss (income), net
Total other expenses, net
Year
ended
December
31,
2015
2014
%
Change
$
$
(in thousands)
161,339 $
(90)
8,832
170,081 $
147,511
(1,455)
(1,779)
144,277
9%
NM
NM
18%
Interest expense increased $13.8 million, or 9%, for the year ended December 31, 2015, as compared with the year ended December 31, 2014, due to a
higher principal balance on our debt resulting from the issuance of $300 million of 2022 private placement notes in October 2015, the full year impact of the $100
million in 2020 notes issued in July 2014 and borrowings in 2015 under our revolving credit facility.
Other loss (income), net increased by $10.6 million primarily as a result of a change in treatment of losses on intercompany balances. Prior to July 2015, we
classified intercompany receivable balances with our Canada and New Zealand subsidiaries as long-term investments with translation gains and losses recorded in
other comprehensive income. Beginning in July 2015, as part of our cash management strategy we determined that settlement of these intercompany balances was
anticipated and therefore these balances are not considered to be long-term investments and any subsequent translation gains or losses are recorded in income.
Income Taxes
The following table provides the significant components of our income tax expense for the years ended December 31, 2015 and 2014 :
Income tax expense
Year
ended
December
31,
2015
2014
%
Change
$
(in thousands)
351 $
514
(32)%
Income tax expense decreased $0.2 million, or 32%, for the year ended December 31, 2015, as compared with the year ended December 31, 2014. Our tax
expense for the years ended December 31, 2015 and 2014 was primarily due to state and foreign income taxes.
Unaudited
Quarterly
Results
of
Operations
The following tables present our unaudited quarterly consolidated results of operations for the four quarters ended December 31, 2016 and 2015 . This
unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of
management, the statement of operations data includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results
of operations for these periods. You should read these tables in conjunction with our audited consolidated financial statements and related notes located elsewhere
in this annual report on Form 10-K. The results of operations for any quarter are not necessarily indicative of the results of operations for a full year or any future
periods.
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Table of Contents
Statement
of
operations
data
Revenue
Loss from operations
Net loss
Statement
of
operations
data
Revenue
Loss from operations
Net loss
December
31,
2016
September
30,
2016
June
30,
2016
March
31,
2016
(in thousands)
Three
Months
Ended
$
204,512 $
198,335 $
180,807 $
(16,818)
(71,168)
(17,736)
(69,974)
(32,873)
(89,722)
174,253
(3,675)
(45,093)
December
31,
2015
September
30,
2015
June
30,
2015
March
31,
2015
(1)
Three
Months
Ended
(in thousands)
$
175,034 $
168,577 $
157,913 $
(15,929)
(62,375)
(78,159)
(125,072)
(4,888)
(43,614)
152,197
(9,699)
(48,046)
(1) During the three months ended March 31, 2015, we recorded certain out-of-period adjustments totaling $2.0 million, primarily associated with the timing of
the recognition of deferred revenue related to 2014 recurring monitoring services. As a result of these adjustments, recurring revenues increased for the
three months ended March 31, 2015 and deferred revenue decreased by $2.0 million, respectively.
Liquidity
and
Capital
Resources
Our primary source of liquidity has historically been cash from operations, proceeds from the issuance of debt securities, borrowing availability under our
revolving credit facility and, to a lesser extent, capital contributions. As of December 31, 2016 , we had $43.5 million of cash and cash equivalents and $283.7
million of availability under our revolving credit facility (after giving effect to $5.7 million of letters of credit outstanding and no borrowings).
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, including the notes and borrowings under our revolving credit facility, 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 for U.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. For example, in May 2016, we repurchased approximately $205 million of the 2019 notes in privately negotiated transactions in conjunction with the
issuance of the 2022 notes. Additionally, in February 2017 we issued an additional $300.0 million aggregate principal amount of the 2022 notes at a price of
108.250% . We used the net proceeds from the offering of these 2022 notes to redeem $300.0 million aggregate principal amount of the existing 2019 notes and
pay the related redemption premium, and to pay all fees and expenses related thereto and will use any remaining proceeds for general corporate purposes.
Capital Contribution
In April 2016, Parent completed the first installment of an issuance and sale to certain investors of a series of preferred stock and contributed the net
proceeds from such issuance of $69.8 million to us as an equity contribution. In July 2016, Parent completed the final installment of the issuance and sale to certain
investors of such series of preferred stock and, in August 2016, contributed the net proceeds from such issuance of $30.6 million to us as an equity contribution.
Both issuances were private placements exempt from registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”).
Cash Flow and Liquidity Analysis
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Significant factors influencing our liquidity position include cash flows generated from recurring revenue and other fees received from the subscribers we
service and the level of investment in capitalized subscriber acquisition costs and general and administrative expenses. Our cash flows provided by operating
activities include cash received from RPU, 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, a portion of subscriber acquisition costs and general and administrative costs. 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. Going forward, we expect the Vivint Flex Pay program to offset a portion of the upfront investment associated with subscriber acquisition costs.
Our 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 (in thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash Flows from Operating Activities
Year
ended
December
31,
2016
2015
2014
$
(365,706) $
(255,307) $
(15,147)
422,280
(35,615)
284,400
(309,637)
(36,284)
95,057
We generally reinvest the cash flows from recurring revenue into our business, primarily to (1) maintain and grow our subscriber base (2) expand our
infrastructure to support this growth (3) enhance our existing service offerings and (4) 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 year ended December 31, 2016 , net cash used in operating activities was $365.7 million . This cash used was primarily from a net loss of $276.0
million , adjusted for $302.9 million in non-cash amortization, depreciation, and stock-based compensation, a $24.6 million increase in deferred revenue due to the
increased subscriber base, a provision for doubtful accounts of $19.6 million , a $12.7 million increase in accrued expenses and other liabilities due primarily from
increases in accrued interest on our long term debt, a $10.1 million loss on early extinguishment of debt and $7.1 million in non-cash restructuring and asset
impairment charges. This was offset by a $419.5 million increase in subscriber acquisition costs, a $24.3 million increase in accounts receivable, a $11.8 million
increase in inventories, a $3.0 million decrease in accounts payable due primarily to the timing of inventory purchases, a $5.2 million increase in prepaid expenses
and other current assets, and a $2.8 million decrease in the restructuring liability.
For the year ended December 31, 2015 , net cash used in operating activities was $255.3 million. This cash used was primarily from a net loss of $279.1
million, adjusted for (1) $245.5 million in non-cash amortization, depreciation, stock-based compensation, a non-cash gain on settlement of the Merger-related
escrow, and (2) $57.7 million restructuring and asset impairment charge related to our Wireless Internet business transition, along with a $21.8 million increase in
accounts payable, primarily related to purchases of inventory and wireless internet equipment, a $18.6 million decrease in inventories, a $18.0 million increase in
accrued expenses and other liabilities, a $14.9 million provision for doubtful accounts and a $15.0 million increase in fees paid by our subscribers in advance of
when the associated revenue is recognized. This was offset by a $354.9 million increase in subscriber acquisition costs and a $14.4 million increase in accounts
receivable.
For the year ended December 31, 2014 , net cash used in operating activities was $309.6 million. This cash used was primarily from a net loss of $238.7
million, adjusted for $232.5 million in non-cash amortization, depreciation and stock-based compensation, $317.5 million in capitalized subscriber acquisition
costs and a $21.9 million increase in accounts receivable, primarily related to the growth in our revenues and timing of our billing cycle. This was partially offset
by a $20.6 million increase in fees paid by subscribers in advance of when the associated revenue is recognized.
Our outstanding debt as of December 31, 2016 was approximately $2.5 billion , approximately $1.3 billion of which was attributable to the transactions
related to Blackstone’s acquisition in November 2012. Net cash interest paid for the years ended December 31, 2016 , 2015 and 2014 related to our indebtedness
(excluding capital leases) totaled $188.1 million , $144.9
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million and $136.9 million , respectively. Our net cash used in operating activities for the years ended December 31, 2016 , 2015 and 2014 , before these interest
payments, was $177.6 million , $110.4 million and $172.7 million , respectively. Accordingly, our net cash provided by operating activities for the years ended
December 31, 2016 , 2015 and 2014 was insufficient to cover these 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 and equipment to support the growth in our business.
For the year ended December 31, 2016 , net cash used in investing activities was $15.1 million . This cash used primarily consisted of capital expenditures of
$11.6 million and capitalized subscriber acquisition costs of $5.2 million , partially offset by proceeds from the sales of capital assets of $3.1 million .
For the year ended December 31, 2015 , net cash used in investing activities was $35.6 million, consisting primarily of capital expenditures of $27.0 million,
a portion of which related to our wireless internet infrastructure, and capitalized subscriber acquisition costs of $24.7 million associated with equipment we own.
This was offset by $14.2 million released from restricted cash.
For the year ended December 31, 2014 , net cash used in investing activities was $36.3 million, consisting primarily of capital expenditures of $30.5 million,
a portion of which related to our wireless internet infrastructure, strategic acquisitions of $18.5 million related to Wildfire Broadband, LLC and Space Monkey and
the acquisition of certain patents and other intangible assets of $9.6 million and capitalized subscriber acquisition costs of $10.6 million associated with equipment
we own. This was offset by net cash of $22.7 million received in connection with the notes receivable from Solar (see Note 14 of our accompanying consolidated
financial statements included elsewhere in this annual report on Form 10-K for additional information) and $14.4 million released from restricted cash.
Cash Flows from Financing Activities
Historically, our cash flows provided by financing activities primarily related to the issuance of debt and, to a lesser extent, from capital contributions from
Parent, all to fund the portion of upfront costs associated with generating new subscribers that are not covered through our operating cash flows. Uses of cash for
financing activities are generally associated with the payment of dividends to our stockholders and the repayment of debt.
For the year ended December 31, 2016 , net cash provided by financing activities was $422.3 million , consisting primarily of $604.0 million in borrowings
on notes, $100 million of proceeds from capital contributions from Parent, and $57.0 million in borrowings on the revolving credit facility. This was offset with
$235.5 million of repayments on notes, $77.0 million of repayments on the revolving credit facility, $18.3 million in financing costs and $8.3 million of
repayments under our capital lease obligations.
For the year ended December 31, 2015 , net cash provided by financing activities was $284.4 million, consisting primarily of $296.3 million in proceeds
from the issuance in October 2015 of the 2022 private placement notes, offset by $6.4 million of repayments of capital lease obligations and $5.4 million in
deferred financing costs.
For the year ended December 31, 2014 , net cash provided by financing activities was $95.1 million, consisting primarily of $102.0 million in proceeds from
the issuance in July 2014 of additional 2020 notes, $32.3 million of equity contributions and $20.0 million in borrowings from our revolving credit facility,
partially offset by $50.0 million of payments of dividends.
Long-Term Debt
We are a highly leveraged company with significant debt service requirements. As of December 31, 2016 , we had approximately $2,519.5 million of
aggregate principal total debt outstanding, consisting of $719.5 million of outstanding 2019 notes, $930.0 million of outstanding 2020 notes, $270 million of
outstanding 2022 private placement notes and $600.0 million of outstanding 2022 notes. In addition, we issued $300 million of additional 2022 notes in the first
fiscal quarter of 2017.
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. In May 2016, we repurchased approximately $205 million of the 2019 notes using
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proceeds from the issuance of the 2022 notes. In February 2017, we issued an additional $300.0 million aggregate principal amount of the 2022 notes and used the
net proceeds from the offering of these 2022 notes to redeem $300.0 million aggregate principal amount of the existing 2019 notes and pay the related redemption
premium, and to pay all fees and expenses related thereto and will use any remaining proceeds for general corporate purposes.
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.
2020 Notes
On November 16, 2012, we issued $380.0 million of the 2020 notes. Interest on the 2020 notes is payable semi-annually in arrears on each June 1 and
December 1. During the year ended December 31, 2013, we issued an additional $450.0 million of the 2020 notes and on July 1, 2014, we issued an additional
$100.0 million of the 2020 notes, each under the indenture dated as of November 16, 2012.
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.
2022 Private Placement Notes
On October 19, 2015, we issued $300.0 million aggregate principal amount of our 2022 private placement notes. Interest on the 2022 private placement notes
will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2016. In May 2016, we repurchased $30 million in
principal amounts of the 2022 private placement notes using proceeds from the issuance of the 2022 notes.
We may, at our option, redeem at any time and from time to time prior to December 1, 2018, some or all of the 2022 private placement 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, 2018, we may,
at our option, redeem at any time and from time to time some or all of the 2022 private placement notes at 104.500%, declining to par from and after December 1,
2019, in each case, plus any accrued and unpaid interest to the date of redemption. In addition, on or prior to December 1, 2018, we may, at our option, redeem up
to 35% of the aggregate principal amount of the 2022 private placement notes with the proceeds from certain equity offerings at 108.875%, plus accrued and
unpaid interest to the date of redemption. At any time and from time to time prior to December 1, 2018, we may at our option redeem during each 12-month period
commencing with the issue date on October 19, 2015 up to 10% of the aggregate principal amount of the 2022 private placement notes at a redemption price equal
to 103% of the aggregate principal amount of the 2022 private placement notes redeemed, plus accrued and unpaid interest, to the redemption date.
2022 Notes
On May 26, 2016, we issued $500.0 million aggregate principal amount of our 2022 notes. On August 17, 2016 we issued an additional $100 million of our
2022 notes at a price of 104.00%. Interest on the 2022 notes will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing on
December 1, 2016.
We may, at our option, redeem at any time and from time to time prior to December 1, 2018, some or all of the 2022 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, 2018, we may, at our option, redeem at
any time and from time to time some or all of the 2022 notes at 103.938%, declining to par from and after December 1, 2020, in each case, plus any accrued and
unpaid interest to the date of redemption. In addition, on or prior to December 1, 2018, we may, at our option, redeem up to 35% of the aggregate principal amount
of the 2022 notes with the proceeds from certain equity offerings at 107.875%, plus accrued and unpaid interest to the date of redemption. At any time and from
time to time prior to December 1, 2018, we may at our option redeem during each 12-month period commencing on the issue date of May 26, 2016 up to 10% of
the aggregate principal amount of the 2022 notes at a redemption price equal to 103% of the aggregate principal amount of the 2022 notes redeemed, plus accrued
and unpaid interest, to the redemption date.
Revolving Credit Facility
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On November 16, 2012, we entered into a $200.0 million senior secured revolving credit facility, with a five year maturity. 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.
On March 6, 2015, we amended and restated the credit agreement to provide for, among other things, (1) an increase in the aggregate commitments
previously available to us from $200.0 million to $289.4 million and (2) the extension of the maturity date with respect to certain of the previously available
commitments. As of December 31, 2016 we had $283.7 million of availability under the revolving line of credit facility (after giving effect to $5.7 million of
letters of credit outstanding and no borrowings).
Borrowings under the amended and restated 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 Series A Revolving Commitments of approximately $247.5 million and Series C Revolving Commitments of approximately $20.8 million is
currently 2.0% per annum and (b) under the Series B Revolving Commitments of approximately $21.2 million is currently 3.0% and (2)(a) the applicable margin
for LIBOR rate-based borrowings (a) under the Series A Revolving Commitments and Series C Revolving Commitments is currently 3.0% per annum and
(b) under the Series B Revolving Commitments is currently 4.0%. The applicable margin for borrowings under the revolving credit facility is subject to one step-
down of 25 basis points based on our meeting a consolidated first lien net leverage ratio test at the end of each fiscal quarter.
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 meeting a consolidated first lien net leverage ratio test) 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.
We are not required to make any scheduled amortization payments under the revolving credit facility. The principal amount outstanding under the revolving
credit facility will be due and payable in full on (1) with respect to the non-extended commitments under the Series C Revolving Credit Facility, November 16,
2017 and (2) with respect to the extended commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2019.
Guarantees and Security
All of our obligations under the revolving credit facility, the 2019 notes, the 2020 notes, the 2022 private placement notes and the 2022 notes are guaranteed
by APX Group Holdings, Inc. 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 17 of our accompanying consolidated financial statements included elsewhere
in this annual report on Form 10-K for additional financial information regarding guarantors and non-guarantors.
The obligations under the revolving credit facility, the 2019 notes, the 2022 private placement notes and the 2022 notes are secured by a security interest in
(i) substantially all of the present and future tangible and intangible assets of APX Group, Inc., 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 APX Group, Inc. 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 APX Group, Inc., each of its subsidiary guarantors and each restricted subsidiary of APX 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.
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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 $60.0 million of
“superpriority” obligations that we may incur in the future, before the holders of the 2019 notes, the 2022 private placement notes and the 2022 notes receive any
such proceeds.
Debt Covenants
The credit agreement governing the revolving credit facility and the debt agreements 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 APX Group, Inc.;
designate restricted subsidiaries as unrestricted subsidiaries; and
transfer or sell assets.
The credit agreement governing the revolving credit facility and the debt agreements governing the notes contain change of control provisions and certain
customary affirmative covenants and events of default. As of December 31, 2016 , 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 debt agreements 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.
Covenant Compliance
Under the debt agreements 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.
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The following table sets forth a reconciliation of net loss to Adjusted EBITDA (in thousands):
Net loss
Interest expense, net
Non-capitalized subscriber acquisition costs (1)
Amortization of capitalized subscriber acquisition costs
Depreciation and amortization (2)
Other expense (income)
Non-cash compensation (3)
Restructuring and asset impairment charge (4)
Income tax expense (benefit)
Other adjustments (5)
Adjusted EBITDA
Year
ended
December
31,
2016
2015
2014
$
(275,957) $
(279,107) $
(238,660)
197,533
175,948
154,877
133,666
7,255
3,999
1,013
67
45,697
444,098 $
161,248
164,013
92,993
151,731
8,832
2,544
59,197
351
25,344
387,146 $
146,056
134,995
58,730
162,594
(1,779)
1,887
—
514
45,078
309,415
$
(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.
(4) Reflects costs associated with the restructuring and asset impairment charges related to the transition of our Wireless Internet business and the 2016
Contract Sales (See Note 3 to the accompanying consolidated financial statements).
(5) Other adjustments represent primarily the following items (in thousands):
Product development (a)
Non-operating legal and professional fees
Purchase accounting deferred revenue fair value adjustment (b)
Monitoring fee (c)
Information technology implementation (d)
One-time compensation-related payments (e)
Non-cash gain on settlement of Merger-related escrow (f)
One-time deferred revenue adjustment (g)
Excess Inventory (h)
Start-up of new strategic initiatives (i)
CMS technology impairment loss (j)
Subcontracted monitoring agreement (k)
All other adjustments
Total other adjustments
Year
ended
December
31,
2016
2015
2014
$
24,189 $
16,423 $
6,399
4,410
3,746
3,745
1,017
—
—
—
—
—
—
3,369
4,710
3,580
1,876
6,617
(12,200)
(2,023)
733
392
—
—
$
2,191
45,697 $
1,867
25,344 $
17,442
883
5,274
3,177
3,196
6,112
—
—
—
3,251
1,351
2,225
2,167
45,078
(a) Costs related to the development of our proprietary equipment and software and Wireless Internet Technology.
(b) Add back revenue reduction directly related to purchase accounting deferred revenue adjustments.
(c) Blackstone Management Partners L.L.C. monitoring fee (See Note 14 to the accompanying consolidated financial statements).
(d) Costs related to the implementation of new information technologies.
(e) Run-rate savings related to December 2014 reduction-in-force (“RIF”), the Wireless Restructuring reduction-in-force, along with severance payments
associated with the RIFs and other non-recurring employee compensation payments.
(f) Gain related to settlement of escrow balance related to the Merger (See Note 14 to the accompanying consolidated financial statements).
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(g) Represents a one-time adjustment to exclude $2.0 million of recurring revenue recognized during the year ended December 31, 2015, related to prior
periods in connection with deferred revenue. (See Note 2 to the accompanying consolidated financial statements.)
(h) Represents reserve for excess inventory associated with discontinued product offerings.
(i) Costs related to the start-up of potential new service offerings and sales channels.
(j) CMS technology impairment loss.
(k) Run-rate savings from committed future reductions in subcontract monitoring fees.
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 SHPs. 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 December 31, 2016 , our total capital lease
obligations were $17.7 million , of which $9.8 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. In January 2015, an amendment to the agreement was made which, among other
changes, increased the required monthly rental payments to approximately $87,000 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.
Contractual
Obligations
The following table summarizes our contractual obligations as of December 31, 2016 . Certain contractual obligations are reflected on our consolidated
balance sheet, while others are disclosed as future obligations under GAAP.
Long-term debt obligations (1)
Interest on long-term debt (2)
Capital lease obligations
Operating lease obligations
Purchase obligations (3)
Other long-term obligations
Total
Less
than
1
Year
Payments
Due
by
Period
1
-
3
Years
3
-
5
Years
(dollars in thousands)
$
2,519,465 $
— $
719,465 $
930,000 $
878,700
18,696
122,013
61,400
62,052
200,145
396,258
217,019
10,513
17,452
15,138
7,713
8,166
30,320
14,512
16,751
17
26,607
10,125
15,859
More
than
5
Years
870,000
65,278
—
47,634
21,625
21,729
Total contractual obligations
$
3,662,326 $
250,961 $
1,185,472 $
1,199,627 $
1,026,266
(1) As of December 31, 2016 , there were no borrowings under our revolving credit facility. At December 31, 2016 , our revolving credit facility provided for
availability of $289.4 million . The principal amount outstanding under the revolving credit facility will be due and payable in full on (1) with respect to the
non-extended commitments under the Series C Revolving Credit Facility, November 16, 2017 and (2) with respect to the extended commitments under the
Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2019. As of December 31, 2016 , there was approximately $283.7
million of availability under our revolving credit facility (after giving effect to $5.7 million of outstanding letters of credit and no borrowings).
(2) Represents aggregate interest payments on aggregate principal amounts of $719.5 million of the outstanding 2019 notes, $930.0 million of outstanding
2020 notes, $270.0 million of the outstanding 2022 private placement notes, and
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Table of Contents
$600.0 million of the outstanding 2022 notes as well as letter of credit and commitment fees for the unused portion of our revolving credit facility. Does not
reflect interest payments on future borrowings under our revolving credit facility.
(3) Purchase obligations consist of commitments for purchases of goods and services that are not already included in our consolidated balance sheet as of
December 31, 2016 . We have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is
reasonably possible we may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made at this time. In the
opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the
accompanying consolidated financial statements.
ITEM
7A.
QUANTITATIVE
AND
QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK
Our operations include activities in the United States and Canada. Historically, we had immaterial operations in New Zealand. These operations expose us to
a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. We monitor and manage these financial exposures
as an integral part of our overall risk management program.
Interest Rate Risk
In connection with the Transactions, we entered into a revolving credit facility that bears interest at a floating rate. As a result, we may be exposed to
fluctuations in interest rates to the extent of our borrowings under the revolving credit facility. Our long-term debt portfolio is expected to primarily consist of
fixed rate instruments. To help manage borrowing costs, we may from time to time enter into interest rate swap transactions with financial institutions acting as
principal counterparties. Assuming the borrowing of all amounts available under our revolving credit facility, if interest rates related to our revolving credit facility
increase by 1% due to normal market conditions, our interest expense will increase by approximately $2.9 million per annum. We had no borrowings under the
revolving credit facility as of December 31, 2016 .
Foreign Currency Risk
We have exposure to the effects of foreign currency exchange rate fluctuations on the results of our Canadian operations. Our Canadian operations use the
Canadian dollar to conduct business but our results are reported in U.S. dollars. Historically, our operations in New Zealand were immaterial to our overall
operating results and we ceased operations in the geographical region during the year ended December 31, 2016 . We are exposed periodically to the foreign
currency rate fluctuations that affect transactions not denominated in the functional currency of our U.S. and Canadian operations. Based on our results of our
Canadian operations for the year ended December 31, 2016 , if foreign currency exchange rates had decreased 10% throughout the year, our revenues would have
decreased by approximately $5.7 million , our total assets would have decreased by $13.9 million and our total liabilities would have decreased by $9.7 million .
We do not currently use derivative financial instruments to hedge investments in foreign subsidiaries. For the year ended December 31, 2016 , before intercompany
eliminations, approximately $57.4 million of our revenues, $139.4 million of our total assets and $96.9 million of our total liabilities were denominated in
Canadian Dollars.
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Table of Contents
ITEM
8.
FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
DATA
INDEX
TO
CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated
Financial
Statements
APX
Group
Holdings,
Inc.
and
Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Equity (Deficit) for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
57
58
59
60
61
62
64
56
Table of Contents
The Board of Directors
APX Group Holdings, Inc. and Subsidiaries
Report
of
Independent
Registered
Public
Accounting
Firm
We have audited the accompanying consolidated balance sheets of APX Group Holdings, Inc. and Subsidiaries as of December 31, 2016 and 2015 , and the related
consolidated statements of operations, comprehensive loss, changes in equity (deficit), and cash flows for each of the three years in the period ended December 31,
2016 . These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of APX Group Holdings, Inc.
and Subsidiaries at December 31, 2016 and 2015 , and the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2016 , in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Salt Lake City, Utah
March 2, 2017
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Table of Contents
APX
Group
Holdings,
Inc.
and
Subsidiaries
Consolidated
Balance
Sheets
(In
thousands,
except
share
and
per-share
amounts)
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Subscriber acquisition costs, net
Deferred financing costs, net
Intangible assets, net
Goodwill
Long-term investments and other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current Liabilities:
Accounts payable
Accrued payroll and commissions
Accrued expenses and other current liabilities
Deferred revenue
Current portion of capital lease obligations
Total current liabilities
Notes payable, net
Revolving line of credit
Capital lease obligations, net of current portion
Deferred revenue, net of current portion
Other long-term obligations
Deferred income tax liabilities
Total liabilities
Commitments and contingencies (See Note 13)
Stockholders’ deficit:
Common stock, $0.01 par value, 100 shares authorized; 100 shares issued and outstanding
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
See accompanying notes to consolidated financial statements
58
December
31,
2016
2015
$
43,520 $
12,891
38,452
10,158
105,021
63,626
1,052,434
4,420
475,392
835,233
11,536
2,559
8,060
26,321
10,626
47,566
55,274
790,644
6,456
558,395
834,416
10,893
$
$
2,547,662 $
2,303,644
49,119 $
46,288
34,265
45,722
9,797
52,207
38,247
35,573
34,875
7,616
185,191
2,486,700
168,518
2,118,112
—
7,935
58,734
47,080
7,204
20,000
11,171
44,782
10,530
7,524
2,792,844
2,380,637
—
731,920
(948,339)
(28,763)
(245,182)
—
627,645
(672,382)
(32,256)
(76,993)
$
2,547,662 $
2,303,644
Operating expenses (exclusive of depreciation and amortization shown separately below)
Selling expenses
General and administrative expenses
Depreciation and amortization
Restructuring and asset impairment charges
Table of Contents
Revenues:
Recurring revenue
Service and other sales revenue
Activation fees
Total revenues
Costs and expenses:
Total costs and expenses
Loss from operations
Other expenses (income):
Interest expense
Interest income
Other loss (income), net
Loss before income taxes
Income tax expense
Net loss
APX
Group
Holdings,
Inc.
and
Subsidiaries
Consolidated
Statements
of
Operations
(In
thousands)
Year
ended
December
31,
2016
2015
2014
$
724,478 $
624,989 $
22,855
10,574
757,907
264,865
131,421
143,168
288,542
1,013
829,009
(71,102)
22,700
6,032
653,721
228,315
122,948
107,212
244,724
59,197
762,396
(108,675)
197,965
161,339
(432)
7,255
(90)
8,832
(275,890)
(278,756)
67
351
537,695
21,980
4,002
563,677
202,769
107,370
126,083
221,324
—
657,546
(93,869)
147,511
(1,455)
(1,779)
(238,146)
514
See accompanying notes to consolidated financial statements
$
(275,957) $
(279,107) $
(238,660)
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Table of Contents
APX
Group
Holdings,
Inc.
and
Subsidiaries
Consolidated
Statements
of
Comprehensive
Loss
(In
thousands)
Net loss
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustment
Unrealized gain on marketable securities
Total other comprehensive income (loss)
Comprehensive loss
Year
ended
December
31,
2016
2015
2014
(275,957) $
(279,107) $
(238,660)
2,482
1,011
3,493
(13,293)
—
(13,293)
(272,464) $
(292,400) $
(11,333)
—
(11,333)
(249,993)
$
$
See accompanying notes to consolidated financial statements
60
Table of Contents
APX
Group
Holdings,
Inc.
and
Subsidiaries
Consolidated
Statements
of
Changes
in
Equity
(Deficit)
(In
thousands)
Common
Stock
Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income
(loss)
Total
Balance, December 31, 2013
$
— $
652,488 $
(154,615) $
(7,630) $
Net loss
Foreign currency translation adjustment
Stock-based compensation
Capital contribution
Cash dividends paid
Balance, December 31, 2014
Net Loss
Foreign currency translation adjustment
Stock-based compensation
Escrow adjustment
Balance, December 31, 2015
Net Loss
Foreign currency translation adjustment
Unrealized gain on marketable securities
Stock-based compensation
Capital contribution
Balance, December 31, 2016
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,936
32,300
(50,000)
636,724
—
—
3,121
(12,200)
627,645
—
—
—
3,868
100,407
(238,660)
—
—
—
—
(393,275)
(279,107)
—
—
—
(672,382)
(275,957)
—
—
—
—
—
(11,333)
—
—
—
(18,963)
—
(13,293)
—
—
(32,256)
—
2,482
1,011
—
—
$
— $
731,920 $
(948,339) $
(28,763) $
See accompanying notes to consolidated financial statements
490,243
(238,660)
(11,333)
1,936
32,300
(50,000)
224,486
(279,107)
(13,293)
3,121
(12,200)
(76,993)
(275,957)
2,482
1,011
3,868
100,407
(245,182)
61
Year
ended
December
31,
2016
2015
2014
$
(275,957) $
(279,107) $
(238,660)
Table of Contents
APX
Group
Holdings,
Inc.
and
Subsidiaries
Consolidated
Statements
of
Cash
Flows
(In
thousands)
Cash flows from operating activities:
Net loss from operations
Adjustments to reconcile net loss to net cash used in operating activities of operations:
Amortization of subscriber acquisition costs
Amortization of customer relationships
Depreciation and amortization of other intangible assets
Amortization of deferred financing costs and bond premiums and discounts
Non-cash gain on settlement of Merger-related escrow
(Gain) Loss on sale or disposal of assets
Loss on early extinguishment of debt
Loss on asset impairment
Stock-based compensation
Provision for doubtful accounts
Deferred income taxes
Restructuring and asset impairment charges
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
154,877
108,178
25,488
10,447
—
(33)
10,085
—
3,868
19,624
(478)
7,126
(24,338)
(11,827)
(5,165)
92,994
125,451
26,279
9,844
(12,200)
(54)
—
—
3,121
14,924
(41)
59,197
(14,421)
18,591
1,450
Subscriber acquisition costs – deferred contract costs
(419,509)
(354,867)
Other assets
Accounts payable
Accrued expenses and other current liabilities
Restructuring liability
Deferred revenue
368
(2,978)
12,702
(2,797)
24,613
160
21,842
18,019
(1,515)
15,026
Net cash used in operating activities
(365,706)
(255,307)
Cash flows from investing activities:
Subscriber acquisition costs – company owned equipment
Capital expenditures
Proceeds from the sale of capital assets
Net cash used in acquisitions
Acquisition of intangible assets
Proceeds from insurance claims
Purchases of short-term investments
Proceeds from sale of short-term investments
Proceeds from note receivable
Change in restricted cash
Investment in preferred stock
Acquisition of other assets
Net cash used in investing activities
(5,243)
(11,642)
3,123
—
(1,385)
—
—
—
—
—
—
—
(15,147)
(24,740)
(26,982)
480
—
(1,363)
2,984
—
—
—
14,214
—
(208)
(35,615)
See accompanying notes to consolidated financial statements
62
58,730
143,578
19,016
9,251
—
662
—
3,116
1,936
15,656
(265)
—
(21,866)
(2,355)
746
(317,538)
—
8,481
(10,895)
—
20,770
(309,637)
(10,580)
(30,500)
964
(18,500)
(9,649)
—
(60,000)
60,069
22,699
14,375
(3,000)
(2,162)
(36,284)
Table of Contents
APX
Group
Holdings,
Inc.
and
Subsidiaries
Consolidated
Statements
of
Cash
Flows
Continued
(In
thousands)
Cash flows from financing activities:
Proceeds from notes payable
Repayments of notes payable
Borrowings from revolving line of credit
Repayments on revolving line of credit
Proceeds from sale of subscriber contracts
Acquisition of subscriber contracts
Repayments of capital lease obligations
Financing costs
Deferred financing costs
Payments of dividends
Proceeds from capital contributions
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Supplemental cash flow disclosures:
Income tax paid
Interest paid
Supplemental non-cash investing and financing activities:
Capital lease additions
Intangible assets acquisitions included within accounts payable, accrued expenses and
other current liabilities and other long-term obligations
Capital expenditures included within accounts payable, accrued expenses and other current
liabilities
Change in fair value of marketable securities
Property acquired under build-to-suit agreements included within other long-term
obligations
Subscriber acquisition costs – company owned assets included within accounts payable
and accrued expenses and other current liabilities
Year
ended
December
31,
2016
2015
2014
$
604,000 $
296,250 $
102,000
(235,535)
57,000
(77,000)
—
—
(8,315)
(9,036)
(9,241)
—
100,407
422,280
(466)
40,961
—
271,000
(271,000)
—
—
(6,414)
—
(5,436)
—
—
284,400
(1,726)
(8,248)
2,559
43,520 $
10,807
2,559 $
435 $
290 $
189,170 $
145,647 $
—
20,000
—
2,261
(2,277)
(6,300)
—
(2,927)
(50,000)
32,300
95,057
(234)
(251,098)
261,905
10,807
196
137,908
8,411 $
11,002 $
12,040
31,283 $
314 $
2,345 $
1,011 $
161 $
— $
4,619 $
— $
185
1,893
—
—
12 $
— $
1,719
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements
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Table of Contents
APX
Group
Holdings,
Inc.
and
Subsidiaries
Notes
to
Consolidated
Financial
Statements
NOTE
1
—DESCRIPTION
OF
BUSINESS
APX Group Holdings, Inc. (“Holdings” or “Parent”), and its wholly-owned subsidiaries, (collectively the “Company”), is one of the largest smart home
companies in North America. The Company is engaged in the sale, installation, servicing and monitoring of smart home and security systems, primarily in the
United States and Canada. Holdings, which is wholly-owned by APX Parent Holdco, Inc., which is owned by 313 Acquisition, LLC. APX Parent Holdco, Inc. and
APX Group Holdings, Inc. have no operations.
NOTE
2
—SIGNIFICANT
ACCOUNTING
POLICIES
Basis
of
Presentation
The Company has prepared the accompanying consolidated financial statements pursuant to generally accepted accounting principles in the United States
(“GAAP”). Preparing financial statements requires the Company to make estimates and assumptions that affect the amounts that are reported in the consolidated
financial statements and accompanying disclosures. Although these estimates are based on the Company’s best knowledge of current events and actions that the
Company may undertake in the future, actual results may be different from the Company’s estimates. The results of operations presented herein are not necessarily
indicative of the Company’s results for any future period.
During the year ended December 31, 2015, the Company recorded certain out-of-period adjustments totaling $2.0 million , primarily associated with the
timing of the recognition of deferred revenue related to 2014 recurring monitoring services. As a result of these adjustments, recurring revenues increased for the
year ended December 31, 2015 and deferred revenue decreased by 2.0 million , respectively. The Company evaluated the impact of the out-of-period adjustments
and determined that they are immaterial to the consolidated financial statements for the year ended December 31, 2015.
Change
in
Accounting
Estimate
—Effective April 1, 2016, the Company updated its estimate of the life of its subscriber relationships and the period and
pattern used to amortize deferred activation fees and deferred subscriber acquisition costs, to better approximate the actual life of the customer attrition patterns.
Prior to the change, the Company amortized deferred activation fees and subscriber acquisition costs over 12 years using a 150% declining balance method, which
converted to a straight-line methodology after approximately five years . Subsequent to the change, the Company amortizes deferred activation fees and subscriber
acquisition costs over 15 years using a 240% declining balance method, which converts to a straight-line methodology after approximately nine years when the
resulting amortization exceeds that from the accelerated method. The effects of this change in estimate were as follows (in thousands):
Year
ended
December
31,
2016
Increase in activation fee revenues
$
Increase in depreciation and amortization
Increase to loss from operations
Increase to net loss
1,400
21,413
20,013
19,621
Restructuring
and
Asset
Impairment
Charges
—Restructuring and asset impairment charges represent expenses incurred in relation to activities to exit or
dispose of portions of the Company's business that do not qualify as discontinued operations. Liabilities associated with restructuring are measured at their fair
value when the liability is incurred. Expenses for related termination benefits are recognized at the date the Company notifies the employee, unless the employee
must provide future service, in which case the benefits are expensed ratably over the future service period. Liabilities related to termination of a contract are
measured and recognized at fair value when the contract does not have any future economic benefit to the entity and the fair value of the liability is determined
based on the present value of the remaining obligation. The Company expenses all other costs related to an exit or disposal activity as incurred (See Note 3 ).
Principles
of
Consolidation
—The accompanying consolidated financial statements include the accounts of APX Group Holdings, Inc. and its subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation.
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Table of Contents
Changes
in
Presentation
of
Comparative
Financial
Statements
— Certain reclassifications have been made to the Company’s consolidated financial
information in order to conform to the current year presentation. These changes did not have a significant impact on the consolidated financial statements.
Revenue
Recognition
—The Company recognizes revenue principally on three types of transactions: (i) recurring revenue, which includes revenues for
monitoring and other smart home services of the Company’s subscriber contracts and recurring monthly revenue associated with Vivint Wireless Inc. (“Wireless
Internet” or “Wireless”), (ii) service and other sales, which includes non-recurring service fees charged to subscribers provided on contracts, contract fulfillment
revenues and sales of products that are not part of the Company's service offerings, and (iii) activation fees on subscriber contracts, which are amortized over the
expected life of the customer.
Recurring revenue for the Company’s subscriber contracts is billed in advance, generally monthly, pursuant to the terms of subscriber contracts and
recognized ratably over the service period. Costs of providing ongoing recurring services are expensed in the period incurred.
Service and other sales revenue is recognized as services are provided or when title to the products and equipment sold transfers to the customer. Contract
fulfillment revenue, included in service and other sales, is recognized when payment is received from customers who cancel their contract in-term. Revenue from
sales of products that are not part of the basic service offering is generally recognized upon delivery of products.
Activation fees represent upfront one-time charges billed to subscribers at the time of installation and are deferred and recognized over the expected
customer life. The Company evaluates subscriber account attrition on a periodic basis, utilizing observed attrition rates for the Company’s subscriber contracts and
industry information and, when necessary, makes adjustments to the estimated subscriber relationship period and amortization method.
Subscriber
Acquisition
Costs
—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 consists 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. The Company evaluates subscriber account
attrition on a periodic basis, utilizing observed attrition rates for the Company’s subscriber contracts and industry information and, when necessary, makes
adjustments to the estimated subscriber relationship period and amortization method.
On the consolidated statement of cash flows, subscriber acquisition costs that are comprised of equipment and related installation costs purchased for or
used in subscriber contracts in which the Company retains ownership to the equipment are classified as investing activities and reported as “Subscriber acquisition
costs – company owned equipment.” All other subscriber acquisition costs are classified as operating activities and reported as “Subscriber acquisition costs –
deferred contract costs” on the condensed consolidated statements of cash flows as these assets represent deferred costs associated with customer contracts.
Cash
and
Cash
Equivalents
—
Cash and cash equivalents consists of highly liquid investments with remaining maturities when purchased of three months
or less.
Accounts
Receivable
—Accounts receivable consists primarily of amounts due from customers for recurring monthly monitoring services. The 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 $4.1 million and $3.5 million at December 31, 2016 and 2015 , respectively. The Company estimates this allowance based on historical collection
experience and subscriber attrition rates. When the Company determines that there are accounts receivable that are uncollectible, they are charged off against the
allowance for doubtful accounts. As of December 31, 2016 and 2015 , no accounts receivable were classified as held for sale. Provision for doubtful accounts is
included in general and administrative expenses in the accompanying consolidated statements of operations.
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Table of Contents
The changes in the Company’s allowance for accounts receivable were as follows for the periods ended (in thousands):
Beginning balance
Provision for doubtful accounts
Write-offs and adjustments
Balance at end of period
Year
ended
December
31,
2016
2015
2014
$
$
3,541 $
19,624
(19,027)
4,138 $
3,373 $
14,924
(14,756)
3,541 $
1,901
15,656
(14,184)
3,373
Inventories
—Inventories, which are comprised of smart home and security system equipment and parts are stated at the lower of cost or market with cost
determined under the first-in, first-out (FIFO) method. The Company adjusts the inventory balance based on anticipated obsolescence, usage and historical write-
offs.
Long-lived
Assets
and
Intangibles
—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 for assets under capital leases, whichever is shorter. Intangible assets with definite lives are amortized over the remaining estimated
economic life of the underlying technology or relationships, which ranges from 2 to 10 years. Definite-lived intangible assets are amortized on the straight-line
method over the estimated useful life of the asset or in a pattern in which the economic benefits of the intangible asset are consumed. Amortization expense
associated with leased assets is included with depreciation expense. Routine repairs and maintenance are charged to expense as incurred. The Company
periodically assesses potential impairment of its long-lived assets and intangibles and performs an impairment review whenever events or changes in circumstances
indicate that the carrying value may not be recoverable (See Note 8 ). In addition, the Company periodically assesses whether events or changes in circumstance
continue to support an indefinite life of certain intangible assets or warrant a revision to the estimated useful life of definite-lived intangible assets.
Effective January 1, 2016, the Company adopted guidance issued by the FASB which provides new standards to determine whether a cloud computing
arrangement includes a software license. The guidance requires the Company to determine if an internal use software obtained in a cloud hosting arrangement
contains a contractual right to take possession of the software and if it is feasible to either run the software on internal hardware or contract with an unrelated
vendor to host the software. If both criteria are met, the company will consider the arrangement to include a software license and classify the purchase as an
intangible. The Company has elected to adopt the guidance prospectively to all arrangements entered into or materially modified after the beginning of 2016. The
Company did not enter into, or modify, any material cloud computing arrangements during the year ended December 31, 2016.
Wireless
Spectrum
Licenses
—The Company has capitalized as an intangible asset wireless spectrum licenses that were acquired from third parties. The
cost basis of the wireless spectrum asset includes the purchase price paid for the licenses at the time of acquisition, plus costs incurred to acquire the licenses. The
asset and related liability were recorded at the net present value of future cash outflows using the Company's incremental borrowing rate at the time of acquisition.
The Company has determined that the wireless spectrum licenses meet the definition of indefinite-lived intangible assets because the licenses may be
renewed periodically for a nominal fee, provided that the Company continues to meet the service and geographic coverage provisions. The Company has also
determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of these wireless spectrum
licenses.
Long-term
Investments
— The Company’s long-term investments are comprised of available-for-sale securities and cost based investments in other
companies. As of December 31, 2016 and 2015 , cost-based investments totaled $0.4 million and $3.5 million , respectively. Available-for-sale securities as of of
December 31, 2016 were $4.0 million . As of December 31, 2015, the Company held no available-for-sale securities.
The Company’s marketable equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate
classification of its investments at the time of purchase and reevaluates the classifications at each balance sheet date. Marketable equity securities, are classified as
either short-term or long-term, based on the nature of each security and its availability for use in current operations. The Company’s marketable equity securities
are carried at fair value, with unrealized gains and losses, reported as a component of accumulated other comprehensive income (“AOCI”) in equity, with the
exception of unrealized losses believed to be other-than-temporary which are reported in earnings in the current period. The cost of securities sold is based upon
the specific identification method.
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Table of Contents
The Company performs impairment analyses of its cost based investments when events occur or circumstances change that would, more likely than not,
reduce the fair value of the investment below its carrying value. When indicators of impairment do not exist and certain accounting criteria are met, the Company
evaluates impairment using a qualitative approach. As of December 31, 2016 , no indicators of impairment existed associated with these cost based investments.
Deferred
Financing
Costs
— Costs incurred in connection with obtaining debt financing are deferred and amortized utilizing the straight-line method,
which approximates the effective-interest method, over the life of the related financing. Deferred financing costs incurred with draw downs on APX's revolving
credit facility will be amortized over the amended maturity dates discussed in Note 5 . If such financing is paid off or replaced prior to maturity with debt
instruments that have substantially different terms, the unamortized costs are charged to expense. Deferred financing costs included in the accompanying
consolidated balance sheets within deferred financing costs, net at December 31, 2016 and 2015 were $4.4 million and $6.5 million , net of accumulated
amortization of $6.9 million and $4.8 million , respectively. Deferred financing costs included in the accompanying consolidated balance sheets within notes
payable, net at December 31, 2016 and 2015 were $39.4 million and $40.2 million , net of accumulated amortization of $35.6 million and $26.1 million ,
respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying consolidated statements of
operations totaled $11.6 million , $10.9 million and $10.1 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.
Effective January 1, 2016, the Company adopted guidance issued by the FASB requiring debt issuance costs related to a recognized debt liability to be
presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company has applied this
retrospectively resulting in a reduction to deferred financing costs, net by $40.2 million as of December 31, 2015 with a corresponding decrease to notes payable,
net.
Residual
Income
Plan
—The Company has a program that allows third-party sales channel partners to receive additional compensation based on the
performance of the underlying contracts they create. The Company calculates the present value of the expected future payments and recognizes this amount in the
period the commissions are earned. Subsequent accretion and adjustments to the estimated liability are recorded as interest and operating expense respectively. The
Company monitors actual payments and customer attrition on a periodic basis and, when necessary, makes adjustments to the liability. The amount included in
accrued payroll and commissions was $1.2 million and $0.8 million as of December 31, 2016 and 2015 , respectively, and the amount included in other long-term
obligations was $6.6 million and $4.3 million at December 31, 2016 and 2015 , respectively, representing the present value of the estimated amounts owed to third-
party sales channel partners.
Stock-Based
Compensation
—The Company measures compensation cost based on the grant-date fair value of the award and recognizes that cost over the
requisite service period of the awards (See Note 12 ).
Advertising
Expense
—Advertising costs are expensed as incurred. Advertising costs were approximately $33.0 million , $25.1 million and $23.6 million
for the years ended December 31, 2016 , 2015 and 2014 , respectively.
Income
Taxes
—The Company accounts for income taxes based on the asset and liability method. Under the asset and liability method, deferred tax assets
and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce
deferred tax assets when it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
The Company recognizes the effect of an uncertain income tax position on the income tax return at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. The Company’s policy for recording interest and penalties is to record such items as a component of the provision for income taxes.
Contracts
Sold
—On March 31, 2014, the Company received approximately $2.3 million in proceeds from the sale of certain subscriber contracts to a third-
party. Concurrently, the Company entered into an agreement with the buyer to continue providing billing, monitoring and support services for the contracts that
were sold for a period of ten years . On November 24, 2014, the Company repurchased the subscriber contracts from this third-party for $2.3 million and the
associated liability was settled. Because of the Company's continuing involvement in servicing the contracts, no material gain/loss on the transaction was
recognized.
During the year ended December 31, 2016, the Company sold all of its New Zealand and Puerto Rico subscriber contracts and ceased operations in these
geographical regions ("2016 Contract Sales"). As a result, during the year ended December 31, 2016 the Company recorded the impact of these transactions in
restructuring and asset impairment (See Note 3 ).
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Table of Contents
Concentrations
of
Credit
Risk
—Financial instruments that potentially subject the Company to concentration of credit risk consist principally of
receivables and cash. At times during the year, the Company maintains cash balances in excess of insured limits. The Company is not dependent on any single
customer or geographic location. The loss of a customer would not adversely impact the Company’s operating results or financial position.
Concentrations
of
Supply
Risk
—As of December 31, 2016 , approximately 57% of the Company’s installed panels were SkyControl panels and 40% were
2GIG Go!Control panels. In connection with the 2GIG Sale in April 2013, the Company entered into a five -year supply agreement with 2GIG, pursuant to which
they will be the exclusive provider of the Company’s control panel requirements, subject to certain exceptions as provided in the supply agreement. The loss of
2GIG as a supplier could potentially impact the Company’s operating results or financial position.
Fair
Value
Measurement
—Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Assets and liabilities subject to on-going fair value measurement are categorized and disclosed into one of
three categories depending on observable or unobservable inputs employed in the measurement. These two types of inputs have created the following fair value
hierarchy:
Level 1: Quoted prices in active markets that are accessible at the measurement date for assets and liabilities.
Level 2: Observable prices that are based on inputs not quoted in active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair
value. The Company recognizes transfers between levels of the hierarchy based on the fair values of the respective financial measurements at the end of the
reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the years ended December 31, 2016 and
2015 .
The carrying amounts of the Company’s accounts receivable, accounts payable and accrued and other liabilities approximate their fair values due to their
short maturities.
Goodwill
—The Company conducts a goodwill impairment analysis annually in the fourth fiscal quarter, as of October 1, and as necessary if changes in
facts and circumstances indicate that the fair value of the Company’s reporting units may be less than its carrying amount. When indicators of impairment do not
exist and certain accounting criteria are met, the Company is able to evaluate goodwill impairment using a qualitative approach. When necessary, the Company’s
quantitative goodwill impairment test consists of two steps. The first step requires that the Company compare the estimated fair value of its reporting units to the
carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit is greater than the carrying value of its net assets,
goodwill is not considered to be impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the
Company would be required to complete the second step of the test by analyzing the fair value of its goodwill. If the carrying value of the goodwill exceeds its fair
value, an impairment charge is recorded. The Company found that no indicators of goodwill impairment existed during the year ended December 31, 2016 , thus a
qualitative approach was used and it was determined that no impairment existed for goodwill.
Foreign
Currency
Translation
and
Other
Comprehensive
Income
—The functional currencies of Vivint Canada, Inc. and Vivint New Zealand, Ltd. are
the Canadian and New Zealand dollars, respectively. Accordingly, assets and liabilities are translated from their respective functional currencies into U.S. dollars at
period-end rates and revenue and expenses are translated at the weighted-average exchange rates for the period. Adjustments resulting from this translation process
are classified as other comprehensive (loss) income and shown as a separate component of equity.
When intercompany foreign currency transactions between entities included in the consolidated financial statements are of a long term investment nature
(i.e., those for which settlement is not planned or anticipated in the foreseeable future) foreign currency translation adjustments resulting from those transactions
are included in stockholders’ (deficit) equity as accumulated other comprehensive loss. When intercompany transactions are deemed to be of a short term nature,
translation adjustments are required to be included in the consolidated statement of operations. Beginning in July 2015, we determined that settlement of these
intercompany balances was anticipated and therefore these balances are not considered to be long-term investments and any subsequent translation gains or losses
are recorded in income. Translation gains related to intercompany balances were $2.1 million for the year ended December 31, 2016 . Translation losses related to
intercompany balances were $9.4 million for the year ended December 31, 2015 . During the year ended December 31, 2014 , there were no translation gains or
losses.
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Table of Contents
Letters
of
Credit
—As of December 31, 2016 and 2015 , the Company had $5.7 million and $5.0 million , respectively, of letters of credit issued in the
ordinary course of business, all of which are undrawn.
New
Accounting
Pronouncements
— In May 2014, the FASB originally issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which
clarifies the principles used to recognize revenue for all entities. This guidance requires companies to recognize revenue when they transfer goods or services to a
customer in an amount that reflects the consideration to which they expect to be entitled. In August 2015, the FASB issued ASU 2015-14 which deferred the
effective date of ASU 2014-09 by one year to be effective for annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU
2016-08 to clarify the implementation guidance on principal versus agent considerations as it relates to Topic 606. In June 2016, the FASB issued ASU 2016-10 to
clarify the implementation guidance on identifying performance obligations and licensing as it relates to Topic 606. This update reduces the complexity when
applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In June
2016, the FASB issued ASU 2016-12 to clarify the implementation guidance on Topic 606, which amends the guidance on transition, collectability, non-cash
consideration and the presentation of sales and other similar taxes.
The Company currently plans to adopt Topic 606 using the modified retrospective approach with the cumulative effect of initially applying the new standard
recognized at the date of initial application and providing certain additional disclosures. However, a final decision regarding the adoption method has not been
made at this time. The Company's final determination will depend on a number of factors, such as the significance of the impact of the new standard on the
Company's financial results, system readiness, including the Company's ability to accumulate and analyze the information necessary to assess the impact on prior
period financial statements, as necessary.
The Company is in the initial stages of evaluating the impact of the new standard on the accounting policies, processes, and system requirements. The
Company has assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. Furthermore, the Company has
made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. The Company expects the standard to have
an effect on the subscriber acquisitions costs, net and deferred revenues included in our condensed consolidated balance sheets and the recognition of revenues and
amortization of subscriber acquisition costs on the consolidated statement of operations. The Company does not expect the standard to have a significant impact to
the consolidated statements of changes in equity or the consolidated statements of cash flows.
While the Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipate this standard could
have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the
impact of the new standard on the financial statements at this time.
In March 2016, the FASB issued ASU 2016-09 to simplify accounting for employee share-based payments. This update involves several aspects of the
accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and will be
applied prospectively and/or retrospectively, with early adoption permitted. The Company plans to adopt this update on the effective date and the adoption is not
expected to materially impact the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07 which eliminates the requirement to retroactively adopt the equity method of accounting when an investment
qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. This update is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2016 and must be applied prospectively, with early adoption permitted. The Company plans to
adopt this update on the effective date and the adoption is not expected to materially impact the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06 to clarify the assessment of contingent put and call options in debt instruments as it relates to Derivatives and
Hedging (Topic 815). The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of
principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is
required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This update is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2016 and must be applied using a modified retrospective approach, with early adoption permitted. The
Company plans to adopt this update on the effective date and it is not expected to materially impact the consolidated financial statements.
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In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations as it relates to lease assets and lease
liabilities. The update requires that lease assets and lease liabilities be recognized on the balance sheet, and that key information about leasing arrangements be
disclosed. Prior to this update, GAAP did not require operating leases to be recognized as lease assets and lease liabilities on the balance sheet. This update is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and must be applied using a modified retrospective approach,
with early adoption permitted. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.
In January 2016, the FASB issued ASU 2016-01 to address certain aspects of the recognition, measurement, presentation, and disclosure of financial
instruments. The main provisions of this update require equity investments to be measured at fair value with changes in fair value recognized in earnings, allow a
company to value equity investments without a readily determined fair value at cost, less any impairments, and simplify the assessment of impairments of equity
investments without a readily determinable fair value by requiring a qualitative assessment. This update is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2017. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the
beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements)
should be applied prospectively to equity investments that exist as of the date of adoption of the Update. Early adoption is permitted. The Company is evaluating
the new guidance and plans to provide additional information about its expected impact upon adoption at a future date.
NOTE
3
–
RESTRUCTURING
AND
ASSET
IMPAIRMENT
CHARGES
During the year ended December 31, 2016, the Company sold all of its New Zealand and Puerto Rico contracts and recorded the impact of these transactions
in restructuring and asset impairment. The calculation of the net loss recorded related to the 2016 Contract Sales included the expensing of all unamortized
deferred subscriber acquisition costs associated with these subscriber accounts in the amount of $7.6 million , the realization of outstanding amounts of
accumulated other comprehensive loss associated with the New Zealand foreign currency translation process of $1.1 million upon the substantial sale of the
subsidiary, offset by cash proceeds of $6.2 million for a total net loss on the 2016 Contract Sales of $2.6 million .
During the year ended December 31, 2015, the board of directors approved a plan to transition the Company’s Wireless Internet business from a 5Ghz to a
60Ghz-based network technology (the “Wireless Restructuring”) and the Company ceased the build-out of 5Ghz networks and stopped the installation of new
customers. During the year ended December 31, 2016, the Company shifted to test installations of the new 60Ghz technology. In connection with the Wireless
Restructuring, the Company recorded restructuring and asset impairment charges consisting of asset impairments, the costs of employee severance, and other
contract termination charges.
Restructuring and asset impairment charges were as follows (in thousands):
Wireless restructuring and asset (recoveries) impairment charges:
Asset (recoveries) impairments
Contract termination (recoveries) costs
Employee severance and termination benefits (recoveries) charges
Total wireless restructuring and asset (recoveries) impairment charges
Loss on subscriber contract sales
Total restructuring and asset impairment charges
During the year ended December 31, 2014, the Company did not incur any restructuring and asset impairment charges.
The following table presents accrued restructuring activity for the years ended December 31, 2016 and 2015 .
70
Year
ended
December
31,
2016
2015
$
(710) $
53,228
(751)
(77)
(1,538)
2,551
4,767
1,202
59,197
—
$
1,013 $
59,197
Table of Contents
Asset
impairments
Contract
termination
costs
Employee
severance
and
termination
benefits
Total
Accrued restructuring balance as of December 31,
2014
$
Restructuring and impairment charges
Cash payments
Non-cash settlements
Accrued restructuring balance as of December 31,
2015
Restructuring and impairment recoveries
Cash payments
Non-cash settlements
— $
— $
53,228
(10)
(53,218)
—
(710)
—
710
4,767
(623)
(190)
3,954
(751)
(2,554)
—
Accrued restructuring balance as of December 31,
2016
$
— $
649
$
— $
1,202
(881)
—
321
(77)
(244)
—
— $
—
59,197
(1,514)
(53,408)
4,275
(1,538)
(2,798)
710
649
The wireless restructuring and impairment recoveries during the year ended December 31, 2016 resulted primarily from a vendor settlement for amounts less
than previously estimated. The Company recorded a non-cash asset impairment charge of $53.2 million during the year ended December 31, 2015. The Company
also recorded cash-based restructuring charges of $6.0 million during the year ended December 31, 2015 related to employee severance and termination benefits as
well as the write off of certain vendor contracts. Accrued restructuring at December 31, 2016 is included in current liabilities within accrued expenses and other
current liabilities of $0.1 million and in long-term liabilities within other long-term obligations of $0.6 million .
Additional charges may be incurred in the future for facility-related or other restructuring activities as the Company continues to align resources to meet the
needs of the business.
NOTE
4
—BUSINESS
COMBINATIONS
Space
Monkey
Acquisition
On August 25, 2014 , the Company’s parent purchased Space Monkey, Inc. (“Space Monkey”), a distributed cloud storage technology solution company,
then merged Space Monkey with a wholly-owned subsidiary of the Company. Pursuant to the terms of the merger the Company paid aggregate cash consideration
of $15.0 million , of which $1.5 million was held in escrow for indemnification obligations and was settled during 2015. This strategic acquisition was made to
support the growth and development of the Company’s smart home platform.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the time of acquisition (in thousands):
Net assets acquired from Space Monkey
Deferred tax liability
Intangible assets (See Note 8)
Goodwill
Total estimated fair value of the assets acquired and liabilities assumed
$
$
404
(1,106)
8,300
7,402
15,000
During the year ended December 31, 2014, the Company incurred costs associated with the Space Monkey acquisition, which were not material, consisting
of accounting, legal and professional fees and payments to employees directly associated with the acquisition. These costs are included in general and
administrative expenses in the accompanying consolidated statements of operations. During the year ended December 31, 2016 and 2015, the Company did no t
incur any costs associated with the Space Monkey acquisition. The associated goodwill is deductible for income tax purposes.
Wildfire
Acquisition
71
Table of Contents
On January 31, 2014 , a wholly-owned subsidiary of the Company completed the purchase of certain assets, and assumed certain liabilities, of Wildfire
Broadband, LLC (“Wildfire”). Pursuant to the terms of the asset purchase agreement the Company paid aggregate cash consideration of $3.5 million , of which
$0.4 million was held in escrow for indemnification obligations and was settled in early 2015. This strategic acquisition was made to provide the Company access
to Wildfire’s existing customers, wireless internet infrastructure and know-how. The associated goodwill is deductible for income tax purposes.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the time of acquisition (in thousands):
Net assets acquired from Wildfire
Intangible assets (See Note 8)
Goodwill
Total cash consideration
$
$
96
2,900
504
3,500
During the year ended December 31, 2014, the Company incurred costs associated with the Wildfire acquisition, which were not material, consisting of
accounting, legal and professional fees and payments to employees directly associated with the acquisition. These costs are included in general and administrative
expenses in the accompanying audited consolidated statements of operations. During the year ended December 31, 2015, the Company impaired all assets of the
Wildfire acquisition as part of the Company’s wireless internet business restructuring (see Note 3 ). During the year ended December 31, 2016 , the Company did
no t incur any costs associated with the Wildfire acquisition.
NOTE
5
—LONG-TERM
DEBT
On November 16, 2012, APX issued $1.3 billion aggregate principal amount of notes, of which $719.5 million aggregate principal amount of 6.375% 2019
notes mature on December 1, 2019 and are secured on a first-priority lien basis by substantially all of the tangible and intangible assets whether now owned or
hereafter acquired by the Company, subject to permitted liens and exceptions, and $380.0 million aggregate principal amount of 8.75% 2020 notes mature on
December 1, 2020 .
During 2013, APX completed two offerings of additional 2020 notes under the indenture dated November 16, 2012. On May 31, 2013, APX issued $200.0
million of 2020 notes at a price of 101.75% and on December 13, 2013, APX issued an additional $250.0 million of 2020 notes at a price of 101.50% .
On July 1, 2014, APX issued an additional $100.0 million of 2020 notes at a price of 102.00% .
On October 19, 2015, APX issued $300.0 million aggregate principal amount of 8.875% 2022 private placement notes at a price of 98% , pursuant to a note
purchase agreement dated as of October 19, 2015 in a private placement exempt from registration under the Securities Act. The 2022 private placement notes will
mature on December 1, 2022, unless on September 1, 2020 (the 91st day prior to the maturity of the 2020 notes) more than an aggregate principal amount of
$190.0 million of such 2020 notes remain outstanding or have not been refinanced as permitted under the note purchase agreement for the 2022 private placement
notes, in which case the 2022 private placement notes will mature on September 1, 2020. The 2022 private placement notes are secured, on a pari passu basis, by
the collateral securing obligations under the 2019 notes, the 2022 private placement notes, and the 2022 notes (as defined below) and the revolving credit facilities,
in each case, subject to certain exceptions and permitted liens.
In May 2016, APX issued $500.0 million aggregate principal amount of 7.875% 2022 notes at par, pursuant to an indenture dated as of May 26, 2016 among
APX, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. The 2022 notes will mature on December 1, 2022,
or on such earlier date when any outstanding pari passu lien indebtedness matures as a result of the operation of any “Springing Maturity” provision set forth in the
agreements governing such pari passu lien indebtedness. The 2022 notes are secured, on a pari passu basis, by the collateral securing obligations under the 2019
notes and 2022 private placement notes and the revolving credit facilities, in all cases, subject to certain exceptions and permitted liens. APX used a portion of the
net proceeds from the issuance of the 2022 notes to repurchase approximately $235 million aggregate principal amount of the outstanding 2019 notes and 2022
private placement notes in privately negotiated transactions and repaid borrowings under the existing revolving credit facility.
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Table of Contents
In August 2016, APX issued an additional $100.0 million aggregate principal amount of the 2022 notes at a price of 104.00% .
In accordance with ASC 470-50 Debt – Modifications and Extinguishments, the Company performed an analysis on a creditor-by-creditor basis to determine
if the repurchased 2019 notes and 2022 private placement notes were substantially
different than the 2022 notes issued in May 2016. As a result of this analysis, during the year ended December 31, 2016 , the Company recorded $10.1 million of
other expense and loss on extinguishment, consisting of $1.0 million of original
issue discount and deferred financing costs associated with the 2019 notes and 2022 private placement notes, and $9.0 million
of the $15.7 million of total costs incurred in conjunction with issuance of the 2022 notes. The original unamortized portion of
deferred financing costs associated with new creditors and creditors under both the 2019 notes and the 2022 notes, whose debt
instruments were not deemed to be substantially different, will be amortized to interest expense over the life of the 2022 notes.
The following table presents deferred financing activity for the year ended December 31, 2016 (in thousands):
Revolving Credit Facility
2019 Notes
2020 Notes
2022 Private Placement Notes
2022 Notes
Total Deferred Financing
Costs
Balance
12/31/2015
$
6,456 $
20,182
18,892
1,170
—
Unamortized
Deferred
Financing
Costs
Additions
Refinances
Early
Extinguishment
Amortized
— $
—
—
—
9,337
— $
(3,423)
—
—
3,423
— $
(585)
—
(110)
—
Balance
12/31/2016
4,420
(2,036) $
(4,481)
(3,839)
(157)
(1,046)
11,693
15,053
903
11,714
$
46,700 $
9,337 $
— $
(695)
$
(11,559) $
43,783
The notes are fully and unconditionally guaranteed, jointly and severally by APX and each of APX’s existing restricted subsidiaries that guarantee
indebtedness under APX’s revolving credit facility or our other indebtedness. Interest accrues at the rate of 6.375% per annum for the 2019 notes, 8.75% per
annum for the 2020 notes, 8.875% per annum for the 2022 private placement notes, and 7.875% per annum for the 2022 notes. Interest on the notes is payable
semiannually in arrears on each June 1 and December 1. APX may redeem the notes at the prices and on the terms specified in the applicable indenture or note
purchase agreement.
Revolving Credit Facility
On November 16, 2012, APX entered into a $200.0 million senior secured revolving credit facility, with a five year maturity. On March 6, 2015, APX
amended and restated the credit agreement governing the revolving credit facility to provide for, among other things, (1) an increase in the aggregate commitments
previously available to APX thereunder from $200.0 million to $289.4 million (“Revolving Commitments”) and (2) the extension of the maturity date with respect
to certain of the previously available commitments.
Borrowings under the amended and restated revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at APX’s option,
either (1) the base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50% , (b) the prime rate of Bank of America, N.A. and (c) the
LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined
by reference to the London interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based
borrowings (1)(a) under the Series A Revolving Commitments of approximately $247.5 million and Series C Revolving Commitments of approximately $20.8
million is currently 2.0% per annum and (b) under the Series B Revolving Commitments of approximately $21.2 million is currently 3.0% and (2)(a) the
applicable margin for LIBOR rate-based borrowings (a) under the Series A Revolving Commitments and Series C Revolving Commitments is currently 3.0% per
annum and (b) under the Series B Revolving Commitments is currently 4.0% . The applicable margin for borrowings under the revolving credit facility is subject
to one step-down of 25 basis points based on APX meeting a consolidated first lien net leverage ratio test at the end of each fiscal quarter. Outstanding borrowings
under the amended and restated revolving credit facility are allocated on a pro-rata basis between each Series based on the total Revolving Commitments.
In addition to paying interest on outstanding principal under the revolving credit facility, APX is required to pay a quarterly commitment fee (which will be
subject to one interest rate step-down of 12.5 basis points, based on APX meeting a
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Table of Contents
consolidated first lien net leverage ratio test) to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. As of
December 31, 2016 the commitment fee percentage was 0.50% . APX also pays customary letter of credit and agency fees.
APX is not required to make any scheduled amortization payments under the revolving credit facility. The principal amount outstanding under the revolving
credit facility will be due and payable in full on (1) with respect to the non-extended commitments under the Series C Revolving Credit Facility, November 16,
2017 and (2) with respect to the extended commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2019.
As of December 31, 2016 there were no outstanding borrowings under the credit facility. As of December 31, 2015 the outstanding borrowings under the
credit facility were $20.0 million .
The Company’s debt at December 31, 2016 consisted of the following (in thousands):
6.375% Senior Secured Notes due 2019
8.75% Senior Notes due 2020
8.875% Senior Secured Notes Due 2022
7.875% Senior Secured Notes Due 2022
Total Notes payable
Outstanding
Principal
Unamortized
Premium
(Discount)
Unamortized
Deferred
Financing
Costs
Net
Carrying
Amount
$
719,465 $
— $
(11,693) $
930,000
270,000
600,000
5,848
(2,960)
3,710
(15,053)
(903)
(11,714)
707,772
920,795
266,137
591,996
$
2,519,465 $
6,598
$
(39,363) $
2,486,700
The Company’s debt at December 31, 2015 consisted of the following (in thousands):
Series C Revolving Credit Facility Due 2017
Series A, B Revolving Credit Facilities Due 2019
6.375% Senior Secured Notes due 2019
8.75% Senior Notes due 2020
8.875% Senior Secured Notes due 2022
Total Notes payable
NOTE
6
—BALANCE
SHEET
COMPONENTS
Outstanding
Principal
Unamortized
Premium
Unamortized
Deferred
Financing
Costs
Net
Carrying
Amount
$
1,440 $
18,560
925,000
930,000
300,000
— $
—
—
7,060
(3,704)
— $
—
(20,182)
(18,892)
(1,170)
1,440
18,560
904,818
918,168
295,126
$
2,175,000 $
3,356
$
(40,244) $
2,138,112
The following table presents material balance sheet component balances as of December 31, 2016 and December 31, 2015 (in thousands):
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Table of Contents
Subscriber acquisition costs
Subscriber acquisition costs
Accumulated amortization
Subscriber acquisition costs, net
Accrued payroll and commissions
Accrued payroll
Accrued commissions
Total accrued payroll and commissions
Accrued expenses and other current liabilities
Accrued interest payable
Accrued payroll taxes and withholdings
Accrued taxes
Wireless restructuring costs
Loss contingencies
Other
Total accrued expenses and other current liabilities
NOTE
7
—PROPERTY
PLANT
AND
EQUIPMENT
Property and equipment consisted of the following (in thousands):
Vehicles
Computer equipment and software
Leasehold improvements
Office furniture, fixtures and equipment
Buildings
Construction in process
Build-to-suit lease asset under construction
Accumulated depreciation and amortization
Property plant and equipment, net
December
31,
2016
2015
1,373,080 $
(320,646)
1,052,434 $
958,261
(167,617)
790,644
24,101 $
22,187
46,288 $
18,071
20,176
38,247
16,944 $
17,153
4,793
3,376
91
2,571
6,490
3,938
2,683
4,275
2,504
5,020
34,265 $
35,573
$
$
$
$
$
$
Estimated
Useful
Lives
3-5 years
3-5 years
2-15 years
7 years
39 years
December
31,
2016
2015
$
31,416 $
27,006
17,717
13,508
702
9,908
5,004
105,261
(41,635)
$
63,626 $
26,935
21,702
17,434
11,776
702
3,837
—
82,386
(27,112)
55,274
Property plant and equipment includes approximately $21.2 million and $20.4 million of assets under capital lease obligations, net of accumulated
amortization of $10.9 million and $7.0 million at December 31, 2016 and 2015 , respectively. Depreciation and amortization expense on all property plant and
equipment was $16.8 million , $16.9 million and $11.3 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. Amortization expense
relates to assets under capital leases as included in depreciation and amortization expense.
Because of its involvement in certain aspects of the construction of a new sales recruiting and training facility in Logan, UT, the Company is deemed to be
the owner of the building for accounting purposes during the construction period. Accordingly, the Company recorded a build-to-suit asset of $5.0 million as of
December 31, 2016 . See Note 13 -Commitments and Contingencies for more information on build-to-suit arrangements.
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Table of Contents
NOTE
8
—GOODWILL
AND
INTANGIBLE
ASSETS
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 , were as follows (in thousands):
Balance as of January 1, 2015
Goodwill Impaired due to Wireless Restructuring (see Note 3)
Effect of Foreign Currency Translation
Balance as of December 31, 2015
Effect of Foreign Currency Translation
Balance as of December 31, 2016
$
841,522
(2,270)
(4,836)
834,416
817
$
835,233
As of December 31, 2016 and December 31, 2015 , the Company had a goodwill balance of $835.2 million and $834.4 million , respectively. Foreign
currency translation adjustments were $0.8 million and $4.8 million for the years ended December 31, 2016 and December 31, 2015 , respectively. In connection
with the Wireless Restructuring (See Note 3 ), the Company fully impaired goodwill related to its Wireless Internet business. The resulting impairment charge of
$2.3 million is included in restructuring and asset impairment charges on the consolidated statement of operations during the year ended December 31, 2015.
Accumulated impairment losses were $2.3 million as of December 31, 2016 and 2015 , respectively.
Intangible
assets,
net
The following table presents intangible asset balances as of December 31, 2016 and 2015 (in thousands):
December
31,
2016
December
31,
2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Estimated
Useful
Lives
Definite-lived intangible
assets:
Customer contracts
$
965,179 $
(539,910) $ 425,269 $
962,842 $
(430,803) $ 532,039
10 years
2GIG 2.0 technology
Other technology
17,000
7,067
(10,479)
(4,984)
6,521
2,083
4,832
4,811
17,000
7,067
7,100
7,524
(7,064)
(3,438)
9,936
8 years
3,629 5 - 7 years
(761)
6,339
6 years
(2,094)
5,430
5 years
7,100
8,724
(2,268)
(3,913)
1,200
(1,200)
—
1,200
(800)
400 2 - 3 years
1,006,270
(562,754)
443,516
1,002,733
(444,960)
557,773
Space Monkey
technology
Patents
Non-compete
agreements
Total definite-lived
intangible assets:
Indefinite-lived intangible
assets:
Spectrum licenses
31,253
IP addresses
Domain names
564
59
—
—
—
31,253
564
59
—
564
58
—
—
—
—
564
58
Total Indefinite-
lived intangible
assets
31,876
—
31,876
622
—
622
Total intangible assets, net $ 1,038,146 $
(562,754) $ 475,392 $ 1,003,355
$
(444,960) $ 558,395
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Table of Contents
During the year ended December 31, 2016 , the Company entered into leasing agreements with a third party for designated radio frequency spectrum in 40
mid-sized metropolitan markets. The initial lease term is for seven years, with an option to obtain title of the applicable spectrum licenses at the end of this initial
term for a nominal fee. The Company acquired $31.3 million of spectrum licenses, measured using the present value of the lease payments, and recorded an
intangible asset and a corresponding liability within other long-term obligations. While licenses are issued for only a fixed time, such licenses are subject to
renewal by the Federal Communications Commission. The Company intends to renew the licenses at the end of the initial term. License renewals within the
industry have occurred routinely and at nominal cost. Moreover, the Company has determined that there are currently no legal, regulatory, contractual, competitive,
economic or other factors that limit the useful life of the licenses. As a result, the Company treats the wireless licenses as an indefinite-lived intangible asset.
Identifiable intangible assets acquired by the Company in connection with the Wildfire acquisition were $2.1 million of customer contracts and $0.8 million
associated with non-compete agreements entered into by certain former members of Wildfire management. In connection with the Wireless Restructuring (See
Note 3 ), the Company fully impaired the remaining unamortized definite-lived intangible assets related to its Wireless Internet business. The resulting impairment
charge of $2.9 million is included in restructuring and asset impairment charges on the consolidated statement of operations during the year ended December 31,
2015.
Identifiable intangible assets acquired by the Company in connection with the Space Monkey acquisition were $7.1 million of Space Monkey technology and
$1.2 million associated with non-compete agreements entered into by certain former members of Space Monkey management.
During the year ended December 31, 2016 , the Company acquired $1.3 million of intangibles related to patents. During the year ended December 31, 2015 ,
the Company acquired $1.4 million of intangibles related to patents, domain names and Internet Protocol (“IP”) addresses.
The Company recognized amortization expense related to capitalized software development costs of $1.1 million , $1.3 million and $1.3 million during the
years ended December 31, 2016 , 2015 , and 2014 , respectively. Amortization expense related to intangible assets was approximately $116.9 million , $134.8
million and $151.3 million for the years ended December 31, 2016 , 2015 , and 2014 , respectively.
As of December 31, 2016 , the remaining weighted-average amortization period for definite-lived intangible assets was 3.8 years . Estimated future
amortization expense of intangible assets, excluding approximately $0.3 million in patents currently in process, is as follows as of December 31, 2016 (in
thousands):
2017
2018
2019
2020
2021
Thereafter
Total estimated amortization expense
77
$
101,296
89,736
78,082
67,288
58,288
48,548
$
443,238
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NOTE
9
—FAIR
VALUE
MEASUREMENTS
Cash equivalents and available-for-sale securities are classified as level 1 assets, as they have readily available market prices in an active market. As of
December 31, 2016 the Company held $42.3 million of money market funds and $4.0 million of corporate securities classified as level 1 investments. As of
December 31, 2015 , the Company held an immaterial amount of money market funds classified as level 1 investments.
The following tables show the Company’s cash and cash equivalents and available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized
losses and fair value by significant investment category recorded as cash and cash equivalents or long-term investments and other assets, net as of December 31,
2016 (in thousands):
Cash
Level 1:
Money market funds
Corporate securities
Subtotal
Total
Adjusted
Cost
Unrealized
Gains Unrealized
Losses
Fair
Value
Cash
and
Cash
Equivalents
$
1,191 $
— $
— $
1,191 $
1,191 $
Long-Term
Investments
and
Other
Assets,
net
—
42,329
3,007
45,336
—
1,011
1,011
—
—
—
42,329
4,018
46,347
42,329
—
42,329
—
4,018
4,018
$
46,527 $
1,011 $
— $
47,538 $
43,520 $
4,018
On February 19, 2014, the Company invested $3.0 million in preferred stock of a privately held company ("investee") not affiliated with the Company. On
October 28, 2016 the investee began trading shares publicly and the Company's preferred stock was converted to public stock. As a result, the Company classified
the investment as an available for sale security.
The carrying amounts of the Company’s accounts receivable, accounts payable and accrued and other liabilities approximate their fair values due to their
short maturities.
Components of long-term debt including the associated interest rates and related fair values (in thousands, except interest rates) are as follows:
Issuance
2019 Notes
2020 Notes
2022 Notes Private Placement Notes
2022 Notes
Total
December
31,
2016
December
31,
2015
Face
Value
Estimated
Fair
Value
Face
Value
$
719,465 $
743,783 $
925,000 $
Estimated
Fair
Value
879,906
930,000
270,000
600,000
946,275
280,372
655,140
930,000
300,000
—
756,788
296,296
—
$
2,519,465 $
2,625,570 $
2,155,000 $
1,932,990
Stated
Interest
Rate
6.375%
8.75%
8.875%
7.875%
The fair value of the 2019 notes, 2020 notes, 2022 private placement notes and the 2022 notes was considered a Level 2 measurement as the value was
determined using observable market inputs, such as current interest rates as well as prices observable from less active markets.
NOTE
10
—FACILITY
FIRE
On March 18, 2014, a fire occurred at a facility leased by the company in Lindon, Utah. This facility contained the Company’s primary inventory warehouse
and call center operations. The Company recognized gross expenses related to the fire of $8.3 million , which were primarily related to impairment of damaged
assets and recovery costs to maintain business continuity. The Company also received insurance recoveries of $8.8 million , related to the fire damage, $3.0 million
of which related to the reconstruction of the facility damaged by the fire, and is included within the Company’s cash flows from
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investing activities in the consolidated statement of cash flows for the year ended December 31, 2015. Insurance recoveries associated with the reconstruction of
the damaged facility exceeded its net book value by $0.5 million . These excess insurance recoveries were included in other income as of December 31, 2014. All
insurance recoveries have been received as of December 31, 2016 . Expenses in excess of insurance recoveries during the year ended December 31, 2016 and 2015
were immaterial.
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NOTE
11
—INCOME
TAXES
APX Group files a consolidated federal income tax return with its wholly-owned subsidiaries.
Income tax provision consisted of the following (in thousands):
Current income tax:
Federal
State
Foreign
Total
Deferred income tax:
Federal
State
Foreign
Total
Year
ended
December
31,
2016
2015
2014
$
— $
— $
545
95
640
—
—
(573)
(573)
392
(1)
391
—
—
(40)
(40)
Provision for income taxes
$
67 $
351 $
The following reconciles the tax expense computed at the statutory federal rate and the Company’s tax expense (in thousands):
—
779
—
779
(925)
(181)
841
(265)
514
Computed expected tax expense
State income taxes, net of federal tax effect
Foreign income taxes
Other reconciling items
Permanent differences
Change in valuation allowance
Provision for income taxes
Year
ended
December
31,
2016
2015
2014
$
(93,770) $
(94,737) $
(81,107)
360
(949)
666
1,688
92,072
259
202
—
1,980
92,647
$
67 $
351 $
395
1,645
—
2,261
77,320
514
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows (in thousands):
Gross deferred tax assets:
Net operating loss carryforwards
Deferred subscriber income
Accrued expenses and allowances
Purchased intangibles
Inventory reserves
Property and Equipment
Alternative minimum tax credit and research and development credit
Valuation allowance
Gross deferred tax liabilities:
Deferred subscriber acquisition costs
Property and equipment
Prepaid expenses
Net deferred tax liabilities
December
31,
2016
2015
$
799,302 $
642,391
19,866
15,452
14,776
6,999
3,482
41
(328,991)
530,927
13,722
15,415
10,576
9,333
3,257
41
(234,771)
459,964
(537,387)
(466,783)
—
(744)
(538,131)
$
(7,204) $
—
(705)
(467,488)
(7,524)
The long-term portion of the net deferred tax liability was approximately $7.2 million and $7.5 million at December 31, 2016 and 2015 , respectively. The
current portion of the net deferred tax liability was immaterial at December 31, 2016 and 2015 , respectively.
The Company had net operating loss carryforwards as follows (in thousands):
Net operating loss carryforwards:
United States
State
Canada
New Zealand
December
31,
2016
2015
$
2,084,897 $
1,553,812
33,526
—
1,695,386
1,338,742
28,629
5,518
U.S. and state net operating loss carryforwards will begin to expire in 2026 , if not used. Included in both the U.S. and state net operating loss carryforwards
are approximately $11.5 million at December 31, 2016 and 2015 , respectively of net operating loss carryforwards for which a benefit will be recorded in
Additional Paid in Capital when realized. The Company had United States research and development credits of approximately $41,000 at December 31, 2016 , and
December 31, 2015 , which begin to expire in 2030 .
Canadian net operating loss carryforwards will begin to expire in 2029 .
Realization of the Company’s net operating loss carryforwards and tax credits is dependent on generating sufficient taxable income prior to their expiration.
Although a portion of these carryforwards are subject to the provisions of Internal Revenue Code Section 382, the Company has not performed a formal study to
determine the amount of the limitation. The use of the net operating loss carryforwards may have additional limitations resulting from future ownership changes or
other factors under Section 382 of the Internal Revenue Code.
The Company has considered and weighed the available evidence, both positive and negative, to determine whether it is more-likely-than-not that some
portion, or all, of the deferred tax assets will not be realized. Based on available information,
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management does not believe it is more likely than not that its deferred tax assets will be utilized. Accordingly, the Company has established a valuation allowance
to the extent of and equal to the net deferred tax assets. The Company recorded a valuation allowance for U.S. deferred tax assets of approximately $329.0 million
and $234.8 million at December 31, 2016 and 2015 , respectively. In addition to the change in valuation allowance from operations, the valuation allowance
changes include impact of acquisition and disposition related items.
As of December 31, 2016 , the Company's income tax returns for the tax years 2013 through 2016, remain subject to examination by the Internal Revenue
Service and state authorities.
NOTE
12
—STOCK-BASED
COMPENSATION
AND
EQUITY
313
Incentive
Units
The Company’s indirect parent, 313 Acquisition LLC (“313”), which is wholly owned by the Investors, has authorized the award of profits interests,
representing the right to share a portion of the value appreciation on the initial capital contributions to 313 (“Incentive Units”). In March 2015, a total of 4,315,106
Incentive Units previously issued to the Company’s Chief Executive Officer and President were voluntarily relinquished. The Company recorded all unrecognized
stock-based compensation associated with such Incentive Units at the time the Incentive Units were relinquished. As of December 31, 2016 , a total of 85,882,836
Incentive Units had been awarded, and were outstanding, to current and former members of senior management and a board member, of which 42,169,456 were
issued to the Company’s Chief Executive Officer and President. The Incentive Units are subject to time-based and performance-based vesting conditions, with one-
third subject to ratable time-based vesting over a five year period and two-thirds subject to the achievement of certain investment return thresholds by The
Blackstone Group, L.P. and its affiliates (“Blackstone”). The Company has not recorded any expense related to the performance-based portion of the awards, as the
achievement of the vesting condition is not yet deemed probable. The fair value of stock-based awards is measured at the grant date and is recognized as expense
over the employee’s requisite service period. The grant date fair value was determined using a Monte Carlo simulation valuation approach with the following
assumptions: expected volatility varies from 55% to 125% ; expected exercise term between 3.96 and 6.00 years; and risk-free rate between 0.62% and 1.18% .
A summary of the Incentive Unit activity for the years ended December 31, 2016 and 2015 is presented below:
Outstanding, December 31, 2014
Granted
Forfeited
Exercised
Outstanding, December 31, 2015
Granted
Forfeited
Exercised
Outstanding, December 31, 2016
Unvested shares expected to vest after December 31, 2016
Exercisable at December 31, 2016
Incentive
Units
Weighted
Average
Exercise
Price
Per
Share
Weighted
Average
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic
Value
74,527,942 $
3,850,000
(4,415,106)
—
73,962,836
12,825,000
(905,000)
—
85,882,836
66,186,360
19,696,476 $
1.03
2.40
1.03
—
1.06
1.93
1.09
—
1.19
1.23
1.03
8.19 $
20,145,882
7.31
104,562,869
6.81
6.99
6.21 $
—
—
—
As of December 31, 2016 , there was $1.8 million of unrecognized compensation expense related to outstanding Incentive Units, which will be recognized
over a weighted-average period of 1.57 years . As of December 31, 2016 and 2015 , the weighted average grant date fair value of the outstanding incentive units
was $0.30 and $0.38 , respectively.
Vivint
Stock
Appreciation
Rights
The Company’s subsidiary, Vivint Group, Inc. (“Vivint Group”), has awarded Stock Appreciation Rights (“SARs”) to various levels of key employees. The
purpose of the SARs is to attract and retain personnel and provide an opportunity to acquire an equity interest of Vivint Group. The SARs are subject to time-based
and performance-based vesting conditions, with
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one-third subject to ratable time-based vesting over a five year period and two-thirds subject to the achievement of certain investment return thresholds by 313. The
Company has not recorded any expense related to the performance-based portion of the awards, as the achievement of the vesting condition is not yet deemed
probable. In connection with this plan, 21,993,158 SARs were outstanding as of December 31, 2016 . In addition, 53,621,891 SARs have been set aside for funding
incentive compensation pools pursuant to long-term incentive plans established by the Company. On April 1, 2015, a new plan was created and all issued and
outstanding Vivint, Inc. (“Vivint”) SARs were re-granted and all reserved SARs were converted under the new Vivint Group plan. The Company assessed the
conversion of the SARs as a modification of equity instruments. The restructuring did not change the fair value of the existing awards and as such, no incremental
compensation expense was incurred as a result of the restructuring.
The fair value of the Vivint Group awards is measured at the grant date and is recognized as expense over the employee’s requisite service period. The fair
value is determined using a Black-Scholes option valuation model with the following assumptions: expected volatility varies from 55% to 125% , expected
dividends of 0% ; expected exercise term between 6.00 and 6.47 years ; and risk-free rates between 0.61% and 1.77% . Due to the lack of historical exercise data,
the Company used the simplified method in determining the estimated exercise term, for all Vivint Group awards.
A summary of the SAR activity for the years ended December 31, 2016 and 2015 is presented below:
Outstanding, December 31, 2014
Converted
Granted
Forfeited
Exercised
Outstanding, December 31, 2015
Granted
Forfeited
Exercised
Outstanding, December 31, 2016
Unvested shares expected to vest after December 31, 2016
Exercisable at December 31, 2016
Stock
Appreciation
Rights
6,696,660 $
3,259,934
11,186,936
(2,307,172)
(172,221)
18,664,137
5,649,573
(2,320,552)
—
21,993,158
19,334,407
2,658,751 $
Weighted
Average
Exercise
Price
Per
Share
Weighted
Average
Remaining
Contractual
Life
(Years)
1.04
0.70
1.03
0.80
0.68
0.87
1.22
0.92
—
0.96
0.98
0.78
Aggregate
Intrinsic
Value
1,734,748
8.62 $
8.62
8.66
3,628,498
8.23
8.37
7.20 $
—
—
—
As of December 31, 2016 , there was $0.9 million of unrecognized compensation expense related to outstanding Vivint awards, which will be recognized
over a weighted-average period of 2.81 years . As of December 31, 2016 and 2015 , the weighted average grant date fair value of the outstanding SARs was $0.22
and $0.25 , respectively.
Wireless
Stock
Appreciation
Rights
The Company’s subsidiary, Vivint Wireless, has awarded SARs to various key employees. The purpose of the SARs is to attract and retain personnel and
provide an opportunity to acquire an equity interest of Vivint Wireless. The SARs are subject to a five year time-based ratable vesting period. In connection with
this plan, 17,500 SARs were outstanding as of December 31, 2016 . The Company does not intend to issue any additional Wireless SARs.
The fair value of the Vivint Wireless awards is measured at the grant date and is recognized as expense over the employee’s requisite service period. The fair
value is determined using a Black-Scholes option valuation model with the following assumptions: expected volatility of 65% , expected dividends of 0% ;
expected exercise term between 6.00 and 6.50 years ; and risk-free rates between 1.51% and 1.77% . Due to the lack of historical exercise data, the Company used
the simplified method in determining the estimated exercise term, for all Vivint Wireless awards.
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A summary of the SAR activity for the year ended December 31, 2016 and 2015 is presented below:
Outstanding, December 31, 2014
Granted
Forfeited
Exercised
Outstanding, December 31, 2015
Granted
Forfeited
Exercised
Outstanding, December 31, 2016
Unvested shares expected to vest after December 31, 2016
Exercisable, December 31, 2016
Stock
Appreciation
Rights
Weighted
Average
Exercise
Price
Per
Share
Weighted
Average
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic
Value
70,000
$
11,000
—
—
81,000
—
(63,500)
—
17,500
7,000
10,500
$
5.00
65.84
—
—
13.26
—
15.54
—
5.00
5.00
5.00
8.41
7.66
6.41
6.41
6.41
—
—
—
—
—
As of December 31, 2016 , there was an immaterial amount of unrecognized compensation expense related to all Vivint Wireless awards. As of
December 31, 2016 and 2015 , the weighted average grant date fair value of the outstanding SARs was $2.30 and $6.02 , respectively.
Stock-based compensation expense in connection with all stock-based awards for the years ended December 31, 2016 , 2015 and 2014 is allocated as follows
(in thousands):
Operating expenses
Selling expenses
General and administrative expenses
Total stock-based compensation
Year
ended
December
31,
2016
2015
2014
$
$
68 $
71 $
(127)
3,927
578
2,472
3,868 $
3,121 $
63
185
1,688
1,936
Stock-based compensation expense presented in selling expenses was negative for the year ended December 31, 2016 due to a retrospective adjustment in the
grant-date fair value of a series of stock-based awards. Stock-based compensation expense included in general and administrative expenses for the year ended
December 31, 2016 included $2.2 million of compensation related to an equity repurchase by 313 from one of the Company's executives.
Capital
Contribution
In April 2016, Parent completed the first installment of an issuance and sale to certain investors of a series of preferred stock and contributed the net
proceeds from such issuance of $69.8 million to the Company as an equity contribution. In July 2016, Parent completed the final installment of the issuance and
sale to certain investors of such series of preferred stock and, in August 2016, contributed the net proceeds from such issuance of $30.6 million to the Company as
an equity contribution. Both issuances were private placements exempt from registration under the Securities Act.
NOTE
13
—COMMITMENTS
AND
CONTINGENCIES
Indemnification
—Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees with
respect to certain litigation matters and investigations that arise in connection with their service to the Company. These obligations arise under the terms of its
certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is
required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.
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Legal
—The Company is named from time to time as a party to lawsuits arising in the ordinary course of business related to its sales, marketing, the
provision of its services and equipment claims. Actions filed against the Company include commercial, intellectual property, customer, and labor and employment
related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and
hour and other laws. In general, litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to
predict, and the costs incurred in litigation can be substantial. The Company believes the amounts provided in its financial statements are adequate in light of the
probable and estimated liabilities. Factors that the Company considers 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 matter, the length of time the matter has been pending, the procedural posture of
the matter, how the Company intends to defend the matter, the likelihood of settling the matter and the anticipated range of a possible settlement. Because such
matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy
alleged liabilities from the matters described above will not exceed the amounts reflected in the Company’s financial statements or that the matters will not have a
material adverse effect on the Company’s results of operations, financial condition or cash flows.
The Company regularly reviews outstanding legal claims and actions to determine if reserves for expected negative outcomes of such claims and actions are
necessary. The Company had reserves for all such matters of approximately $2.6 million and $2.5 million as of December 31, 2016 and 2015 , respectively. In
conjunction with one of the settlements, the Company is obligated to pay certain future royalties, based on sales of future products.
Operating
Leases
—The Company leases office and warehouse space, certain equipment, towers, wireless spectrum, software and an aircraft under
operating leases with related and unrelated parties expiring in various years through 2028 . The leases require the Company to pay additional rent for increases in
operating expenses and real estate taxes and contain renewal options. The Company's operating lease arrangements and related terms consisted of the following (in
thousands):
Warehouse, office space and other
Wireless towers, spectrum and other
Total Rent Expense
Rent
Expense
Years
ended
December
31,
2016
2015
11,222 $
11,632
Lease
Term
1 - 15 years
4,732
3,509
1 - 10 years
15,954 $
15,141
$
$
Capital
Leases
—The Company also enters into certain capital leases with expiration dates through October 2020. On an ongoing basis, the Company enters
into vehicle lease agreements under a Fleet Lease Agreement. The lease agreements are typically 36 months leases for each vehicle and the average remaining life
for the fleet is 19 months as of December 31, 2016 . As of December 31, 2016 and 2015 , the capital lease obligation balance was $17.7 million and $18.8 million ,
respectively.
Spectrum
Licenses
—During the year ended December 31, 2016 , the Company entered into leasing agreements with a third party for designated radio
frequency spectrum in 40 mid-sized metropolitan markets. The initial lease term is for seven years, with an option to obtain title of the applicable spectrum licenses
at the end of the initial term for a nominal fee. While licenses are issued for only a fixed time, such licenses are subject to renewal by the Federal Communications
Commission (FCC). The Company intends to renew the licenses at the end of the initial term. License renewals within the industry have occurred routinely and at
nominal cost. Moreover, the Company has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the
useful life of the licenses. As a result, the Company treats these Spectrum licenses as an indefinite-lived intangible asset.
As of December 31, 2016 , future minimum lease payments were as follows (in thousands):
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2017
2018
2019
2020
2021
Thereafter
Amounts representing interest
Total lease payments
Operating
Capital
Total
$
17,452 $
10,513 $
15,322
14,998
13,521
13,086
47,634
—
6,117
2,049
17
—
—
(963)
27,965
21,439
17,047
13,538
13,086
47,634
(963)
$
122,013 $
17,733 $
139,746
Build-to-Suit
Lease
Arrangements
—In June 2016, the Company entered into a non-cancellable lease, whereby the Company will occupy a new
building being constructed in Logan, UT as a location to further sales recruitment and training, as well as research and development. Because of its involvement in
certain aspects of the construction per the terms of the lease, the Company is deemed the owner of the building for accounting purposes during the construction
period. Accordingly, as of December 31, 2016 , the Company recorded a build-to-suit lease asset of $5.0 million included in property and equipment, net, and a
corresponding $4.6 million build-to-suit lease liability included in other long-term obligations and building costs paid by the Company of $0.4 million .
Construction on the new building is expected to be completed during the first quarter of 2017.
In addition to the commitments mentioned above, the Company had other off-balance sheet obligations of $61.4 million as of December 31, 2016 that
consisted of commitments related to software licenses, marketing activities, and other goods and services.
NOTE
14
—RELATED
PARTY
TRANSACTIONS
Transactions with Vivint Solar
The Company and Vivint Solar, Inc. (“Solar”) have entered into agreements under which the Company subleased corporate office space through October
2014, and provides certain other ongoing administrative services to Solar. During the year ended December 31, 2016 , 2015 and 2014 the Company charged $4.6
million , $7.1 million and $8.5 million , respectively of general and administrative expenses to Solar in connection with these agreements. The balance due from
Solar in connection with these agreements and other expenses paid on Solar’s behalf was $0.2 million and $1.9 million at December 31, 2016 and December 31,
2015 , respectively, and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
On December 27, 2012, the Company executed a Subordinated Note and Loan Agreement with Solar. The terms of the agreement stated that Solar may
borrow up to $20.0 million , bearing interest on the outstanding balance at an annual rate of 7.5% , which interest was due and payable semi-annually on June 1
and December 1 of each year commencing on June 1, 2013 . On October 10, 2014, in connection with the completion of its initial public offering, Solar repaid
loans to APX, the Company’s wholly-owned subsidiary, and to the Company’s parent entity. The Company’s parent entity, in turn, returned a portion of such
proceeds to APX as a capital contribution. These transactions resulted in the receipt by APX of an aggregate amount of $55.0 million . These variable interests
represent the Company’s maximum exposure to loss from direct involvement with Solar.
Also in connection with Solar’s initial public offering, the Company entered into a number of agreements with Solar related to services and other support that
it has provided and will provide to Solar including:
•
•
•
•
A Master Intercompany Framework Agreement which establishes a framework for the ongoing relationship between the Company and Solar and
contains master terms regarding the protection of each other’s confidential information, and master procedural terms, such as notice procedures,
restrictions on assignment, interpretive provisions, governing law and dispute resolution;
A Non-Competition Agreement in which the Company and Solar each define their current areas of business and their competitors, and agree not to
directly or indirectly engage in the other’s business for three years;
A Transition Services Agreement pursuant to which the Company will provide to Solar various enterprise services, including services relating to
information technology and infrastructure, human resources and employee benefits, administration services and facilities-related services;
A Product Development and Supply Agreement pursuant to which one of Solar’s wholly owned subsidiaries will, for an initial term of three years,
subject to automatic renewal for successive one -year periods unless either party elects otherwise, collaborate with the Company to develop certain
monitoring and communications equipment that
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will be compatible with other equipment used in Solar’s energy systems and will replace equipment Solar currently procures from third parties;
•
•
A Marketing and Customer Relations Agreement which governs various cross-marketing initiatives between the Company and Solar, in particularly the
provision of sales leads from each company to the other; and
A Trademark License Agreement pursuant to which the licensor, a special purpose subsidiary majority-owned by the Company and minority-owned by
Solar, will grant Solar a royalty-free exclusive license to the trademark “VIVINT SOLAR” in the field of selling renewable energy or energy storage
products and services.
In November 2016, the Company amended the Marketing and Customer Relations Agreement with Solar to update certain terms and conditions governing
existing cross-marketing initiatives and to implement new cross-marketing initiatives including a three -month pilot program with the purpose of exploring
potential opportunities for each company to offer, sell and integrate the other company’s respective products and services with its standard product offering.
Other Related-party Transactions
On September 3, 2014, APX paid a dividend in the amount of $50.0 million to Holdings, its sole stockholder, which in turn paid a dividend in the amount of
$50.0 million to its stockholders.
The Company incurred additional expenses during the years ended December 31, 2016 , 2015 and 2014 of approximately $4.2 million , $2.5 million , $3.1
million , respectively, for other related-party transactions including contributions to the charitable organization Vivint Gives Back, legal fees, and other services.
Accrued expenses and other current liabilities at December 31, 2016 and 2015 included payables of $2.5 million and $1.7 million , respectively.
On November 16, 2012, the Company was acquired by an investor group comprised of certain investment funds affiliated with Blackstone Capital Partners
VI L.P., and certain co-investors and management investors through certain mergers and related reorganization transactions (collectively, the “Merger”). At the
time of the Merger, a portion of the purchase price was placed in escrow to cover potential adjustments to the total purchase consideration associated with certain
indemnities and adjustments to tangible net worth. In April 2015, the parties to the Merger reached an agreement regarding the amount to be paid from escrow. As
the Company had previously recorded expenses related to these pre-merger costs, this agreement resulted in a reduction to general and administrative expenses of
$12.2 million , with the offset to additional paid-in capital.
In connection with the Merger, the Company entered into a support and services agreement with Blackstone Management Partners L.L.C. (“BMP”), an
affiliate of Blackstone. Under the support and services agreement, the Company paid BMP, at the closing of the Merger, a transaction fee of approximately $20
million as consideration for BMP’s performance of due diligence investigations, financial and structural analysis, providing corporate strategy and other advice and
negotiation assistance in connection with the Merger. In addition, the Company engaged BMP to provide monitoring, advisory and consulting services on an
ongoing basis. In consideration for these services, the Company agreed to pay an annual monitoring fee equal to the greater of (i) a minimum base fee of $2.7
million subject to adjustments if the Company engages in a business combination or disposition that is deemed significant and (ii) the amount of the monitoring fee
paid in respect of the immediately preceding fiscal year, without regard to any post-fiscal year “true-up” adjustments as determined by the agreement. The
Company incurred expenses of approximately $3.7 million , $3.6 million and 3.2 million during the years ended December 31, 2016 , 2015 and 2014 , respectively,
in connection with this agreement.
Under the support and services agreement, the Company also engaged BMP to arrange for Blackstone’s portfolio operations group to provide support
services customarily provided by Blackstone’s portfolio operations group to Blackstone’s private equity portfolio companies of a type and amount determined by
such portfolio services group to be warranted and appropriate. BMP will invoice the Company for such services based on the time spent by the relevant personnel
providing such services during the applicable period but in no event shall the Company be obligated to pay more than $1.5 million during any calendar year.
During the years ended December 31, 2016 , 2015 and 2014 the Company incurred no costs associated with such services.
Blackstone Advisory Partners L.P. (“BAP”), an affiliate of Blackstone, participated as one of the initial purchasers of the 2020 notes in each of the May
2013, December 2013 and July 2014 offerings and received fees at the time of closing of such issuances aggregating approximately $0.6 million .
BAP participated as one of the initial purchasers of the 2022 notes in each of the May 2016 and August 2016 offerings and received fees at the time of
closing of such issuances aggregating approximately $0.5 million .
87
Table of Contents
On May 2, 2016, the Company and David Bywater, its former Chief Operating Officer, agreed that in connection with the appointment of Mr. Bywater as
interim Chief Executive Officer of Vivint Solar, Inc., Mr. Bywater would take a leave of absence from the Company. On December 15, 2016, the Board of
Directors (the “Board”) of the Company appointed Scott Hardy to serve as the Company’s Chief Operating Officer effective December 15, 2016. Mr. Hardy will
succeed David Bywater, who notified the Company on December 15, 2016 of his intent to resign as the Company’s Chief Operating Officer.
In April 2016, Parent completed the first installment of an issuance and sale to certain investors of a series of preferred stock and contributed the net
proceeds from such issuance of $69.8 million to the Company as an equity contribution. In July 2016, Parent completed the final installment of the issuance and
sale to certain investors of such series of preferred stock and, in August 2016, contributed the net proceeds from such issuance of $30.6 million to the Company as
an equity contribution. Both issuances were private placements exempt from registration under the Securities Act.
The company incurred stock-based compensation expense of $2.2 million included in general and administrative expenses for the year ended December 31,
2016 related to an equity repurchase by 313 from one of the Company's executives.
Long-term investments and other assets, includes amounts due for non-interest bearing advances made to employees that are expected to be repaid in excess
of one year . Amounts due from employees as of both December 31, 2016 and 2015 , amounted to approximately $0.3 million . As of December 31, 2016 and 2015
, this amount was fully reserved.
Prepaid expenses and other current assets at December 31, 2016 and 2015 included a receivable for $0.4 million and $0.2 million , respectively, from certain
members of management in regards to their personal use of the corporate jet.
From time to time, the Company does business with a number of other companies affiliated with Blackstone.
Transactions involving related parties cannot be presumed to be carried out at an arm’s-length basis.
88
Table of Contents
NOTE
15
—SEGMENT
REPORTING
AND
BUSINESS
CONCENTRATIONS
For the years ended December 31, 2016 and 2015 , the Company conducted business through one operating segment, Vivint. Historically, the Company
primarily operated in three geographic regions: United States, Canada and New Zealand. During the year ended December 31, 2016 , the Company completed the
2016 Contract Sales and ceased operations in New Zealand. Historically, the Company's operations in New Zealand were considered immaterial and reported in
conjunction with the United States. Revenues and long-lived assets by geographic region were as follows (in thousands):
As
of
and
for
the
Year
ended
December
31,
2016
Revenue from external customers
Property and equipment, net
Year
ended
December
31,
2015
Revenue from external customers
Property and equipment, net
Year
ended
December
31,
2014
Revenue from external customers
Property and equipment, net
United
States
Canada
Total
$
$
$
700,471 $
57,436 $
62,781
845
602,418 $
51,303 $
55,103
171
529,521 $
34,156 $
62,368
422
757,907
63,626
653,721
55,274
563,677
62,790
NOTE
16
—EMPLOYEE
BENEFIT
PLAN
The Company offers eligible employees the opportunity to defer a percentage of their earned income into company-sponsored 401(k) plans. No matching
contributions were made to the plans for the years ended December 31, 2016 and 2015 .
89
Table of Contents
NOTE
17
—GUARANTOR
AND
NON-GUARANTOR
SUPPLEMENTAL
FINANCIAL
INFORMATION
The 2019 notes, 2020 notes, 2022 private placement notes and the 2022 notes were issued by APX. The 2019 notes, 2020 notes, 2022 private placement
notes and the 2022 notes are fully and unconditionally guaranteed, jointly and severally by Holdings and each of APX’s existing and future material wholly-owned
U.S. restricted subsidiaries. APX’s existing and future foreign subsidiaries are not expected to guarantee the notes.
Presented below is the consolidating financial information of APX, subsidiaries of APX that are guarantors (the “Guarantor Subsidiaries”), and APX’s
subsidiaries that are not guarantors (the “Non-Guarantor Subsidiaries”) as of and for the years ended December 31, 2016 , 2015 and 2014 . The audited
consolidating financial information reflects the investments of APX in the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries using the equity method of
accounting.
90
Table of Contents
Assets
Condensed
Consolidating
Balance
Sheet
December
31,
2016
(In
thousands)
Parent
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Current assets
$
— $
25,136 $
143,954 $
3,730 $
(67,799) $
Property and equipment, net
Subscriber acquisition costs, net
Deferred financing costs, net
Investment in subsidiaries
Intercompany receivable
Intangible assets, net
Goodwill
$
$
Long-term investments and other assets
Total
Assets
Liabilities
and
Stockholders’
(Deficit)
Equity
Current liabilities
Intercompany payable
Notes payable and revolving line of
credit, net of current portion
Capital lease obligations, net of current
portion
Deferred revenue, net of current portion
Accumulated losses of investee
Other long-term obligations
Deferred income tax liability
Total (deficit) equity
Total
liabilities
and
stockholders’
(deficit)
equity
$
—
—
—
—
—
—
—
—
—
—
4,420
2,228,903
—
—
—
106
62,781
974,975
—
—
9,492
443,189
809,678
11,523
845
77,459
—
—
—
32,203
25,555
13
—
—
—
(2,228,903)
(9,492)
—
—
(106)
105,021
63,626
1,052,434
4,420
—
—
475,392
835,233
11,536
— $
2,258,565 $
2,455,592 $
139,805 $
(2,306,300) $
2,547,662
17,047 $
160,956 $
74,987 $
(67,799) $
185,191
— $
—
—
—
2,486,700
—
—
245,182
—
—
—
—
—
—
—
—
7,368
53,991
47,080
106
9,492
(9,492)
—
—
—
2,486,700
567
4,743
—
7,204
—
—
(245,182)
—
(106)
7,935
58,734
—
47,080
7,204
(245,182)
(245,182)
2,186,091
42,812
(1,983,721)
(245,182)
— $
2,258,565 $
2,455,592 $
139,805 $
(2,306,300) $
2,547,662
91
Table of Contents
Assets
Condensed
Consolidating
Balance
Sheet
December
31,
2015
(In
thousands)
Parent
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Current assets
$
— $
2,537 $
91,555 $
6,540 $
(53,066) $
Property and equipment, net
Subscriber acquisition costs, net
Deferred financing costs, net
Investment in subsidiaries
Intercompany receivable
Intangible assets, net
Goodwill
$
$
Long-term investments and other assets
Total
Assets
Liabilities
and
Stockholders’
(Deficit)
Equity
Current liabilities
Intercompany payable
Notes payable and revolving line of
credit, net of current portion
Capital lease obligations, net of current
portion
Deferred revenue, net of current portion
Accumulated losses of investee
Other long-term obligations
Deferred income tax liability
Total (deficit) equity
Total
liabilities
and
stockholders’
(deficit)
equity
$
—
—
—
—
—
—
—
—
—
—
6,456
2,070,404
—
—
—
106
55,012
728,547
—
—
22,398
519,301
809,678
10,880
262
62,097
—
—
—
39,094
24,738
13
—
—
—
(2,070,404)
(22,398)
—
—
(106)
47,566
55,274
790,644
6,456
—
—
558,395
834,416
10,893
— $
2,079,503 $
2,237,371 $
132,744 $
(2,145,974) $
2,303,644
18,384 $
143,896 $
59,304 $
(53,066) $
168,518
— $
—
—
—
2,138,112
—
—
76,993
—
—
—
—
—
—
—
—
—
11,169
40,960
—
10,530
106
22,398
(22,398)
—
—
—
2,138,112
2
3,822
—
—
7,524
—
—
(76,993)
—
(106)
11,171
44,782
—
10,530
7,524
(76,993)
(76,993)
2,030,710
39,694
(1,993,411)
(76,993)
— $
2,079,503 $
2,237,371 $
132,744 $
(2,145,974) $
2,303,644
92
Table of Contents
Condensed
Consolidating
Statements
of
Operations
and
Comprehensive
Loss
For
the
Year
ended
December
31,
2016
(In
thousands)
Revenues
Costs and expenses
(Loss) income from operations
Loss from subsidiaries
Other expense (income), net
Parent
$
— $
—
—
(275,957)
—
—
—
(69,637)
206,320
(Loss) income before income tax expenses
(275,957)
(275,957)
Income tax expense (benefit)
—
—
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
— $
715,072 $
45,539 $
787,138
(72,066)
—
(1,207)
(70,859)
545
44,575
964
—
(325)
1,289
(478)
(2,704) $
(2,704)
—
345,594
—
345,594
—
757,907
829,009
(71,102)
—
204,788
(275,890)
67
Net (loss) income
$
(275,957) $
(275,957) $
(71,404) $
1,767 $
345,594 $
(275,957)
Other comprehensive (loss) income, net of tax
effects:
Foreign currency translation adjustment
Unrealized gain on marketable securities
—
—
2,482
—
2,482
(2,482)
1,011
1,011
—
(1,011)
2,482
1,011
Comprehensive (loss) income
$
(275,957) $
(272,464)
$
(70,393) $
4,249 $
342,101 $
(272,464)
93
Table of Contents
Condensed
Consolidating
Statements
of
Operations
and
Comprehensive
Loss
For
the
Year
ended
December
31,
2015
(In
thousands)
Revenues
Costs and expenses
Loss from operations
Loss from subsidiaries
Other expense, net
Loss before income tax expenses
Income tax expense (benefit)
Net loss
Other comprehensive (loss) income, net of tax
effects:
Parent
$
— $
—
—
(279,107)
—
(279,107)
—
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
— $
622,507 $
34,022 $
—
—
(118,885)
160,222
(279,107)
—
730,322
(107,815)
—
9,763
(117,578)
392
34,882
(860)
—
96
(956)
(41)
(2,808) $
(2,808)
653,721
762,396
—
(108,675)
397,992
—
397,992
—
—
170,081
(278,756)
351
$
(279,107) $
(279,107) $
(117,970) $
(915) $
397,992 $
(279,107)
Foreign currency translation adjustment
—
(13,293)
2
(13,294)
13,292
(13,293)
Comprehensive loss
$
(279,107) $
(292,400) $
(117,968) $
(14,209) $
411,284 $
(292,400)
94
Table of Contents
Condensed
Consolidating
Statements
of
Operations
and
Comprehensive
Loss
For
the
Year
ended
December
31,
2014
(In
thousands)
Parent
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Revenues
Costs and expenses
(Loss) income from operations
(Loss) income from subsidiaries
Other expense (income), net
Loss from operations before income tax
expense
Income tax (benefit) expense
Net loss
Other comprehensive loss, net of tax effects:
Foreign currency translation adjustment
Comprehensive loss
$
$
$
— $
530,888 $
35,911 $
— $
—
—
(238,660)
—
—
—
(93,850)
145,917
623,124
(92,236)
—
(1,676)
(238,660)
(239,767)
(90,560)
—
(1,107)
779
37,544
(1,633)
—
36
(1,669)
842
(3,122) $
(3,122)
—
332,510
563,677
657,546
(93,869)
—
—
144,277
332,510
(238,146)
—
514
(238,660) $
(238,660) $
(91,339) $
(2,511) $
332,510 $
(238,660)
—
(11,333)
(6,895)
(4,438)
11,333
(11,333)
(238,660) $
(249,993) $
(98,234) $
(6,949) $
343,843 $
(249,993)
95
Table of Contents
Condensed
Consolidating
Statements
of
Cash
Flows
For
the
Year
ended
December
31,
2016
(In
thousands)
Cash flows from operating activities:
Net cash (used in) provided by
operating activities
$
Cash flows from investing activities:
Subscriber acquisition costs – company
owned equipment
Capital expenditures
Proceeds from sale of capital assets
Investment in subsidiary
Acquisition of intangible assets
Net cash (used in) provided by
investing activities
Cash flows from financing activities:
Proceeds from notes payable
Repayment on notes payable
Borrowings from revolving line of
credit
Repayment of revolving line of credit
Payment of intercompany settlement
Intercompany receivable
Intercompany payable
Repayments of capital lease obligations
Financing costs
Deferred financing costs
Net cash provided by (used in)
provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash:
Beginning of period
End of period
$
Parent
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
— $
— $
(380,508) $
14,802 $
— $
(365,706)
—
—
—
—
—
—
(100,407)
(408,214)
—
—
(5,243)
(11,642)
3,080
—
(1,385)
(100,407)
(408,214)
(15,190)
604,000
(235,535)
57,000
(77,000)
100,407
—
—
—
—
(9,036)
(9,241)
—
—
—
—
—
3,000
12,906
408,214
(8,295)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
100,407
430,595
415,825
—
—
22,381
20,127
2,299
(1,941)
24,680 $
18,186 $
2,201
654 $
96
—
—
43
—
—
43
—
—
—
—
—
(3,000)
—
(12,906)
(20)
—
—
(15,926)
(466)
(1,547)
—
—
—
508,621
—
(5,243)
(11,642)
3,123
—
(1,385)
508,621
(15,147)
—
—
—
— $
(100,407)
—
(12,906)
(395,308)
—
—
—
604,000
(235,535)
57,000
(77,000)
100,407
—
—
—
(8,315)
(9,036)
(9,241)
(508,621)
422,280
—
—
—
— $
(466)
40,961
2,559
43,520
Proceeds from capital contribution
100,407
Table of Contents
Cash flows from operating activities:
Net cash (used in) provided by
operating activities
Cash flows from investing activities:
Subscriber acquisition costs – company
owned equipment
Capital expenditures
Proceeds from sale of capital assets
Investment in subsidiary
Acquisition of intangible assets
Proceeds from insurance claims
Change in restricted cash
Investment in convertible note
Other assets
Net cash used in investing
activities
Cash flows from financing activities:
Proceeds from notes payable
Borrowings from revolving line of
credit
Repayment of revolving line of credit
Intercompany receivable
Intercompany payable
Repayments of capital lease obligations
Deferred financing costs
Net cash provided by (used in)
provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash:
Beginning of period
End of period
Condensed
Consolidating
Statements
of
Cash
Flows
For
the
Year
ended
December
31,
2015
(In
thousands)
Parent
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
(1,052) $
(267,327) $
13,072 $
— $
(255,307)
—
—
—
—
—
—
—
—
—
—
—
—
(296,895)
—
—
—
—
—
(23,641)
(26,941)
480
—
(1,363)
2,984
14,214
—
(208)
(1,099)
(41)
—
—
—
—
—
—
—
—
—
—
296,895
—
—
—
—
—
(24,740)
(26,982)
480
—
(1,363)
2,984
14,214
—
(208)
—
(296,895)
(34,475)
(1,140)
296,895
(35,615)
—
296,250
—
—
—
11,601
296,895
(6,402)
—
271,000
(271,000)
—
—
(5,436)
290,814
302,094
—
(7,133)
—
292
—
—
—
—
—
—
—
—
—
—
—
—
—
(11,601)
(12)
—
(11,613)
(1,726)
(1,407)
$
—
— $
9,432
2,299 $
(2,233)
(1,941) $
3,608
2,201 $
97
—
296,250
—
271,000
— $
(271,000)
(11,601)
(285,294)
—
—
—
—
(6,414)
(5,436)
(296,895)
284,400
—
—
—
— $
(1,726)
(8,248)
10,807
2,559
Table of Contents
Condensed
Consolidating
Statements
of
Cash
Flows
For
the
Year
ended
December
31,
2014
(In
thousands)
Net cash used in investing activities
(32,300)
(339,955)
(36,159)
(194)
372,324
Cash flows from operating activities:
Net cash provided by (used in)
operating activities
Cash flows from investing activities:
Subscriber acquisition costs – company
owned equipment
Capital expenditures
Proceeds from sale of capital assets
Investment in subsidiary
Acquisition of intangible assets
Net cash used in acquisitions
Investment in marketable securities
Proceeds from marketable securities
Proceeds from note receivable
Change in restricted cash
Investment in convertible note
Other assets
Cash flows from financing activities:
Proceeds from notes payable
Borrowings from revolving line of credit
Proceeds from capital contribution
Intercompany receivable
Intercompany payable
Proceeds from contract sales
Acquisition of contracts
Repayments of capital lease obligations
Deferred financing costs
Payment of dividends
Net cash (used in) provided by
financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash:
Beginning of period
End of period
$
Parent
APX
Group,
Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
50,000 $
(894) $
(318,734) $
9,991 $
(50,000) $
(309,637)
—
—
—
—
—
—
(32,300)
(340,024)
—
—
—
—
—
—
—
—
—
—
(60,000)
60,069
—
—
—
—
(10,580)
(30,315)
964
—
(9,649)
(18,500)
—
—
22,699
14,375
(3,000)
(2,153)
—
(185)
—
—
—
—
—
—
—
—
—
(9)
—
—
—
372,324
—
—
—
—
—
—
—
—
—
—
32,300
102,000
20,000
32,300
—
—
—
—
—
—
(50,000)
—
—
—
—
—
(2,927)
(50,000)
—
—
—
10,658
340,024
2,261
(2,277)
(6,297)
—
—
—
—
—
—
—
—
(32,300)
(10,658)
(10,658)
(329,366)
—
—
(3)
—
—
—
—
—
—
(17,700)
101,373
344,369
(10,661)
(322,324)
—
—
(239,476)
(10,524)
(234)
(1,098)
—
—
(10,580)
(30,500)
964
—
(9,649)
(18,500)
(60,000)
60,069
22,699
14,375
(3,000)
(2,162)
(36,284)
102,000
20,000
32,300
—
—
2,261
(2,277)
(6,300)
(2,927)
95,057
(234)
(251,098)
50,000
(50,000)
248,908
8,291
9,432 $
(2,233) $
4,706
3,608 $
—
— $
261,905
10,807
98
—
—
—
— $
Table of Contents
NOTE
18
—SUBSEQUENT
EVENTS
Vivint Flex Pay
On January 3, 2017, the Company announced the introduction of the Vivint Flex Pay plan. Under the Vivint Flex Pay plan, the Company (i) will launch a
Consumer Financing Program in the first quarter of 2017, pursuant to which it will offer to qualified customers in the United States an opportunity to finance the
purchase of Products used in connection with Vivint’s smart home and security services through a third party financing provider and (ii) has begun offeing retail
installment contracts (“RICs”) with respect to the purchase of Products to certain of the Company's customers who do not qualify to participate in the Consumer
Financing Program, but qualify under Vivint’s historical underwriting criteria. Vivint may also establish credit programs either directly or through an affiliate or
pursuant to an agreement with a third party to provide installment loans or similar products to customers that do not qualify to participate in the Consumer
Financing Program. Alternatively, customers may purchase the Products with cash or credit card.
Under the Vivint Flex Pay plan, customers pay separately for the Products and Vivint’s smart home and security services. Under the Consumer Financing
Program, qualified customers will be eligible for installment loans provided by a third party financing provider of up to $4,000 for either 42 or 60 months. In
connection with the Consumer Financing Program, a subsidiary of the Company entered into an agreement (the “CFP Agreement”) with Citizens Bank, N.A.
("Citizens") pursuant to which Citizens is the exclusive provider of installment loans under the Consumer Financing Program for Vivint’s customers who are
eligible for such loans. Pursuant to the CFP Agreement, Vivint pays a monthly fee to Citizens based on the average daily balance of the loans provided by Citizens
outstanding and Citizens and Vivint share liability for credit losses, with Vivint being responsible for approximately 5% to 100% of lost principal balances,
depending on factors specified in the CFP Agreement. The initial term of the CFP Agreement is five years, subject to automatic, one -year renewals unless
terminated by either party in accordance with its terms.
2022 Notes
On February 1, 2017, APX issued an additional $300.0 million aggregate principal amount of the 2022 notes at a price of 108.250% . The Company used the
net proceeds from the offering of these 2022 notes to to redeem $300.0 million aggregate principal amount of the existing 2019 notes and pay the related
redemption premium, and to pay all fees and expenses related thereto and will use any remaining proceeds for general corporate purposes.
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ITEM
9.
CHANGES
IN
AND
DISAGREEMENTS
WITH
ACCOUNTANTS
ON
ACCOUNTING
AND
FINANCIAL
DISCLOSURE
None.
ITEM
9A.
CONTROLS
AND
PROCEDURES
Disclosure
Controls
and
Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our
management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2016 , the end of the period covered by this report. Based upon that evaluation, our principal executive
officer and principal financial officer concluded that, as of the end of the period covered by this report, the design and operation of our disclosure controls and
procedures were effective at the reasonable assurance level.
Internal
Control
Over
Financial
Reporting
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Our internal control over financial
reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures
that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
Our internal control systems include the controls themselves, actions taken to correct deficiencies as identified, an organizational structure providing for
division of responsibilities, careful selection and training of qualified financial personnel and a program of internal audits.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 . In making this assessment,
management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) (2013 framework).
Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2016 .
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter ended December 31, 2016 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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In the first fiscal quarter of 2017, we implemented new enterprise resource planning ("ERP") software, primarily to manage financial accounting, inventory
and supply chain functions of our business. During the implementation of the ERP and throughout the remainder of the year we will evaluate and enhance our
Internal Controls Over Financial Reporting to ensure appropriate coverage of process and technical risks.
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ITEM
9B.
OTHER
INFORMATION
Iran
Threat
Reduction
and
Syria
Human
Rights
Act
of
2012
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, the Company
hereby incorporates by reference herein Exhibit 99.1 of this report, which includes disclosures publicly filed or provided to The Blackstone Group L.P. by
Travelport Worldwide Limited and NCR Corporation, which may be considered our affiliates.
PART
III
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ITEM
10.
DIRECTORS,
EXECUTIVE
OFFICERS
AND
CORPORATE
GOVERNANCE
The following table sets forth, as of March 2, 2016, certain information regarding our directors and executive officers who are responsible for overseeing the
management of our business.
Name
Todd R. Pedersen
Alex J. Dunn
Mark J. Davies
Joy Driscoll Durling
Matthew J. Eyring
Dale R. Gerard
Scott R. Hardy
JT Hwang
Patrick E. Kelliher
Shawn J. Lindquist
Jefferson H. Lyman
Todd M. Santiago
Jeremy B. Warren
Nathan B. Wilcox
David F. D’Alessandro
Paul S. Galant
Bruce McEvoy
Jay D. Pauley
Joseph S. Tibbetts, Jr.
Peter F. Wallace
Age
48
45
56
40
47
46
39
42
53
47
40
44
42
50
66
49
39
39
64
41
Position
Chief Executive Officer and Director
President and Director
Chief Financial Officer
Chief Information and Digital Enablement Officer
Chief Strategy and Innovation Officer
Senior Vice President of Finance and Treasurer
Chief Operating Officer
Chief Engineering Officer
Chief Accounting Officer
Chief Legal Officer
Chief Marketing Officer
Chief Revenue Officer
Chief Technology Officer
Chief Compliance Officer
Director
Director
Director
Director
Director
Director
Todd R. Pedersen founded the Company in 1999 and served as our President, Chief Executive Officer and Director. In February 2013, Mr. Pedersen
relinquished his title as our President and remained our Chief Executive Officer and Director. In 2011, Mr. Pedersen founded our sister company, Vivint Solar, and
served as its Chief Executive Officer from August 2011 through January 2013. Mr. Pedersen currently serves as a member of Vivint Solar’s board of directors, a
position he has held since November 2012. Mr. Pedersen was named the Ernst & Young Entrepreneur of the Year in 2010 in the services category for the Utah
Region. Mr. Pedersen attended Brigham Young University.
Alex J. Dunn was named our President in February 2013. Prior to this, he served as our Chief Operating Officer and Director from July 2005 through
January 2013. Prior to joining us, Mr. Dunn served as Deputy Chief of Staff and Chief Operating Officer to Governor Mitt Romney in Massachusetts. Before
joining Governor Romney’s staff, Mr. Dunn served as entrepreneur-in-residence at the venture capital firm General Catalyst. There, he helped start m-Qube, a
mobile media management company. Prior to that, he co-founded LavaStorm Technologies, an international telecommunications software company, where he
served as Chief Executive Officer. Mr. Dunn is also a founder of our sister company, Vivint Solar, where he served as the Interim Chief Executive Officer from
April 2013 through September 2013 and as the Chief Operating Officer from August 2011 through January 2013. Mr. Dunn currently serves on the board of
directors of Vivint Solar, a position he has held since November 2012. Mr. Dunn holds a B.S. in sociology from Brigham Young University.
Mark J. Davies has served as our Chief Financial Officer since November 2013. Prior to joining us, Mr. Davies served two years as Executive Vice
President of Alcoa, as President of the company’s Global Business Services unit and member of the Alcoa Executive Council. Prior to Alcoa, Mr. Davies worked
at Dell Inc. for 12 years, most recently as the Managing Vice President of Strategic Programs, reporting to Chairman, Michael Dell. Prior to that, Mr. Davies
served as Chief Financial Officer of the Global Consumer Group. Mr. Davies holds a B.S. in Accounting from Western Washington University and an MBA from
Arizona State University.
Joy Driscoll Durling has served as our Chief Information and Digital Enablement Officer since February 27, 2017. Prior to joining us, she served in various
positions at Adobe Systems Incorporated from January 2006 until February 2017, including Vice President, Adobe Cloud Platform Strategy and Operations from
July 2016 to February 2017, Senior Director, Adobe
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Cloud Platform Strategy and Operations from January 2015 to July 2016, and Senior Director, Office of CIO from October 2010 to January 2015, with roles that
included chief of staff to the Chief Information Officer of Adobe, with a focus on enterprise architecture, portfolio management, and mergers and acquisitions, as
well as running all aspects of a global, innovative enterprise IT organization. She also served as Director and Senior Manager, of Business Operations and
Program Management of Adobe. Prior to Adobe, she served in various roles at Macromedia and Andersen Business Consulting focused in the high tech and
software industry. Ms. Durling holds a B.S. degree in Business Administration from the University of North Carolina - Chapel Hill.
Matthew J. Eyring has served as our Chief Strategy and Innovation Officer since December 2012. Prior to joining us, Mr. Eyring was the Managing Partner
of Innosight, a global strategy and innovation consulting firm. Prior to Innosight, Mr. Eyring was Vice President and General Manager at LavaStorm Technologies.
Prior to that, Mr. Eyring was a Product Manager at Medtronic, Inc. Mr. Eyring holds a B.A. in economics from the University of Utah and an MBA from the
Harvard Business School.
Dale R. Gerard has served as our Senior Vice President of Finance and Treasurer since September 2014. Prior to this, he served as our Vice President of
Finance and Treasurer from January 2013 to September 2014. Prior to this, he served as our Treasurer from March 2010 to January 2013. Prior to joining us, Mr.
Gerard was the Assistant Treasurer and Director of Finance at ACL. Before joining ACL, Mr. Gerard served as Senior Treasury Analyst at Wabash National
Corporation. Prior to that, Mr. Gerard spent four years at Chemtura Corporation, formerly Great Lakes Chemical Corporation, as Finance Analyst in the Fine
Chemical and Fluorine business units. Mr. Gerard holds a B.S. in Accounting and an MBA from Purdue University.
Scott R. Hardy has served as our Chief Operating Officer since December 2016. Prior to this, he served as our Senior Vice President, Inside Sales from
February 2014 to December 2016. He joined Vivint as Vice President, Business Analytics in 2013. Prior to joining us, Mr. Hardy served as Principal at the Cicero
Group, LP, a consulting and market research firm, from 2011 to 2013, where he led the firm’s strategy consulting practice. Mr. Hardy also served in senior
consulting roles at McKinsey and Company from 2006 to 2009 and Monitor Group from 2000 to 2002, where he focused on growth strategy and sales and
marketing projects. From 2009 to 2011, Mr. Hardy held senior roles at Cisco, an information technology company, including Director of Cisco’s Telepresence
Cloud business unit and Director of Product Management, and starting in 2009 until their acquisition by Cisco in the same year, he led strategy and business
development for TANDBERG, a provider of video conferencing systems. Mr. Hardy holds a B.S. in economics from Brigham Young University and an MBA
from the Harvard Business School.
JT Hwang has served as our Chief Engineering Officer since February 27, 2017. Prior to this, he served as our Chief Information Officer from June 2010 to
January 2013 and from August 2014 to February 2017, and he served as our Chief Technology Officer from March 2008 to June 2010 and January 2013 to August
2014. He has over 16 years of experience in the computer science field. Prior to joining us, Mr. Hwang was Chief Architect at Netezza Corporation, a global
provider of data warehouse appliance solutions. He also served as Chief Architect of Hewlett-Packard’s Advanced Solutions Lab. Mr. Hwang holds a B.S. of
science and a Master of Engineering, Computer Science from the Massachusetts Institute of Technology.
Patrick E. Kelliher has served as our Chief Accounting Officer since February 2014. Prior to this, he served as our Vice President of Finance and Corporate
Controller from March 2012 to February 2014. Prior to joining us, Mr. Kelliher served as Senior Director of Finance and Business Unit Controller of Adobe from
November 2009 to March 2012. Prior to Adobe, Mr. Kelliher was the Vice President of Finance and Controller for Omniture, Inc. Before that he has served in
various senior finance roles at other high growth technology companies. Mr. Kelliher holds a B.S. in Accounting and Finance from Northern Illinois University
and an MBA from the University of Chicago Graduate School of Business.
Shawn J. Lindquist has served as our Chief Legal Officer since May 2016. From February 2014 to May 2016, Mr. Lindquist served as Chief Legal Officer,
Executive Vice President and Secretary of Vivint Solar, Inc. From February 2010 to February 2014, Mr. Lindquist served as Chief Legal Officer, Executive Vice
President and Secretary of Fusion-io, Inc. From 2005 to January 2010, Mr. Lindquist served as Chief Legal Officer, Senior Vice President and Secretary of
Omniture, Inc. Prior to Omniture, Mr. Lindquist was a corporate and securities attorney at Wilson Sonsini Goodrich & Rosati, P.C. Mr. Lindquist has also served
as in-house corporate and mergers and acquisitions counsel for Novell, Inc., and as Vice President and General Counsel of a privately held, venture-backed
company. Mr. Lindquist has also served as an adjunct professor of law at the J. Reuben Clark Law School at Brigham Young University. Mr. Lindquist holds a
B.S. in Business Management and J.D. from Brigham Young University.
Jefferson H. Lyman has served as our Chief Marketing Officer of the Company since February 2014. Prior to this, he served as our Vice President of
Consumer Experience from August 2013 to February 2014. Prior to joining us, Mr. Lyman served as Senior Director for Mobile & Web Design at NIKE+, Nike’s
activity tracking service from November 2010 to July
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2013. Mr. Lyman held other positions at NIKE, including leading digital and marketplace communication for NIKEiD (NIKE’s custom footwear experience) and
Nike Basketball. Mr. Lyman holds a B.S. in Nutritional Science from Brigham Young University and an MBA from the University of Oregon.
Todd M. Santiago has served as our Chief Revenue Officer since February 2013. Prior to joining us, Mr. Santiago was President of 2GIG from December
2008 to March 2013 where he coordinated the successful launch of Go!Control. Prior to joining 2GIG, Mr. Santiago was Partner and General Manager of
Signature Academies in Boise, ID and VP and General Manager at NCH Corporation in Irving, TX. Mr. Santiago is the brother-in-law of Mr. Pedersen. Mr.
Santiago holds a B.A. of English from Brigham Young University and an MBA from the Harvard Business School.
Jeremy B. Warren has served as our Chief Technology Officer since December 2014. Prior to this, he served as Vice President of Innovation from
November 2012 to December 2014. Prior to joining us, Mr. Warren was Chief Technology Officer at 2GIG Technologies where he was responsible for the
engineering and mass production of 2GIG’s product line. Prior to joining 2GIG, Mr. Warren was Chief Technology Officer of the U.S. Department of Justice and
Chief Architect of Lavastorm Technologies. Mr. Warren attended the Massachusetts Institute of Technology.
Nathan B. Wilcox has served as our Chief Compliance Officer since May 2016. From October 2007 to May 2016, Mr. Wilcox served as our General
Counsel and Secretary. Prior to joining us, Mr. Wilcox was a shareholder at Anderson & Karrenberg, P.C., and specialized in commercial and civil litigation. With
more than 22 years of experience, he has extensive experience in civil and commercial litigation. Mr. Wilcox is the past president of the Electronic Security
Association and a member of the Electronic Security Association’s Bylaws Committee. Mr. Wilcox holds a B.S. of Business Management from the University of
Utah and a J.D. from Creighton University.
David F. D’Alessandro has served as a Director of the Company since July 31, 2013. Since 2010, Mr. D’Alessandro has served as chairman of the board of
directors of SeaWorld Entertainment, Inc. Mr. D’Alessandro also serves on the boards of directors of several private companies as well as our publicly traded sister
company, Vivint Solar. He served as chairman, president and chief executive officer of John Hancock Financial Services, Inc. from 2000 to 2004, having served as
president and chief operating officer of the same entity from 1996 to 2000, and guided it through a merger with ManuLife Financial Corporation in 2004.
Mr. D’Alessandro served as president and chief operating officer of ManuLife in 2004. He is a former partner of the Boston Red Sox. A graduate of Syracuse
University, he holds honorary doctorates from three colleges and serves as vice chairman of Boston University.
Paul S. Galant has served as a Director of the Company since October 2, 2015. Mr. Galant has served as Chief Executive Officer of VeriFone Systems, Inc.,
and a member of VeriFone’s Board of Directors since 2013. Prior to joining Verifone, Mr. Galant served as the CEO of Citigroup Inc.’s Enterprise Payments
business since 2010. In this role, Mr. Galant oversaw the design, marketing and implementation of global business-to-consumer and consumer-to-business digital
payments solutions. From 2009, Mr. Galant served as CEO of Citi Cards, heading Citigroup’s North American and International Credit Cards business. From 2007
to 2009, Mr. Galant served as CEO of Citi Transaction Services, a division of Citi’s Institutional Clients Group. From 2002 to 2007, Mr. Galant was the Global
Head of the Cash Management business, one of the largest processors of payments globally. Mr. Galant joined Citigroup, a multinational financial services
corporation, in 2000. Prior to joining Citigroup, Mr. Galant held positions at Donaldson, Lufkin & Jenrette, Smith Barney, and Credit Suisse. Mr. Galant holds a
B.S. from Cornell University where he graduated a Phillip Merrill Scholar.
Bruce McEvoy has served as a Director of the Company since November 16, 2012. Mr. McEvoy is a Senior Managing Director at Blackstone in the Private
Equity Group. Before joining Blackstone in 2006, Mr. McEvoy worked at General Atlantic from 2002 to 2004, and was a consultant at McKinsey & Company
from 1999 to 2002. Mr. McEvoy currently serves on the board of directors of GCA Services Group, Inc., Performance Food Group Company, RGIS Inventory
Specialists, SeaWorld Entertainment, Inc., Catalent Inc. and our publicly traded sister company, Vivint Solar. Mr. McEvoy was formerly a director of DJO
Orthopedics and Vistar Corporation. Mr. McEvoy holds and A.B in History from Princeton University and an MBA from the Harvard Business School.
Jay D. Pauley has served as a Director of the Company since October 2, 2015. Mr. Pauley is a principal at Summit Partners, which he joined in 2010. Prior
to joining Summit Partners, Mr. Pauley was Vice President at GTCR, a private equity firm, and an associate at Apax Partners, a private equity and venture capital
firm. Before that, he worked for GE Capital. Mr. Pauley currently serves on the boards of directors of numerous private companies, including our publicly traded
sister company, Vivint Solar. Mr. Pauley holds a B.S. from the Ohio State University and an MBA from the Wharton School at the University of Pennsylvania.
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Joseph S. Tibbetts, Jr. has served as a Director of the Company since October 2, 2015. Mr. Tibbetts served as the senior vice president and chief financial
officer for Publicis.Sapient Corporation, a publicly traded global services company from February 2015 to September 2015. Prior to that Mr. Tibbetts served as
senior vice president and global chief financial officer for Sapient Corporation from October 2006 to February 2015. He began serving as Sapient Corporation’s
treasurer in December 2012 and was reappointed as Sapient Corporation’s chief accounting officer in June 2013, a role he previously held from 2009 to 2012. In
addition to being Sapient Corporation’s chief financial officer, Mr. Tibbetts also served as Sapient Corporation’s managing director-SapientNitro Asia Pacific, for
a period of approximately 18 months ending in 2012. Prior to joining Sapient Corporation, Mr. Tibbetts was the chief financial officer of Novell, Inc. from
February 2003 to June 2006 and, prior to that, he held a variety of senior financial management positions at Charles River Ventures, Lightbridge, Inc., and
SeaChange International, Inc. Mr. Tibbetts was also formerly a partner with Price Waterhouse LLP. Mr. Tibbetts holds a B.S. in business administration from the
University of New Hampshire. Mr. Tibbetts currently serves on the board of directors of our publicly traded sister company, Vivint Solar.
Peter F. Wallace has served as a Director of the Company since November 16, 2012. Mr. Wallace is a Senior Managing Director at Blackstone in the Private
Equity Group, which he joined in 1997. Mr. Wallace serves on the board of directors of our publicly traded sister company, Vivint Solar (Chair,) as well as
Michaels Stores, Inc., Outerstuff, SeaWorld Entertainment, Service King, Tradesmen International and The Weather Channel Companies. Mr. Wallace was
formerly a director of AlliedBarton Security Services, Crestwood Midstream partners LP, GCA Services, New Skies Satellites Holdings Ltd. and Pelmorex Media,
Inc. Mr. Wallace received a B.A. in government from Harvard College.
Corporate
Governance
Matters
Background and Experience of Directors
When considering whether directors have the experiences, qualifications, attributes or skills, taken as a whole, to enable the Board to satisfy its oversight
responsibilities effectively in light of our business and structure, the Board focused on, among other things, each person’s background and experience as reflected
in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience
and skills relevant to the size and nature of our business. The members of the Board considered, among other things, the following important characteristics which
make each director a valuable member of the Board:
• Mr. Pedersen’s extensive knowledge of our industry and significant experience, as well as his insights as the original founder of our firm. Mr. Pedersen
has played a critical role in our firm’s successful growth since its founding and has developed a unique and unparalleled understanding of our business.
• Mr. Dunn’s extensive knowledge of our industry and significant leadership experience.
• Mr. D’Alessandro’s extensive business and leadership experience, including as Chairman, President and Chief Executive Officer of John Hancock
Financial Services, as well as his familiarity with board responsibilities, oversight and control resulting from serving on the boards of directors of
public companies.
• Mr. McEvoy’s extensive knowledge of a variety of different industries and his significant financial and investment experience from his involvement in
Blackstone.
• Mr. Wallace’s significant financial expertise and business experience, including as a Senior Managing Director in the Private Equity Group at
Blackstone, as well as his familiarity with board responsibilities, oversight and control resulting from serving on the boards of directors of public
companies.
• Mr. Galant’s significant business and leadership experience, including as the Chief Executive Officer of Citigroup’s Enterprise Payments business, as
well as his familiarity with board responsibilities, oversight and control resulting from serving on the board of directors of VeriFone Systems.
• Mr. Pauley’s significant financial expertise and business experience, including as a principal at Summit Partners, as well as his familiarity with board
responsibilities, oversight and control resulting from serving on the boards of directors of public companies.
• Mr. Tibbetts’ significant financial expertise and business experience, including as Senior Vice President and Chief Financial Officer of Sapient
Corporation and 20 years at Price Waterhouse LLP (now PricewaterhouseCoopers LLP) including his experience as an Audit Partner and National
Director of the firm’s Software Services Group, as well as his familiarity with board responsibilities, oversight and control resulting from serving on the
boards of directors of public companies.
Independence of Directors
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We are not a listed issuer whose securities are listed on a national securities exchange or in an inter-dealer quotation system which has requirements that a
majority of the board of directors be independent. However, if we were a listed issuer whose securities were traded on the New York Stock Exchange and subject
to such requirements, we would be entitled to rely on the controlled company exception contained in Section 303A of the NYSE Listed Company Manual from the
requirements that a majority of our Board of Directors consist of independent directors, that our Board of Directors have a compensation committee that is
comprised entirely of independent directors and that our Board of Directors have a Nominating Committee that is comprised entirely of independent directors.
Pursuant to Section 303A of the NYSE Listed Company Manual, a company of which more than 50% of the voting power is held by an individual, a group of
another company is exempt from the requirements that its board of directors consist of a majority of independent directors. At December 31, 2015, Blackstone
beneficially owns greater than 50% of the voting power of the Company which would qualify the Company as a controlled company eligible for exemption under
the rule.
Committees of the Board
Our Board of Directors has an Audit Committee and a Compensation Committee. Our Board of Directors may also establish from time to time any other
committees that it deems necessary and advisable.
Audit Committee
Our Audit Committee consists of Messrs. McEvoy, Tibbetts and Wallace. The Audit Committee is responsible for assisting our Board of Directors with its
oversight responsibilities regarding: (i) the integrity of our financial statements; (ii) our compliance with legal and regulatory requirements; (iii) our independent
registered public accounting firm’s qualifications and independence; and (iv) the performance of our internal audit function and independent registered public
accounting firm. While our Board of Directors has not designated any of its members as an audit committee financial expert, we believe that each of the current
Audit Committee members is fully qualified to address any accounting, financial reporting or audit issues that may come before it.
Compensation Committee
Our Compensation Committee consists of Messrs. D’Alessandro, McEvoy and Wallace. The Compensation Committee is responsible for determining,
reviewing, approving and overseeing our executive compensation program.
Code of Ethics
We are not required to adopt a code of ethics because our securities are not listed on a national securities exchange and we do not have a code of ethics that
applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Although
we do not have a code of ethics, our other compliance procedures are sufficient to ensure that we carry out our responsibilities in accordance with applicable laws
and regulations.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was at any time during fiscal year 2016 , or at any other time, one of our officers or employees. We are parties
to certain transactions with our Sponsor described in “Certain Relationships and Related Transactions, and Director Independence.” None of our executive officers
has served as a director or member of a compensation committee (or other committee serving an equivalent function) of any entity, one of whose executive officers
served as a director of our Board or member of our Compensation Committee.
ITEM
11.
EXECUTIVE
COMPENSATION
Compensation
Committee
Report
The Compensation Committee has reviewed and discussed with management the following Compensation Discussion and Analysis. Based on such review
and discussions, the Compensation Committee approved the inclusion of the following Compensation Discussion and Analysis in this annual report on Form 10-K
for the fiscal year ended December 31, 2016 .
Submitted
by
the
Compensation
Committee:
David F. D’Alessandro, Chair
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Bruce McEvoy
Peter F. Wallace
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Introduction
Compensation
Discussion
and
Analysis
Our executive compensation plan is designed to attract and retain individuals with the qualifications to manage and lead the Company as well as to
motivate them to develop professionally and contribute to the achievement of our financial goals and ultimately create and grow our overall enterprise value.
Our named executive officers, or NEOs, for 2016 were:
•
Todd R. Pedersen, our Chief Executive Officer;
• Mark J. Davies, our Chief Financial Officer;
•
Alex J. Dunn, our President;
• Matthew J. Eyring, our Chief Strategy and Innovation Officer; and
•
Todd M. Santiago, our Chief Revenue Officer.
Executive
Compensation
Objectives
and
Philosophy
Our primary executive compensation objectives are to:
•
•
•
attract, retain and motivate senior management leaders who are capable of advancing our mission and strategy and ultimately, creating and maintaining our
long-term equity value. Such leaders must engage in a collaborative approach and possess the ability to execute our business strategy in an industry
characterized by competitiveness and growth;
reward senior management in a manner aligned with our financial performance; and
align senior management’s interests with our equity owners’ long-term interests through equity participation and ownership.
To achieve our objectives, we deliver executive compensation through a combination of the following components:
•
•
•
•
•
•
Base salary;
Cash bonus opportunities;
Long-term incentive compensation;
Broad-based employee benefits;
Supplemental executive perquisites; and
Severance benefits.
Base salaries, broad-based employee benefits, supplemental executive perquisites and severance benefits are designed to attract and retain senior
management talent. We also use annual cash bonuses and long-term equity awards to promote performance-based pay that aligns the interests of our named
executive officers with the long-term interests of our equity-owners and to enhance executive retention.
Compensation
Determination
Process
The compensation committee of our Board of Directors (the “Committee”) is responsible for making all executive compensation determinations.
Messrs. Pedersen and Dunn generally participate in discussions and deliberations with our Committee regarding the determinations of annual cash
incentive awards for our executive officers. Specifically, they make recommendations to our Committee regarding the performance targets to be used under our
annual bonus plan and the amounts of annual cash incentive awards. Messrs. Pedersen and Dunn do not participate in discussions or determinations regarding their
individual compensation.
Role
of
Compensation
Consultant
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In 2016, the Committee retained Frederic W. Cook & Co., Inc. (“FW Cook”) as its compensation consultant. FW Cook reports directly to the
Committee. The Committee may replace FW Cook or hire additional consultants at any time. During 2016, FW Cook provided the following key services for the
Committee:
•
•
recommendations to the Committee on selection of companies for inclusion in our Compensation Peer Group (as disclosed below); and
a competitive evaluation of total compensation for the CEO and his direct reports (including the other NEOs) versus our Compensation Peer
Group and other survey data.
Use
of
Competitive
Data
The Committee does not target a specific market percentile when making executive compensation decisions; however, it believes that information
regarding compensation practices at similar companies is a useful tool to help maintain practices that accomplish our executive compensation objectives. In 2016,
as noted above, the Committee engaged FW Cook to assist and make recommendations regarding the selection of companies to be included in the Compensation
Peer Group. The constituents of the Compensation Peer Group represent companies operating in broadly similar or related industries that fall within a reasonable
range with us in certain metrics, including revenue, EBITDA and total enterprise value. The companies included in the Compensation Peer Group are listed below:
ADT Corporation
Akamai Technologies
Fitbit Inc.
Garmin Ltd.
InterDigital, Inc.
Rollins, Inc.
Harman International Industries
J2 Global Inc.
Servicemaster Global Holdings
IMAX Corporation
Nu Skin Enterprises
Waste Connections Inc.
2016
Compensation
Peer
Group
In 2016, ADT Corporation was acquired by an affiliate of Apollo Global Management and therefore it will be removed from future iterations of the
Compensation Peer Group. The Committee intends to periodically review the Compensation Peer Group to ensure that it remains an appropriate comparator frame
for evaluating our executive compensation practices. In addition to the Compensation Peer Group data, the Committee reviewed proprietary technology company
survey data, size-adjusted to our revenue. The identity of individual companies comprising the survey data is not available to or considered by the Committee or
management in its evaluation process.
The Committee uses the information from both the Compensation Peer Group and the survey data as one factor to determine whether our
compensation levels are competitive, and to make any necessary adjustments to reflect executive performance and our performance. As a part of this process, FW
Cook measured our target pay levels for the NEOs versus the competitive data within each compensation component and in the aggregate. In order to evaluate the
retentive and alignment power of their existing ownership stakes, FW Cook also prepared an analysis of the carried interest levels of our NEOs versus executives
serving in similar positions at the Compensation Peer Group.
Employment
Agreements
On August 7, 2014, Messrs. Pedersen and Dunn entered into employment agreements with us. These employment agreements contained the same
material terms as, and superseded, those they had entered into previously with our indirect parent, 313 Acquisition LLC (“Parent”). On March 8, 2016, Messrs.
Davies, Eyring and Santiago entered into employment agreements with us. A full description of the material terms of each of these employment agreements is
discussed below under “Narrative Disclosure to Summary Compensation Table and 2016 Grants of Plan-Based Awards.”
Compensation
Elements
The following is a discussion and analysis of each component of our executive compensation program:
Base Salary
Annual base salaries compensate our executive officers for fulfilling the requirements of their respective positions and provide them with a predictable
and stable level of cash income relative to their total compensation.
Our Committee believes that the level of an executive officer’s base salary should reflect such executive’s performance, experience and breadth of
responsibilities, salaries for similar positions within our industry and any other factors
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relevant to that particular job. The Committee, with the assistance of our Human Resources Department, also used the experience, market knowledge and insight of
its members in evaluating the competitiveness of current salary levels.
In the sole discretion of our Committee, base salaries for our executive officers may be periodically adjusted to take into account changes in job
responsibilities or competitive pressures.
In consideration of the above-mentioned factors and with reference to the competitive data provided by FW Cook, the Committee made the following
base salary adjustments for the named executive officers, effective as of July 25, 2016:
Name
Todd R. Pedersen
Mark J. Davies
Alex J. Dunn
Matthew J. Eyring
Todd M. Santiago
Base
Salary
prior
to
July
25,
2016
($)
Base
Salary
Effective
as
of
July
25,
2016
($)
525,000
515,000
525,000
515,000
530,450
660,000
600,000
660,000
600,000
600,000
The “Summary Compensation Table” and corresponding footnotes to the table show the base salary earned by each named executive officer during
fiscal 2016 as well as the base salary adjustments for each of our named executive officers made during fiscal 2016 .
Bonuses
Cash bonus opportunities are available to various managers, directors and executives, including our named executive officers, in order to motivate
their achievement of short-term performance goals and tie a portion of their cash compensation to performance.
Fiscal 2016 Management Bonus - Messrs. Pedersen and Dunn
In fiscal 2016 , Messrs. Pedersen and Dunn participated in a formalized annual cash incentive compensation plan pursuant to which they are eligible to
receive an annual cash incentive award based on the achievement of company-wide performance objectives. As provided in their respective employment
agreements, the target bonus amounts for each of Messrs. Pedersen and Dunn are 100% of their respective base salaries.
The actual bonus amounts to be paid to Messrs. Pedersen and Dunn for fiscal 2016 performance are calculated by multiplying each named executive
officer’s bonus potential target (which is equal to 100% of his base salary at the end of the performance period) by an achievement factor based on our actual
achievement relative to company-wide performance objectives.
The achievement factor was determined by calculating our actual achievement against the company-wide performance targets based on the pre-
established scale set forth in the following table:
%
Attainment
of
Performance
Target
Less than 90%
90%
100%
110%
130% or greater
Achievement
Factor
0
50%
100%
200%
250%
Based on the pre-established scale set forth above, no cash incentive award would be paid to Messrs. Pedersen and Dunn unless our actual
performance for 2016 was at or above 90% of the performance target(s). If our actual performance was 100% of target, then Messrs. Pedersen and Dunn would be
entitled to their respective bonus potential target amounts. If performance was 110% of target, then they would be eligible for a cash incentive award equal to
200% of their respective bonus potential target amounts. If performance was 130% or more of target, then they would be eligible for a maximum cash
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incentive equal to 250% of their respective bonus potential target amounts. For performance percentages between these levels, the resulting achievement factor
would be adjusted on a linear basis. The performance target for 2016 for Messrs. Pedersen and Dunn was Adjusted EBITDA (as that term is defined elsewhere in
this annual report on Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources—Covenant Compliance”) of $444,000,000 for the Company.
For fiscal 2016 , the Company's actual Adjusted EBITDA achieved was $444,098,000 , or 100% of target, which results in an achievement factor of
100% of their respective base salaries under the annual cash incentive plan. The following table illustrates the calculation of the annual cash incentive awards
payable to each of Messrs. Pedersen and Dunn in light of these performance results.
Name
Todd R. Pedersen
Alex J. Dunn
Salary
(1)
($)
660,000
660,000
Target
Bonus
%
100%
100%
Target
Bonus
Amount
($)
660,000
660,000
Achievement
Factor
100%
100%
Bonus
Earned
($)
660,000
660,000
(1) The annual base salaries of Messrs. Pedersen and Dunn were increased from $525,000 to $660,000, effective as of July 25, 2016.
Fiscal 2016 Management Bonus – Messrs. Davies, Eyring and Santiago
For fiscal 2016 , Messrs. Davies, Eyring and Santiago are eligible to receive a discretionary bonus based on a percentage of such executive’s base
salary. In recognition of their contributions to our company, the Compensation Committee approved an increase to the bonus potential target for each of these
executives, from 50% to 60% of the executive’s annual base salary, for fiscal 2016 . As a result, each of Messrs. Davies, Eyring and Santiago are eligible to receive
a target bonus opportunity of 60% of their respective base salaries. The following table sets forth the bonus awards payable to Messrs. Davies, Eyring and
Santiago, respectively, which were based on Mr. Davies’ contribution to financial management and operational improvement, Mr. Eyring’s contribution to our
product innovation and strategy, and Mr. Santiago’s contribution to the success of our 2016 selling efforts:
Named
Executive
Officer
Mark J. Davies
Matthew J. Eyring
Todd M. Santiago
Salary
(1)
($)
600,000
600,000
600,000
Target
Bonus
%
(2)
Target
Bonus
Amount
($)
Bonus
Amount
Payable
($)
60%
60%
60%
360,000
360,000
360,000
360,000
360,000
360,000
(1) Effective July 25, 2016, the base salaries of Messrs. Davies, Eyring and Santiago were increased as follows: for Messrs. Davies and Eyring, from $515,000
to $600,000; and for Mr. Santiago, from $530,450 to $600,000.
(2) The bonus potential target for each of Messrs. Davies, Eyring and Santiago was increased from 50% to 60% for fiscal 2016.
Sign-On Bonuses
From time to time, the Committee may award sign-on bonuses in connection with the commencement of an NEO’s employment with us. Sign-on
bonuses are used only when necessary to attract highly skilled individuals to the Company. Generally they are used to incentivize candidates to leave their current
employers, or may be used to offset the loss of unvested compensation they may forfeit as a result of leaving their current employers.
Long-Term Incentive Compensation
Equity Awards
313 Acquisition LLC (“Parent”), an entity controlled by investment funds or vehicles affiliated with Blackstone, grants long-term equity incentive
awards designed to promote our interest by providing these executives with the opportunity to
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acquire equity interests as an incentive for their remaining in our service and aligning the executives’ interests with those of the Company’s ultimate equity
holders. The long-term equity incentive awards are in the form of Class B Units in Parent.
The Class B Units are profits interests having economic characteristics similar to stock appreciation rights and represent the right to share in any
increase in the equity value of Parent. Therefore, the Class B Units only have value to the extent there is an appreciation in the value of our business from and after
the applicable date of grant. In addition, the vesting of two-thirds of the Class B Units is subject to Blackstone achieving minimum internal rates of return on its
investment in Class A Units, as described further below.
The Class B Units granted to our named executive officers are designed to motivate them to focus on efforts that will increase the value of our equity
while enhancing their retention. The specific sizes of the equity grants made are determined in light of Blackstone’s practices with respect to management equity
programs at other private companies in its portfolio and the executive officer’s position and level of responsibility with us.
In 2016, in order to recognize their contributions to our company to date and to enhance the alignment of their interests with that of the equity owners,
Messrs. Davies, Eyring and Santiago were granted 400,000 Class B Units, 850,000 Class B Units and 850,000 Class B Units, respectively.
The Class B Units are divided into a time-vesting portion (one-third of the Class B Units granted), a 2.0x exit-vesting portion (one-third of the Class B
Units granted), and a 3.0x exit-vesting portion (one-third of the Class B Units granted). Unvested Class B units are not entitled to distributions from the Company.
For additional information regarding our Class B Units, see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards—Equity
Awards.”
The initial award of Class B Units granted to Mr. Davies in connection with the commencement of his employment in 2013 contain the following
different economic terms: Mr. Davies’s Class B Units will not entitle him to receive any distributions in respect of such units unless and until the cumulative value
of such foregone distributions attributable to each Class B Unit equals the fair market value of a Class B Unit on the date of the grant of such Class B Unit (such
foregone amount, the “Delayed Amount Per Class B Unit”). At that point, Mr. Davies (together with the other holders of Class B Units subject to similar foregone
distributions) will become entitled to receive pro rata distributions of all subsequent amounts (to the exclusion of other holders who do not have similar rights) until
he has received distributions per Class B Unit equal to the Delayed Amount Per Class B Unit. Thereafter, Mr. Davies will become entitled to receive the same
amounts with respect to his Class B Units as other holders of Class B Units receive with respect to their Class B Units.
Another key component of our long-term equity incentive program is that at the time of the Transactions certain of our NEOs and other eligible
employees were provided with the opportunity to invest in Class A Units of Parent on the same general terms as Blackstone and other co-investors. The Class A
Units are equity interests, have economic characteristics that are similar to those of shares of common stock in a corporation and have no vesting schedule. We
consider this investment opportunity an important part of our long-term equity incentive program because it encourages equity ownership and aligns the NEOs’
financial interests with those of our ultimate equity holders. Each of Messrs. Pedersen, Dunn and Santiago, when presented with the opportunity, chose to invest in
Class A Units of Parent. In 2016, Parent repurchased 3,720,019 Class A Units from Mr. Dunn.
Benefits and Perquisites
We provide to all of our employees, including our named executive officers, employee benefits that are intended to attract and retain employees while
providing them with retirement and health and welfare security. Broad-based employee benefits include:
•
•
a 401(k) savings plan;
paid vacation, sick leave and holidays;
• medical, dental, vision and life insurance coverage; and
•
employee assistance program benefits.
We do not match employee contributions to the 401(k) savings plan. At no cost to the employee, we provide an amount of basic life insurance valued
at $50,000.
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We also provide our named executive officers with specified perquisites and personal benefits that are not generally available to all employees, such as
personal use of our Company leased aircraft, use of a company vehicle, financial advisory services, reimbursement for health insurance premiums, enhanced
employee cafeteria benefits, country club memberships, excess liability insurance premiums, alarm system fees, event tickets, fuel expenses, relocation assistance
and, in certain circumstances, reimbursement for personal travel. Each of Messrs. Pedersen and Dunn has also been provided with an annual fringe benefit
allowance of $300,000 under the terms of their employment agreements. We also reimburse our named executive officers for taxes incurred in connection with
certain of these perquisites. In addition, on January 1, 2013, we entered into time-sharing agreements with Messrs. Pedersen and Dunn, governing their personal
use of the Company leased aircraft. Messrs. Pedersen and Dunn pay for personal flights an amount equal to the aggregate variable cost to the Company for such
flights, up to the maximum authorized by Federal Aviation Regulations. The aggregate variable cost for this purpose includes fuel costs, out-of-town hangar costs,
landing fees, airport taxes and fees, customs fees, travel expenses of the crew, any “deadhead” segments of flights to reposition corporate aircraft and other related
rental fees. In addition, family members of our named executive officers have, in limited circumstances, accompanied the named executive officers on business
travel on the Company leased aircraft for which we incurred de minimis incremental costs.
We provide these perquisites and personal benefits in order to further our goal of attracting and retaining our executive officers. These benefits and
perquisites are reflected in the “All Other Compensation” column of the “Summary Compensation Table” and the accompanying footnote in accordance with the
SEC rules.
Severance Arrangements
Our Board of Directors believes that providing severance benefits to our named executive officers is critical to our long-term success, because
severance benefits act as a retention device that helps secure an executive’s continued employment and dedication to the Company. Each of our named executive
officers have severance arrangements, which are included in their employment agreements. Messrs. Pedersen and Dunn are eligible to receive severance benefits if
their employment is terminated for any reason other than voluntary resignation or willful misconduct. The severance payments to our named executive officers are
contingent upon the affected executive’s execution of a release and waiver of claims, which contains non-compete, non-solicitation and confidentiality provisions.
See “Potential Payments Upon Termination or Change in Control” for descriptions of these arrangements.
Messrs. Davies, Eyring and Santiago are eligible to receive severance benefits if their employment is terminated by us without “cause” (as defined
below under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards—Employment Agreements”) and other than by reason of
death or while he is disabled. See “Potential Payments Upon Termination or Change in Control” for descriptions of these arrangements.”
Summary
Compensation
Table
The following table provides summary information concerning compensation paid or accrued by us to or on behalf of our named executive officers.
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Table of Contents
Name
and
Principal
Position
Todd R. Pedersen,
Chief Executive Officer and
Director
Mark J. Davies,
Chief Financial Officer
Alex J. Dunn,
President and Director
Matthew J. Eyring,
Chief Strategy and Innovation
Officer
Todd M. Santiago,
Chief Sales Officer
Year
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
Salary
($)
(1)
582,115
525,000
500,000
Bonus
($)
(2)
Stock
Awards
($)
(3)
—
—
—
—
—
—
550,962
360,000
511,250
755,625
6,667
—
500,000
734,500
398,856
582,115
—
518,750
511,784
500,000
276,342
—
—
—
550,962
360,000
14,167
534,808
257,500
515,000
241,535
—
—
559,875
360,000
14,167
526,588
263,294
515,000
241,535
—
—
Non-Equity
Incentive
Plan
Compensation
($)
(4)
660,000
Declined
Non-Equity
Incentive
Plan
Compensation
($)
(5)
—
All
Other
Compensation
($)
(6)
869,823
Total
($)
2,111,938
525,000
—
687,561
1,737,561
332,262
(282,262)
776,538
1,326,538
—
—
—
660,000
518,750
—
—
—
—
—
89,992
1,007,621
311,534
1,578,409
47,584
1,680,940
2,926,862
4,168,977
680,060
2,229,344
332,262
(282,262)
742,772
1,569,114
—
—
—
—
—
—
—
63,736
988,865
—
—
—
—
—
86,836
53,576
879,144
810,111
142,412
1,076,454
127,432
89,442
917,314
845,977
(1) Effective July 25, 2016, the base salaries of Messrs. Pedersen, Davies, Dunn, Eyring and Santiago were increased as follows: for Messrs. Pedersen and
Dunn, from $525,000 to $660,000; for Messrs. Davies and Eyring, from $515,000 to $600,000; and for Mr. Santiago, from $530,450 to $600,000.
(2) The amounts reported in this column for Messrs. Davies, Eyring and Santiago for 2016 represent their annual discretionary bonuses earned with respect to
fiscal 2016.
(3) Amounts included in this column for Messrs. Davies, Eyring and Santiago reflect the aggregate grant date fair value of the Class B Units granted during
each of the years presented calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718,
Compensation-Stock Compensation (“FASB ASC Topic 718”) and using the assumptions in Note 12 - Stock Based Compensation and Equity to the
Consolidated Financial Statements in Part II, Item 8 of this report. Achievement of the performance conditions for the exit-vesting portions of the Class B
Units was not deemed probable on the date of grant, and, accordingly, pursuant to the SEC’s disclosure rules, no value is included in this table for those
portions of the awards. The fair value at the grant date of the Class B Units granted to Mr. Davies in fiscal 2016 assuming achievement of the performance
conditions was $17,333. The fair value at the grant date of the Class B Units granted to Mr. Davies in fiscal 2014 assuming achievement of the performance
conditions was $975,522. The fair value at the grant date of the Class B Units granted to Messrs. Eyring and Santiago in fiscal 2016 assuming achievement
of the performance conditions was $36,833. The terms of these units are summarized under “Compensation Discussion and Analysis-Compensation
Elements-Long-Term Incentive Compensation” above and under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
Awards Table-Equity Awards” and “Potential Payments Upon Termination or Change in Control” below.
(4) Amounts reported in this column for Messrs. Pedersen and Dunn reflect amounts earned under the annual cash incentive plan. See “Compensation
Discussion and Analysis-Compensation Elements-Bonuses.”
(5) Messrs. Pedersen and Dunn voluntarily declined an amount of $282,262 related to their fiscal 2014 annual cash incentive awards. See “Compensation
Discussion and Analysis—Compensation Elements—Bonuses.”
(6) Amounts reported under All Other Compensation for fiscal 2016 reflect the following:
(a)
as to Mr. Pedersen, $300,000 additional cash compensation paid to Mr. Pedersen pursuant to his employment agreement (see “Narrative Disclosure
to Summary Compensation Table and Grants of Plan Based Awards-Employment Agreements”), reimbursement for health insurance premiums,
excess liability insurance premiums,
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country club membership fees, actual Company expenditures for use, including business use, of a Company car, alarm system fees, the value of event
tickets, fuel expenses, and Company paid personal travel, $150,010 in actual Company expenditures for financial advisory services provided to
Mr. Pedersen, other miscellaneous personal benefits and $263,279 reimbursed for taxes with respect to perquisites. In addition, Mr. Pedersen
reimburses the Company for the aggregate variable costs associated with his personal use of the Company leased aircraft in accordance with the time-
sharing agreement described under “Compensation Discussion and Analysis-Compensation Elements-Benefits and Perquisites.” While maintenance
costs are not included in the reimbursement amount under the time-sharing agreement, the Company has determined it is appropriate to allocate a
portion of the maintenance costs when calculating the aggregate incremental cost associated with personal use of the Company aircraft for purposes
of SEC disclosure. Therefore, amounts reported also reflect $91,215 in maintenance costs allocated on the basis of the proportion of personal use. In
addition, family members of Mr. Pedersen have, in limited circumstances, accompanied him on business travel on the Company leased aircraft for
which we incurred de minimis incremental costs;
as to Mr. Davies, $29,500 in actual Company expenditures for use, including business use, of a Company car, reimbursement for health insurance
premiums, country club membership fees, the value of event tickets, the value of meals in the Company cafeteria, excess liability insurance
premiums, fuel expenses and $28,409 reimbursed for taxes owed with respect to perquisites. In addition, family members of Mr. Davies have, in
limited circumstances, accompanied him on business travel on the Company leased aircraft for which we incurred de minimis incremental costs;
as to Mr. Dunn, $300,000 additional cash compensation paid to Mr. Dunn pursuant to his employment agreement (see “Narrative Disclosure to
Summary Compensation Table and Grants of Plan Based Awards-Employment Agreements”), reimbursement for health insurance premiums, excess
liability insurance premiums, the value of meals in the Company cafeteria, country club membership fees, actual Company expenditures for use,
including business use, of a Company car, alarm system fees, the value of event tickets, $150,010 in actual Company expenditures for financial
advisory services provided to Mr. Dunn, other miscellaneous personal benefits and $141,837 reimbursed for taxes with respect to perquisites and
$2,232,000 of stock-based compensation related to the repurchase by Parent of 3,720,019 Class A Units. In addition, Mr. Dunn reimburses the
Company for the aggregate variable costs associated with his personal use of the Company leased aircraft in accordance with the time-sharing
agreement described under “Compensation Discussion and Analysis-Compensation Elements-Benefits and Perquisites.” As discussed in footnote 6(a)
above, amounts reported reflect a similar allocation of $15,052 in maintenance costs associated with Mr. Dunn’s personal use of the Company leased
aircraft. In addition, family members of Mr. Dunn have, in limited circumstances, accompanied him on business travel on the Company leased
aircraft for which we incurred de minimis incremental costs;
as to Mr. Eyring, $21,060 in actual Company expenditures for use, including business use, of a Company car, reimbursement for health insurance
premiums, country club membership fees, the value of event tickets, the value of meals in the Company cafeteria, excess liability insurance
premiums, fuel expenses, alarm system fees and $17,730 reimbursed for taxes owed with respect to perquisites. In addition, family members of
Mr. Eyring have, in limited circumstances, accompanied him on business travel on the Company leased aircraft for which we incurred de minimis
incremental costs; and
as to Mr. Santiago, $37,736 in actual Company expenditures for use, including business use, of a Company car, reimbursement for health insurance
premiums, country club membership fees, the value of event tickets, the value of meals in the Company cafeteria, excess liability insurance
premiums, fuel expenses and $42,598 reimbursed for taxes owed with respect to perquisites. In addition, family members of Mr. Santiago have, in
limited circumstances, accompanied him on business travel on the Company leased aircraft for which we incurred de minimis incremental costs.
(b)
(c)
(d)
(e)
Grants
of
Plan-Based
Awards
in
2016
The following table provides supplemental information relating to grants of plan-based awards made to our named executive officers during 2016 .
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Estimated
Future
Payouts
Under
Non-Equity
Incentive
Plan
Awards(1)
Estimated
Future
Payouts
Under
Equity
Incentive
Plan
Awards
(2)
Name
Todd R. Pedersen
Grant
Date
—
Threshold
($)
330,000
Target
($)
660,000
1,650,000
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
(2)
Mark J. Davies
9/20/2016
—
—
—
Alex Dunn
—
330,000
660,000
1,650,000
Matthew J. Eyring
9/20/2016
Todd M. Santiago
9/20/2016
—
—
—
—
—
—
—
—
—
—
—
—
266,667
—
566,667
566,667
—
—
—
—
—
—
133,333
—
283,333
283,333
Grant
Date
Fair
Value
of
Stock
and
Option
Awards
($)
(3)
—
6,667
—
14,167
14,167
(1) Reflects the possible payouts of cash incentive compensation to Messrs. Pedersen and Dunn under the fiscal 2016 management bonus. The actual amounts
paid are reflected in the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table” and described in “Compensation
Discussion and Analysis—Compensation Elements—Bonuses—Fiscal 2016 Management Bonus – Messrs. Pedersen and Dunn” above.
(2) As described in more detail in the “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards-Equity Awards” section that
follows, amounts reported reflect grants of Class B Units that are divided into three tranches for vesting purposes: one third are time-vesting, one-third are
2.0x exit-vesting and one-third are 3.0x exit-vesting. All of the exit-vesting units are reported as an equity incentive plan award in the “Estimated Future
Payouts Under Equity Incentive Plan Awards” column, while the time-vesting tranche of the awards are reported as an all other stock award in the “All Other
Stock Awards: Number of Shares of Stock or Units” column.
(3) Amounts included in this column represent the grant date fair value of the Class B Units granted to Messrs. Davies, Eyring and Santiago calculated in
accordance with FASB ASC Topic 718. The value at the grant date for the exit-vesting portions of the Class B Units is based upon the probable outcome of
the performance conditions. See footnote (3) to the Summary Compensation Table.
Narrative
Disclosure
to
Summary
Compensation
Table
and
Grants
of
Plan-Based
Awards
Employment Agreements
Employment Agreements with Messrs. Pedersen and Dunn
The employment agreements with our Chief Executive Officer (CEO), Todd Pedersen, and our President, Alex Dunn, contain substantially similar
terms. The principal terms of each of these agreements are summarized below, except with respect to potential payments and other benefits upon specified
terminations, which are summarized below under “Potential Payments Upon Termination or Change in Control.”
Each employment agreement was entered into on August 7, 2014, provides for a term ending on November 16, 2017 and extends automatically for
additional one-year periods unless either party elects not to extend the term. Under the employment agreements, each executive is eligible to receive a minimum
base salary, specified below, and an annual bonus based on the achievement of specified financial goals for fiscal years 2013 and beyond. If these goals are
achieved, the executive may receive an annual incentive cash bonus equal to a percentage of his base salary as provided below.
Mr. Pedersen’s employment agreement provides that he is to serve as CEO and is eligible to receive a base salary originally set at $500,000, subject to
periodic adjustments as may be approved by our Board of Directors. Effective January 1, 2015, Mr. Pedersen’s base salary was increased from $500,000 to
$525,000, and effective July 25, 2016, his base salary was increased from $525,000 to $660,000. Mr. Pedersen is also eligible to receive a target bonus of 100% of
his annual base salary at the end of the fiscal year if targets established by the Board of Directors are achieved.
Mr. Dunn’s employment agreement provides that he is to serve as President and is eligible to receive a base salary originally set at $500,000, subject to
periodic adjustments as may be approved by our Board of Directors. Effective January 1, 2015, Mr. Dunn’s base salary was increased from $500,000 to $525,000,
and effective July 25, 2016, his base salary was
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increased from $525,000 to $660,000. Mr. Dunn is also eligible to receive a target bonus of 100% of his annual base salary at the end of the fiscal year if targets
established by the Board of Directors are achieved.
The employment agreements contain the method for determining the bonus of Messrs. Pedersen and Dunn for any given year. The agreements provide
that the calculation of any bonus will be determined based on the achievement of performance objectives, with targets for “threshold,” “target,” and “high”
achievement of the specified objectives as further described under “Compensation Discussion and Analysis-Compensation Elements-Bonuses.”
In addition, each employment agreement provides for the following:
•
•
•
Reasonable personal use of the company airplane, subject to reimbursement by the executive of an amount determined on a basis consistent with
IRS guidelines;
An annual payment equal to $300,000 per year, subject to all applicable taxes and withholdings, intended to be used to reimburse the Company
for the costs of the executive’s personal use of the company airplane; and
Access to a financial advisor to provide the executive with customary financial advice, subject to a combined aggregate cap of $250,000 on such
professional fees for Messrs. Pedersen and Dunn.
Each executive officer is also entitled to participate in all employee benefit plans, programs and arrangements made available to other executive
officers generally.
Each of the employment agreements also contains restrictive covenants, including an indefinite covenant on confidentiality of information, and
covenants related to non-competition and non-solicitation of our employees and customers and affiliates at all times during employment, and for two years after
any termination of employment. These covenants are substantially the same as the covenants Messrs. Pedersen and Dunn agreed to in connection with their receipt
of Class B Units summarized below under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards—Equity Awards—
Restrictive Covenants.”
Employment Agreements with Messrs. Davies, Eyring and Santiago
On March 8, 2016, we entered into employment agreements with certain of our officers, including Messrs. Davies, Eyring and Santiago. The
employment agreements with Messrs. Davies, Eyring and Santiago contain substantially similar terms. The principal terms of each of these agreements are
summarized below.
The employment agreement with each of these named executive officers provides for a term ending on March 8, 2019, which extends automatically
for additional one-year periods unless either party elects not to extend the term. Under the employment agreements, each executive is eligible to receive a
minimum base salary, and an annual bonus award with a target amount equal to a percentage of his base salary. The current annual base salary of each of Messrs.
Davies, Eyring and Santiago is $600,000, and each of them is eligible to earn an annual bonus award with a target amount equal to 60% of their base salary at the
end of the performance period. If the employment of Messrs. Davies, Eyring or Santiago terminates for any reason, the executive is entitled to receive: (1) any base
salary accrued through the date of termination; (2) reimbursement of any unreimbursed business expenses properly incurred by the executive; and (3) such
employee benefits, if any, as to which the executive may be entitled under the Company’s employee benefit plans (the payments and benefits described in
(1) through (3) being “accrued rights”).
If the employment of Messrs. Davies, Eyring or Santiago is terminated by us without “cause” (as defined below) and other than by reason of death or
while he is disabled (any such termination, a “qualifying termination”), such executive is entitled to the accrued rights and, conditioned upon execution and non-
revocation of a release and waiver of claims in favor of the Company and its affiliates, and continued compliance with the non-compete, non-solicitation, non-
disparagement, and confidentiality provisions set forth in the employment agreements:
•
•
a pro rata portion of his target annual bonus based upon the portion of the fiscal year during which the executive was employed (the “pro rata
bonus”);
a lump-sum cash payment equal to 150% of the executive’s then-current base salary plus 150% of the actual bonus the executive received in
respect of the immediately preceding fiscal year (or, if a termination of employment occurs prior to any annual bonus becoming payable under his
employment agreement, the target bonus for the immediately preceding fiscal year); and
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•
a lump-sum cash payment equal to the cost of the health and welfare benefits for the executive and his dependents, at the levels at which the
executive received benefits on the date of termination, for 18 months (the “COBRA payment”).
For purposes of their respective employment agreements, the term "cause" means the executive’s continued failure to substantially perform his
employment duties for a period of 10 days following written notice from the Company; any dishonesty in the performance of the executive’s employment duties
that is materially injurious to the Company; act(s) on the executive’s part constituting either a felony or a misdemeanor involving moral turpitude; the executive’s
willful malfeasance or misconduct in connection with his employment duties that causes substantial injury to us; or the executive’s material breach of the
restrictive covenants set forth in the employment agreements. Each of the foregoing events is subject to specified notice and cure periods.
In the event of the executive’s termination of employment due to death or disability, he will only be entitled to the accrued rights, the pro rata bonus
payment, and the COBRA payment.
Each executive officer is also entitled to participate in all employee benefit plans, programs and arrangements made available to other executive
officers generally.
Each of the employment agreements also contains restrictive covenants, including an indefinite covenant on confidentiality of information, and
covenants related to non-competition and non-solicitation of the Company’s employees and customers and affiliates at all times during employment, and for 18
months after any termination of employment.
Equity Awards
As a condition to receiving his Class B Units, each named executive officer was required to enter into a subscription agreement with us and Parent and
to become a party to the limited liability company agreement of Parent as well as a securityholders agreement. These agreements generally govern the named
executive officer’s rights with respect to the Class B units and contain certain rights and obligations of the parties thereto with respect to vesting, governance,
distributions, indemnification, voting, transfer restrictions and rights, including put and call rights, tag-along rights, drag-along rights, registration rights and rights
of first refusal, and certain other matters.
Vesting Terms
Only vested Class B units are entitled to distributions. The Class B units are divided into a time-vesting portion (1/3 of the Class B Units granted), a
2.0x exit-vesting portion (1/3 of the Class B Units granted), and a 3.0x exit-vesting portion (1/3 of the Class B Units granted).
•
•
Time-Vesting Units: Twelve months after the initial “vesting reference date,” as defined in the applicable subscription agreement, 20% of the named
executive officer’s time-vesting Employee Units will vest, subject to continued employment through such date. The “vesting reference date” for Messrs.
Pedersen and Dunn is November 16, 2012, the date of the grant of their Class B Units. The “vesting reference” date for the Class B Units granted to
Messrs. Eyring and Santiago on August 12, 2013 is also November 16, 2012 and the “vesting reference date” for the Class B Units granted to Mr. Davies is
November 4, 2013, which is the date he commenced employment with us. Thereafter, an additional 20% of the named executive officer’s time-vesting
Class B Units will vest every year until he is fully vested, subject to his continued employment through each vesting date. Notwithstanding the foregoing,
the time-vesting Class B Units will become fully vested upon a change of control (as defined in the securityholders agreement) that occurs while the named
executive officer is still employed by us. In addition, as to Messrs. Pedersen and Dunn, the time-vesting Class B Units will also continue to vest for one
year following a termination by Parent without “cause” (excluding by reason of death or disability) or resignation by the executive for “good reason,” each
as defined in the executive’s employment agreement (any such termination, a “qualifying termination”).
2.0x Exit-Vesting Units: The 2.0x exit-vesting Class B Units vest if the named executive officer is employed by us when and if Blackstone receives cash
proceeds in respect of its Class A units in the Company equal to (x) a return equal to 2.0x Blackstone’s cumulative invested capital in respect of the Class A
Units and (y) an annual internal rate of return of at least 20% on Blackstone’s cumulative invested capital in respect of its Class A Units. In addition, (i) as
to Messrs. Pedersen and Dunn, the 2.0x exit-vesting Class B Units will remain eligible to vest for one year following a qualifying termination if a change of
control occurs during such one-year period and, as a result of such change of control, the 2.0x exit-vesting conditions are met.
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•
3.0 Exit-Vesting Units: The 3.0x exit-vesting Class B Units vest if the named executive officer is employed by us when and if Blackstone receives cash
proceeds in respect of its Class A units in the Company equal to (x) a return equal to 3.0x Blackstone’s cumulative invested capital in respect of the Class A
Units and (y) an annual internal rate of return of at least 25% on Blackstone’s cumulative invested capital in respect of its Class A Units. In addition, as to
Messrs. Pedersen and Dunn, the 3.0x exit-vesting Class B Units will remain eligible to vest for one year following a qualifying termination if a change of
control occurs during such one-year period and, as a result of such change of control, the 3.0x exit-vesting conditions are met.
In addition, on March 8, 2016, Parent amended the subscription agreements relating to the Class B Units held by each of Messrs. Davies, Eyring and
Santiago to provide that if the executive is terminated by us without “cause” (as defined for the purposes of the employment agreement) and other than by reason
of death or while he is disabled, his 2.0x and 3.0x exit-vesting Class B Units will remain outstanding and eligible to vest for a six-month period following any such
termination if the applicable vesting criteria are satisfied during the six-month period. If the exit-vesting units do not become vested following the end of the six-
month period, they will be forfeited without consideration. The Class B Units granted to Messrs. Davies, Eyring and Santiago in 2016 also contain these
termination terms. The Compensation Committee determined that such amendment to the terms of their awards would help secure the continued employment and
dedication of Messrs. Davies, Eyring and Santiago.
Other than as described above with respect to Messrs. Pedersen, Dunn, Davies, Eyring and Santiago, any Class B Units that have not vested as of the
date of termination of a named executive officer’s employment will be immediately forfeited.
Put Rights
Prior to an initial public offering, if an executive officer’s employment is terminated due to death or disability, such executive has the right, subject to
specified limitations and for a specified period following the termination date, to cause the Company to purchase on one occasion all, but not less than all, of such
executive’s vested Class B Units, in either case, at the fair market value of such units.
Call Rights Regarding Messrs. Pedersen’s and Dunn’s Class B Units
If Messrs. Pedersen or Dunn are terminated for any reason, or in the event of a restrictive covenant violation, the Company has the right, for a
specified period following the termination of such executive’s employment, to purchase all of such executive’s vested Class B units as follows:
Triggering
Event
Death or Disability
Call
Price
fair market value
Put
Price
fair market value
Termination With Cause or Voluntary Resignation When
Grounds Exist for Cause
lesser of (a) fair market value and (b) cost
Termination Without Cause or Resignation For Good Reason
fair market value
Voluntary Resignation Without Good Reason Prior to
November 16, 2014
Voluntary Resignation on or After November 16, 2014
Restrictive Covenant Violation
lesser of (a) fair market value and (b) cost
fair market value
lesser of (a) fair market value and (b) cost
N/A
N/A
N/A
N/A
N/A
Call Rights Regarding Other Executive Officers’ Class B Units
With respect to our other executive officers, if the executive officer is terminated for any reason, in the event of a restrictive covenant violation or if
the executive engages in any conduct that would be a violation of a restrictive covenant set forth in the executive’s management unit subscription agreement but for
the fact that the conduct occurred outside the relevant periods (any such conduct a “Competitive Activity”), then the Company has the right, for a specified period
following the termination of such executive’s employment, to purchase all of such executive’s vested Class B units as follows:
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Triggering
Event
Death or Disability
Termination With Cause or Voluntary Resignation When
Grounds Exist for Cause
Termination Without Cause
Voluntary Resignation Prior to November 16, 2014, or, if Later,
the Second Anniversary of Date of Hire
Voluntary Resignation on or After November 16, 2014, or, if
Later, the Second Anniversary of Date of Hire
Restrictive Covenant Violation
Competitive Activity Not Constituting a Restrictive Covenant
Violation
Restrictive Covenants
Call
Price
fair market value
Put
Price
fair market value
lesser of (a) fair market value and (b) cost
fair market value
lesser of (a) fair market value and (b) cost
fair market value
lesser of (a) fair market value and (b) cost
fair market value
N/A
N/A
N/A
N/A
N/A
N/A
In addition, as a condition of receiving their units in Parent, our executive officers have agreed to specified restrictive covenants, including an
indefinite covenant on confidentiality of information, and covenants related to non-disparagement, non-competition and non-solicitation of our employees and
customers and affiliates at all times during the named executive officer’s employment, and for specified periods after any termination of employment as set forth in
the subscription agreement (two years for Messrs. Pedersen and Dunn and one-year non-compete and non-solicit periods and a three-year non-disparagement
period for each of our other named executive officers).
Additional terms regarding the equity awards are summarized above under “Compensation Discussion and Analysis—Compensation Elements—
Long-Term Equity Compensation” and under “Potential Payments Upon Termination or Change in Control” below.
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Outstanding
Equity
Awards
at
2016
Fiscal
Year-End
The following table provides information regarding outstanding equity awards for our named executive officers as of December 31, 2016 . The equity awards held
by the named executive officers are Class B Units, which represent an equity interest in Parent.
Stock
Awards
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
(3)
15,494,699
266,667
2,883,333
15,494,699
566,667
2,883,333
566,667
2,883,333
Number
of
Shares
or
Units
of
StockThat
Have
Not
Vested
(#)
(1)
1,549,470
133,333
576,667
Grant
Date
11/16/2012
9/20/2016
3/3/2014
11/16/2012
1,549,470
9/20/2016
7/12/2013
9/20/2016
7/12/2013
283,333
288,333
283,333
288,333
Name
Todd R. Pedersen
Mark J. Davies
Alex J. Dunn
Matthew J. Eyring
Todd M. Santiago
(1) Reflects the number of time-vesting Class B Units of Parent, which vest 20% over a five year period on each anniversary of November 16, 2012 or the
applicable vesting reference date, subject to the executive’s continued employment on such date. Additional terms of these time-vesting units are
summarized under “Compensation Discussion and Analysis—Compensation Elements—Long-Term Equity Compensation,” “Narrative Disclosure to
Summary Compensation Table and Grants of Plan Based Awards Table—Equity Awards” and “Potential Payments Upon Termination or Change in
Control.”
Vesting of the time-vesting Class B Units will be accelerated upon a change of control that occurs while the executive is still employed by us and, as to
Messrs. Pedersen and Dunn, will also continue to vest for one year following a qualifying termination, each as described under “Narrative Disclosure to Summary
Compensation Table and Grants of Plan-Based Awards—Equity Awards.”
(2) Because there was no public market for the Class B Units of Parent as of December 31, 2016 , the market value of such units was not determinable as of
such date.
(3) Reflects exit-vesting Class B Units (of which one-half are 2.0x exit-vesting and one-half are 3.0x exit-vesting). Unvested exit-vesting Class B units vest as
described under the “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards—Equity Awards” section above. As to (i)
Messrs. Pedersen and Dunn, the 2.0x and 3.0x exit-vesting Class B Units will remain eligible to vest for one year following a qualifying termination if a
change of control occurs during such one-year period and, as a result of such change of control, the respective exit-vesting conditions are met, and (ii) as to
Messrs. Davies, Eyring and Santiago, 2.0x and 3.0x exit-vesting Class B Units will remain outstanding and eligible to vest for a six-month period following
a termination by us without “cause” (as defined for the purposes of his employment agreement) and other than by reason of death or while he is disabled if
the applicable vesting criteria are satisfied during the six-month period, each as described under “Narrative Disclosure to Summary Compensation Table
and Grants of Plan-Based Awards—Equity Awards.”
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Option
Exercises
and
Stock
Vested
in
2016
The following table provides information regarding the equity held by our named executive officers that vested during 2016 .
Name
Todd R. Pedersen
Mark J. Davies
Alex J. Dunn
Matt J. Eyring
Todd M. Santiago
Equity
Awards
Number
of
Shares
or
Units
Acquired
on
Vesting
(#)
1,549,470
288,333
1,549,470
288,333
288,333
Value
Realized
on
Vesting
($)
(1)
(1)
(1)
(1)
(1)
(1) Because there was no public market for the Class B Units of Parent as of December 31, 2016 , the market value of such units on the vesting date was not
determinable.
Pension
Benefits
We have no pension benefits for our executive officers.
Nonqualified
Deferred
Compensation
We have no nonqualified defined contribution or other nonqualified deferred compensation plans for our executive officers.
Potential
Payments
Upon
Termination
or
Change
in
Control
The following section describes the potential payments and benefits that would have been payable to our named executive officers under existing plans
and contractual arrangements assuming (1) a termination of employment or (2) a change of control occurred, in each case, on December 30, 2016, the last business
day of fiscal 2016 . The amounts shown in the table do not include payments and benefits to the extent they are provided generally to all salaried employees upon
termination of employment and do not discriminate in scope, terms or operation in favor of the named executive officers. These include distributions of plan
balances under our 401(k) savings plan and similar items.
Messrs. Pedersen and Dunn
Pursuant to their respective employment agreements, if Mr. Pedersen’s or Mr. Dunn’s employment terminates for any reason, the executive is entitled
to receive: (1) any base salary accrued through the date of termination; (2) any annual bonus earned, but unpaid, as of the date of termination; (3) reimbursement of
any unreimbursed business expenses properly incurred by the executive; and (4) such employee benefits, if any, as to which the executive may be entitled under
our employee benefit plans (the payments and benefits described in (1) through (4) being “accrued rights”).
If the employment of Messrs. Pedersen and Dunn is terminated by us without “cause” (as defined below) (other than by reason of death or while he is
disabled) or if either executive resigns with “good reason” (as defined below) (any such termination, a “qualifying termination”), such executive is entitled to the
accrued rights and, conditioned upon execution and non-revocation of a release and waiver of claims in favor of us and our affiliates, and continued compliance
with the non-compete, non-solicitation, non-disparagement, and confidentiality provisions set forth in the employment agreements and described above under
“Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards”:
•
•
a pro rata portion of his target annual bonus based upon the portion of the fiscal year during which the executive was employed (the “pro rata bonus”);
a lump-sum cash payment equal to 200% of the executive’s then-current base salary plus 200% of the actual bonus the executive received in respect of the
immediately preceding fiscal year (or, if a termination of employment occurs prior
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•
to any annual bonus becoming payable under his employment agreement, the target bonus for the immediately preceding fiscal year); and
a lump-sum cash payment equal to the cost of the health and welfare benefits for the executive and his dependents, at the levels at which the executive
received benefits on the date of termination, for two years (the “COBRA payment”).
For purposes of the employment agreements of each of Messrs. Pedersen and Dunn, the term “cause” means the executive’s continued failure to
substantially perform his employment duties for a period of ten (10) days; any dishonesty in the performance of the executive’s employment duties that is
materially injurious to us; act(s) on the executive’s part constituting either a felony or a misdemeanor involving moral turpitude; the executive’s willful
malfeasance or misconduct in connection with his employment duties that causes substantial injury to us; or the executive’s material breach of any covenants set
forth in the employment agreements, including the restrictive covenants set forth therein. A termination for “good reason” is deemed to occur upon specified
events, including: a material reduction in the executive’s base salary; a material reduction in the executive’s authority or responsibilities; specified relocation
events; or our breach of any of the provisions of the employment agreements. Each of the foregoing events is subject to specified notice and cure periods.
In the event of the executive’s termination of employment due to death or disability, he will only be entitled to the accrued rights, the pro rata bonus
payment, and the COBRA payment.
Messrs. Davies, Eyring and Santiago
Pursuant to their respective employment agreements, if the employment of Messrs. Davies, Eyring or Santiago terminates for any reason, the executive
is entitled to receive: (1) any base salary accrued through the date of termination; (2) reimbursement of any unreimbursed business expenses properly incurred by
the executive; and (3) such employee benefits, if any, as to which the executive may be entitled under the Company’s employee benefit plans (the payments and
benefits described in (1) through (3) being “accrued rights”).
If the employment of Messrs. Davies, Eyring or Santiago is terminated by us without “cause” (as defined below) and other than by reason of death or
while he is disabled (any such termination, a “qualifying termination”), such executive is entitled to the accrued rights and, conditioned upon execution and non-
revocation of a release and waiver of claims in favor of the Company and its affiliates, and continued compliance with the non-compete, non-solicitation, non-
disparagement, and confidentiality provisions set forth in the employment agreements:
•
•
•
a pro rata portion of his target annual bonus based upon the portion of the fiscal year during which the executive was employed (the “pro rata
bonus”);
a lump-sum cash payment equal to 150% of the executive’s then-current base salary plus 150% of the actual bonus the executive received in
respect of the immediately preceding fiscal year (or, if a termination of employment occurs prior to any annual bonus becoming payable under
his employment agreement, the target bonus for the immediately preceding fiscal year); and
a lump-sum cash payment equal to the cost of the health and welfare benefits for the executive and his dependents, at the levels at which the
executive received benefits on the date of termination, for 18 months (the “COBRA payment”).
Under the employment agreements for Messrs. Davies, Eyring, and Santiago, “cause” means the executive’s continued failure to substantially perform
his employment duties for a period of ten (10) days following written notice from the Company; any dishonesty in the performance of the executive’s employment
duties that is materially injurious to the Company; act(s) on the executive’s part constituting either a felony or a misdemeanor involving moral turpitude; the
executive’s willful malfeasance or misconduct in connection with his employment duties that causes substantial injury to us; or the executive’s material breach of
the restrictive covenants set forth in the employment agreements. Each of the foregoing events is subject to specified notice and cure periods.
In the event of the executive’s termination of employment due to death or disability, he will only be entitled to the accrued rights, the pro rata bonus
payment, and the COBRA payment.
The following table lists the payments and benefits that would have been triggered for Messrs. Pedersen, Davies, Dunn Eyring and Santiago under the
circumstances described below assuming that the applicable triggering event occurred on December 30, 2016.
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Name
Todd
R.
Pedersen
Termination Without Cause or for Good
Reason
Change of Control
Death or Disability
Mark
J.
Davies
Termination Without Cause or for Good
Reason
Change of Control
Death or Disability
Alex
J.
Dunn
Termination Without Cause or for Good
Reason
Change of Control
Death or Disability
Matthew
J.
Eyring
Termination Without Cause or for Good
Reason
Change of Control
Death or Disability
Todd
M.
Santiago
Termination Without Cause or for Good
Reason
Change of Control
Death or Disability
Cash
Severance
($)(1)
Prorated
Bonus
($)(2)
Continuation
of
Health
Benefits
($)(3)
Accrued
But
Unused
Vacation
($)(4)
Value
of
Accelerated
Equity
($)(5)
2,640,000
660,000
—
—
—
660,000
27,785
—
27,785
1,440,000
360,000
20,839
—
—
—
360,000
—
—
2,640,000
660,000
—
—
—
660,000
27,785
—
27,785
1,440,000
360,000
20,839
—
—
—
360,000
—
—
1,440,000
360,000
20,839
—
—
—
360,000
—
—
63,462
—
63,462
34,615
—
34,615
50,769
—
50,769
34,615
—
34,615
34,615
—
34,615
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
3,391,247
—
751,247
1,855,454
—
394,615
3,378,554
—
738,554
1,855,454
—
394,615
1,855,454
—
394,615
(1) Messrs. Pedersen and Dunn's cash severance reflects a lump sum cash payment equal to the sum of (x) 200% of the executive’s base salary of $660,000 and
(y) 200% of the executive’s respective actual annual bonus for the preceding fiscal year. For fiscal 2016, Messrs. Pedersen and Dunn each received an
annual bonus of $660,000. Messrs. Davies, Eyring and Santiago's cash severance reflects a lump sum cash payment equal to the sum of (x) 150% of the
executive’s base salary of $600,000 and (y) 150% of the executive’s respective actual annual bonus for the preceding fiscal year. For fiscal 2016,
Messrs.Davies, Eyring and Santiago each received an annual bonus of $360,000.
(2) Reflects the executive’s target bonus for the 12 completed months of employment for the 2016 fiscal year.
(3) For Messrs. Pedersen and Dunn reflects the cost of providing the executive officer with continued health and welfare benefits for the executive and his
dependents under COBRA for two years and assuming 2016 rates. For Messrs. Davies, Eyring and Santiago reflects the cost of providing the executive
officer with continued health and welfare benefits for the executive and his dependents under COBRA for 18 months and assuming 2016 rates.
(4) Amounts reported in this column reflect the following number of accrued but unused vacation days: Mr. Pedersen, 25 days; Mr. Davies, 15 days;
Mr. Dunn, 20 days; Mr. Eyring, 15 days and Mr. Santiago, 15 days.
(5) Upon a change of control each of Messrs. Pedersen’s, Davies', Dunn’s, Eyring's and Santiago's unvested time-vesting Class B Units would become
immediately vested. However, because there was no public market for the Class B Units as of December 30, 2016 , the market value of such Class B Units
was not determinable. In addition, the unvested 2.0x and 3.0x exit-vesting Class B Units would vest upon a change of control if the applicable exit-vesting
hurdles were met. Amounts reported assume that the exit-vesting Class B Units do not vest upon a change of control.
Messrs. Davies, Eyring and Santiago
In addition, as described above under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards—Equity Awards—
Restrictive Covenants,” as a condition of receiving their units in Parent, Messrs. Davies,
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Eyring and Santiago agreed to specified restrictive covenants for specified periods upon a termination of employment, including an indefinite covenant on
confidentiality of information, and one-year non-competition and non-solicitation covenants and a three-year non-disparagement covenant.
Director
Compensation
The members of our Board of Directors other than David D’Alessandro, who was elected to the Board of Directors in fiscal 2013, and Paul Galant and
Joseph S. Tibbetts, Jr., who were elected to the Board of Directors in October 2015, received no additional compensation for serving on the Board of Directors or
our Audit or Compensation Committees during 2016 .
In connection with the election of each of Messrs. D’Alessandro, Galant and Tibbetts, the Company entered into a letter agreement setting forth the
compensation terms related to his service on the Board of Directors. Pursuant to their respective letter agreements, the Company will pay each of them an annual
retainer of $150,000 per year, and Messrs. D’Alessandro, Galant and Tibbetts will not be eligible for any bonus amounts or be eligible to participate in any of the
Company’s employee benefit plans.
In addition, in 2013, an affiliate of Mr. D’Alessandro was granted 500,000 Class B Units, which are similar to the Class B Units granted to the named
executive officers. The Class B Units are divided into a time-vesting portion (one-third of the Class B Units granted), a 2.0x exit-vesting portion (one-third of the
Class B Units granted), and a 3.0x exit-vesting portion (one-third of the Class B Units granted). The vesting terms of these units are substantially similar to the
Class B Units previously granted to our named executive officers and are described under “Narrative to Summary Compensation Table and Grants of Plan-Based
Awards—Equity Awards” and the “vesting reference date” is July 18, 2013. However, if Mr. D’Alessandro ceases to serve on the Board of Directors, all unvested
time-vesting Class B Units will be forfeited, and a percentage of the exit-vesting Class B Units will be forfeited with such percentage equal to 100% prior to
July 31, 2014, 80% prior to July 31, 2015, 60% prior to July 31, 2016, 40% prior to July 31, 2017, 20% prior to July 31, 2018 and 0% on or after July 31, 2018.
On September 20, 2016, each of Messrs. Galant and Tibbetts was granted an award of stock appreciation rights pursuant to the Vivint Group, Inc.
Amended and Restated 2013 Omnibus Incentive Plan covering 84,034 shares of common stock of Vivint Group, Inc., with a strike price of $1.19 per share, which
become vested and exercisable on July 1, 2017. Upon exercise of a vested SAR, Vivint shall pay the holder an amount equal to the number of shares subject to
such vested SAR which are being exercised, multiplied by the excess of the fair market value of one share over the applicable strike price, and reduced by the
aggregate amount of all applicable income and employment taxes required to be withheld.
The following table provides information on the compensation of our non-management directors in fiscal 2016 .
Name
David F. D’Alessandro
Paul S. Galant
Bruce McEvoy (2)
Jay D. Pauley (2)
Joseph S. Tibbetts, Jr.
Peter F. Wallace (2)
Fees
Earned
or
Paid
in
Cash
($)
150,000
150,000
—
—
150,000
—
Stock
Awards
($)
(1)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
All
Other
Compensation
($)
—
7,500
—
—
7,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
150,000
157,500
—
—
157,500
—
(1) As of December 31, 2016 , Mr. D’Alessandro held 66,650 unvested time-vesting Class B Units and 333,350 unvested Class B Units subject to exit-vesting
criteria and each of Messrs. Galant and Tibbetts held stock appreciation rights covering 84,034 shares of common stock of Vivint Group, Inc., which
become vested and exercisable on July 1, 2017.
(2) Employees of Blackstone and Summit Partners do not receive any compensation from us for their services on our Board of Directors.
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ITEM
12.
SECURITY
OWNERSHIP
OF
CERTAIN
BENEFICIAL
OWNERS
AND
MANAGEMENT
AND
RELATED
STOCKHOLDER
MATTERS
Acquisition LLC owns 99.6% of the issued and outstanding shares of common stock of APX Parent Holdco, Inc., which, in turn, owns 100% of the issued
and outstanding shares of common stock of Parent Guarantor, which, in turn owns 100% of the issued and outstanding shares of common stock of the Issuer.
The following table sets forth certain information as of December 31, 2016 with respect to Class A limited liability company interests in Acquisition LLC
(“Class A Units”) beneficially owned by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding Class A Units, (ii) each of our
directors, (iii) each of our named executive officers and (iv) all of our directors and executive officers as a group.
The amounts and percentages of shares of Class A Units beneficially owned are reported on the basis of SEC regulations governing the determination of
beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for
purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one
person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person
has no economic interest.
Except as indicated in the footnotes to the table, each of the unitholders listed below has sole voting and investment power with respect to Class A Units
owned by such unitholder. Unless otherwise noted, the address of each beneficial owner is c/o APX Group, Inc. 4931 North 300 West, Provo, Utah 84604.
Name
and
Address
of
Beneficial
Owner
Principal
Unitholders:
Blackstone Funds(1)(2)
Summit Funds(1)(3)
Directors
and
Named
Executive
Officers(4):
Todd R. Pedersen
Alex J. Dunn
David F. D’Alessandro
Bruce McEvoy(5)
Jay D. Pauley
Joseph S. Tibbetts, Jr.
Paul S. Galant
Peter F. Wallace(5)
Mark J. Davies
Matthew J. Eyring
Todd M. Santiago
All Directors and Executive Officers as a Group (9 persons)
* Indicates less than 1%
Class
A
Units
Amount
and
Nature
of
Beneficial
Ownership
579,077,203
50,000,000
96,479,649
5,279,981
—
—
—
—
—
—
—
—
1,500,000
104,884,630
Percent
of
Class
74%
6%
12%
1%
—
—
—
—
—
—
—
—
*
13%
(1) The limited liability company agreement of Acquisition LLC (the “LLC Agreement”) provides that the business and affairs of Acquisition LLC will be
managed by the Board of Directors, initially comprised of five members, three of whom will be appointed by Blackstone, one of whom will be appointed
by Mr. Pedersen, and one of whom will be appointed by the Summit Funds, and Blackstone Capital Partners VI L.P. (“BCP VI”) acting as managing
member (in
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such capacity, the “Managing Member”). The Managing Member is an affiliate of Blackstone and will have the ability to appoint its own successor if it
resigns its position as Managing Member. Effective July 30, 2013, the Managing Member increased the size of the Board of Directors from five to six
members and appointed Mr. D’Alessandro to the Board of Directors. Pursuant to the LLC Agreement, Members of Acquisition LLC, including employee
members, will be deemed to have voted their respective limited liability company interests in Acquisition LLC in favor of all actions taken by the Board of
Directors and the Managing Member. The Managing Member, the Blackstone entities described below, and Stephen A. Schwarzman may be deemed to
beneficially own all the outstanding shares of common stock of the Issuer indirectly beneficially owned by Acquisition LLC, directly held by its wholly
owned indirect subsidiary Parent Guarantor and all of the limited liability company interests in Acquisition LLC. Each of the Managing Member, such
Blackstone entities and Mr. Schwarzman disclaim beneficial ownership of such shares of common stock of the Issuer and limited liability company
interests in Acquisition LLC (other than the Blackstone Funds to the extent of their direct holdings).
(2) Represents (i) 436,112,143.59 Class A Units directly held by BCP VI, (ii) 2,644,957.26 Class A Units directly held by Blackstone Family Investment
Partnership VI—ESC L.P. (“BFIP VI—ESC”), (iii) 220,012.15 Class A Units directly held by Blackstone Family Investment Partnership VI L.P. (“BFIP
VI”) and (iv) 140,100,090 Class A Units directly held by Blackstone VNT Co-Invest, L.P. (“VNT”) (BCP VI, BFIP VI-ESC, BFIP VI and VNT are
collectively referred to as the “Blackstone Funds”). BCP VI Side-by-Side GP L.L.C. is the general partner of each of BFIP VI-ESC and BFIP VI.
Blackstone Management Associates VI L.L.C. is the general partner of each of BCP VI and VNT. BMA VI L.L.C. is the sole member of Blackstone
Management Associates VI L.L.C. Blackstone Holdings III L.P. is the managing member of BMA VI L.L.C. and the sole member of BCP VI Side-by-Side
GP L.L.C. The general partner of Blackstone Holdings III L.P. is Blackstone Holdings III GP L.P. The general partner of Blackstone Holdings III GP L.P.
is Blackstone Holdings III GP Management L.L.C. The sole member of Blackstone Holdings III GP Management L.L.C. is The Blackstone Group L.P. The
general partner of The Blackstone Group L.P. is Blackstone Group Management L.L.C. Blackstone Group Management L.L.C. is wholly owned by
Blackstone’s senior managing directors and controlled by its founder, Stephen A. Schwarzman. Each of such Blackstone entities and Mr. Schwarzman may
be deemed to beneficially own the limited liability company interests in Acquisition LLC beneficially owned by the Blackstone Funds directly or indirectly
controlled by it or him, but each disclaims beneficial ownership of such limited liability company interests in Acquisition LLC (other than the Blackstone
Funds to the extent of their direct holdings). The address of each of Mr. Schwarzman and each of the other entities listed in this footnote is c/o The
Blackstone Group L.P., 345 Park Avenue, New York, New York 10154.
(3) Class A Units shown as beneficially owned by the Summit Funds (as hereinafter defined) are held by the following entities: (i) Summit Partners Growth
Equity Fund VIII-A, L.P. (“SPGE VIII-A”) owns 36,490,138.53 Class A Units, (ii) Summit Partners Growth Equity Fund VIII-B, L.P. (“SPGE VIII-B”)
owns 13,330,631.47 Class A Units, (iii) Summit Investors I, LLC (“SI”) owns 164,980 Class A Units and (iv) Summit Investors I (UK), LP (“SI(UK)” and
together with SPGE VIII-A, SPGE VIII-B and SI, the “Summit Funds”) owns 14,250 Class A Units. Summit Partners, L.P. is (i) the managing member of
Summit Partners GE VIII, LLC, which is the general partner of Summit Partners GE VIII, L.P., which is the general partner of each of Summit Partners
Growth Equity Fund VIII-A, L.P. and Summit Partners Growth Equity Fund VIII-B, L.P., and (ii) the manager of Summit Investors Management, LLC,
which is the managing member of Summit Investors I, LLC and the general partner of Summit Investors I (UK), L.P. Summit Partners, L.P., through a
three-person investment committee currently composed of Peter Y. Chung, Bruce R. Evans and Martin J. Mannion, has voting and dispositive authority
over the Units held by the Summit Funds. Each of such Summit entities and therefore Summit Partners, L.P. may be deemed to beneficially own limited
liability company interests in Acquisition LLC beneficially owned by the Summit Funds directly or indirectly controlled by it, but each disclaims beneficial
ownership of such limited liability company interests in Acquisition LLC (other than Summit Partners, L.P. and other than the Summit Funds to the extent
of their direct holdings). The address of each of these entities and Messrs. Chung, Evans and Mannion is 222 Berkeley Street, 18th Floor, Boston,
Massachusetts 02116.
(4) Certain directors and executive officers also own profits interests in Acquisition LLC, having economic characteristics similar to stock appreciation rights,
in the form of Class B Units of Acquisition LLC, as described under “Management—Executive Compensation—Compensation Discussion and Analysis—
Long-term Incentive Compensation”. Directors and executive officers as a group hold an aggregate of 73,919,456 Class B Units.
(5) Messrs. McEvoy and Wallace are each employees of affiliates of the Blackstone Funds, but each disclaims beneficial ownership of the limited liability
company interests in Acquisition LLC beneficially owned by the Blackstone Funds. The address for Messrs., McEvoy and Wallace is c/o The Blackstone
Group L.P., 345 Park Avenue, New York, New York 10154.
ITEM
13.
CERTAIN
RELATIONSHIPS
AND
RELATED
TRANSACTIONS,
AND
DIRECTOR
INDEPENDENCE
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Support
and
Services
Agreement
In connection with the Merger, we entered into a support and services agreement with Blackstone Management Partners L.L.C. (“BMP”), an affiliate of
Blackstone. Under the support and services agreement, we paid BMP, at the closing of the Merger, an approximately $20.0 million transaction fee as consideration
for BMP undertaking due diligence investigations and financial and structural analysis and providing corporate strategy and other advice and negotiation assistance
in connection with the Merger. In addition, we have agreed to reimburse BMP for any out-of-pocket expenses incurred by BMP and its affiliates and to indemnify
BMP and its affiliates and related parties, in each case, in connection with the Transactions and the provision of services under the support and services agreement.
Monitoring Services and Fees
In addition, under this agreement, we have engaged BMP to provide, directly or indirectly, monitoring, advisory and consulting services that may be
requested by us in the following areas: (a) advice regarding the structure, distribution and timing of debt and equity offerings and advice regarding relationships
with our lenders and bankers, (b) advice regarding the structuring and implementation of equity participation plans, employee benefit plans and other incentive
arrangements for certain of our key executives, (c) general advice regarding dispositions and/or acquisitions, (d) advice regarding the strategic direction of our
business of Parent Guarantor, the Surviving Company and such other advice directly related or ancillary to the above advisory services as may be reasonably
requested by us. These services will generally be provided until the first to occur of (i) the tenth anniversary of the closing date of the Merger (November 16,
2022), (ii) the date of a first underwritten public offering of shares of our common stock listed on the New York Stock Exchange or Nasdaq’s national market
system for aggregate proceeds of at least $150 million (an “IPO”) and (iii) the date upon which Blackstone owns less than 9.9% of our common stock or that of our
direct or indirect controlling parent and such stock has a fair market value (as determined by Blackstone) of less than $25 million (each of the events specified in
clauses (i) through (iii) above, the “Exit Date”).
In consideration for the monitoring services we have paid BMP, at the closing of the Merger, a monitoring fee (for advisory services to the provided by BMP
during the remainder of our 2012 fiscal year) and will pay at the beginning of each subsequent fiscal year a monitoring fee (for advisory services to be provided by
BMP during such fiscal year). The monitoring fee paid at the closing of the Transactions was $0.7 million (which amount is equal to $2.7 million prorated based on
the portion of fiscal 2012 which occurred after the Transactions). The monitoring fee payable for monitoring services in any subsequent fiscal year of ours will be
equal to the greater of (i) a minimum base fee of $2.7 million (the
“Minimum Annual Fee”), subject to adjustment as summarized below if we engage in a business combination or disposition that is “significant” (as defined in the
Support and Services Agreement) and (ii) the amount of the monitoring fee paid in respect of the immediately preceding fiscal year, without regard to the post-
fiscal year “true-up” adjustment described in the paragraph below (which will not yet have occurred at the time the annual monitoring fee is paid). We refer to the
adjusted monitoring fee for any fiscal year of the Surviving Company as the “Monitoring Fee” for such fiscal year.
In the case of a significant business combination or disposition, if 1.5% of our pro forma consolidated EBITDA (as defined in the Support and Services
Agreement) after giving effect to the business combination or disposition exceeds (in the case of a business combination) or is less than (in the case of a
disposition) the then-current Monitoring Fee, the Monitoring Fee for the year in which the significant business combination or disposition occurs will be adjusted
upward or downward, respectively, by the amount of such excess or shortfall, with such adjustment prorated based on the remaining full or partial fiscal quarters
remaining in our then-current fiscal year. We will pay upward adjustments to the Monitoring Fee promptly upon availability of the pro forma income statement
prepared in respect of such business combination. Downward adjustments to the Monitoring Fee will be effected through a rebate of the fee paid to BMP in that
fiscal year. Subsequently, the Minimum Annual Fee applicable to full fiscal years following any significant business combination or disposition will be equal to
1.5% of our pro forma consolidated EBITDA after giving effect to the business combination or disposition (subject to further adjustments for subsequent
significant business combinations and dispositions). However, in all cases (including in the case of a current-year rebate described above), the Monitoring Fee will
always be at least $2.7 million and in no event will a rebate for a downward adjustment result in BMP retaining a monitoring fee of less than $2.7 million for
monitoring services in respect of any particular fiscal year.
In addition to the adjustments to the Minimum Annual Fee and the Monitoring Fee in connection with significant business combinations or dispositions and
the related payments or rebates described above, there may be other adjustments to the Monitoring Fee based on projected consolidated EBITDA and a post-fiscal
year “true-up.” If 1.5% of our projected consolidated EBITDA, as first presented to our board of directors by senior management during the last third of such fiscal
year, is projected to exceed the amount of the monitoring fee already paid to BMP in respect of monitoring services due to be rendered during that fiscal year, we
will pay BMP the amount of such excess as an upward adjustment to the Monitoring Fee within two business days of such presentation. Following the completion
of each applicable fiscal year and within deadlines
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required by our revolving credit facility, our chief financial officer will certify to BMP the amount of our consolidated EBITDA for such fiscal year. If 1.5% of
such certified consolidated EBITDA is greater than the Monitoring Fee previously paid to BMP for monitoring services rendered during that fiscal year (including
the adjustment in respect of projected EBITDA described above), we will, jointly and severally, pay BMP the amount of such excess within two business days of
such certification. If 1.5% of such certified consolidated EBITDA is less than the monitoring fee previously paid to BMP for services rendered during that fiscal
year (including the adjustment in respect of projected consolidated EBITDA described above), the amount of such shortfall will be applied as a credit against the
next payment by us of the Monitoring Fee to BMP. However, BMP will always be entitled to retain the Minimum Annual Fee as then in effect and BMP will have
no obligation to rebate any amount that would result in BMP having been paid Monitoring Fees for monitoring services in an amount less than the Minimum
Annual Fee applicable to the relevant fiscal year.
Upon (i) an IPO, or (ii) the date upon which Blackstone owns less than 50% of the common stock of the Company or its direct or indirect controlling parent,
and such stock has a fair market value (as determined by Blackstone) of less than $25 million, we will pay to BMP a milestone payment equal to the present value
of all Monitoring Fee payments that, absent such event occurring, would otherwise have accrued and been payable through the tenth anniversary of the date of the
support and services agreement, based on the continued payment of a Monitoring Fee in an amount equal to the then-applicable estimate for the Monitoring Fee for
the fiscal year of the Surviving Company in which such event occurs, discounted at a rate equal to the yield to maturity on the close of business on the second
business day immediately preceding the date the payment is payable of the class of outstanding U.S. government bonds having a final maturity closest to such tenth
anniversary date.
Portfolio Operations Support and Other Services
Under the support and services agreement, we have, retroactively to September 16, 2012 (the date of the transaction agreement relating to the Merger) and
through the Exit Date (or an earlier date determined by BMP), engaged BMP to arrange for Blackstone’s portfolio operations group to provide support services
customarily provided by Blackstone’s portfolio operations group to Blackstone’s private equity portfolio companies of a type and amount determined by such
portfolio services group to be warranted and appropriate. BMP will invoice us for such services based on the time spent by the relevant personnel providing such
services during the applicable period and Blackstone’s allocated costs of such personnel, but in no event shall we be obligated to pay more than $1.5 million during
any calendar year.
Investor
Securityholders’
Agreement
In connection with the closing of the Merger, 313 Acquisition LLC and the Parent Guarantor entered into a Securityholders’ Agreement (the
“Securityholders’ Agreement”) with the Investors. The Securityholders’ Agreement governs certain matters relating to ownership of 313 Acquisition LLC and the
Parent Guarantor, including with respect to the election of directors of our parent companies, transfer of shares, including tag-along rights and drag-along rights,
other special corporate governance provisions and registration rights (including customary indemnification provisions).
Agreements
with
Solar
Trademark / Service Mark License Agreement
On June 1, 2011, we and Solar entered into a Trademark / Service Mark License Agreement, or the Trademark Agreement. Pursuant to the Trademark
Agreement, we granted Solar and its subsidiaries a non-exclusive license to use certain Vivint marks, subject to certain quality control requirements, in exchange
for a fee per month of $0.01 per kilowatt hour of electricity generated by the solar equipment each month for each customer account. On June 10, 2013, the
Trademark Agreement was amended and restated to grant Solar a royalty-free, non-exclusive license to the marks, and was applied retroactively to be in effect as
of January 1, 2013. Solar may only use the marks to manufacture, purchase and distribute its solar energy systems for residential rooftop installation, as well as in
advertising and promotional material. We generally have the right to consent to any sublicense of the marks. In connection with its recent initial public offering,
Solar terminated this agreement and we do not expect any additional payments to us as a result of this termination. See “Agreements with Solar” below.
Master Backup Maintenance Service Agreement
On January 23, 2014, we entered into a Master Backup Maintenance Services Agreement, or the Master Maintenance Agreement, with Vivint Solar Provider,
LLC, one of Solar’s wholly owned subsidiaries, pursuant to which Vivint Solar Provider, LLC, engaged us as a backup provider of, among other tasks, specified
maintenance, operations and customer
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services tasks related to Solar’s solar energy systems owned by third parties. The Master Maintenance Agreement provides the framework for a form agreement to
be entered into by us and Solar’s investment funds. The form agreement requires us, upon certain triggering events, primarily the default of Vivint Solar Provider,
LLC, to provide certain services and maintenance that it was providing. These services are to be provided at the cost incurred by us in providing such services, plus
10%. The agreement also requires each party to maintain certain levels of insurance coverage. In addition, Vivint Solar Provider, LLC, granted us a power of
attorney to perform services and otherwise take action on behalf of Vivint Solar Provider, LLC, under the agreements covered by the agreement. Either party may
terminate the agreement if the other fails to perform its material obligations and such failure is not remedied within 30 days of receipt of notice or upon the
occurrence of a force majeure event that prevents such party from performing its obligations for a continuous 180 day period. Vivint Solar Provider, LLC, us, and
one of Solar’s investment funds entered into an addendum to the agreement, which provide that such investment fund would receive the backup services under the
agreement. Vivint Solar Provider, LLC may also terminate the agreement if we become insolvent or by providing 60 days’ prior written notice to us. In connection
with its recent initial public offering, Solar terminated this agreement. See “Agreements with Solar” below.
Agreements in Connection with Solar’s Initial Public Offering
In connection with Solar’s initial public offering in 2014, we have negotiated on an arm’s-length basis and entered into a number of agreements with Solar
related to services and other support that we have provided and will provide to Solar, including:
• Master Intercompany Framework Agreement . This agreement establishes a framework for the ongoing relationship between us and Solar. This agreement
contains master terms regarding the protection of each other’s confidential information, and master procedural terms, such as notice procedures,
restrictions on assignment, interpretive provisions, governing law and dispute resolution. We and Solar each make customary representations and
warranties that will apply across all of the agreements between us, and we each agree not to damage the value of the goodwill associated with the
“VIVINT” or “VIVINT SOLAR” marks. We agree to provide Solar notice if we plans to stop using or to abandon rights in the “VIVINT” mark in any
country or jurisdiction, and Solar is permitted to take steps to prevent abandonment of the “VIVINT” mark. We each also agree not to make public
statements about each other without the consent of the other or disparage one another.
•
•
Non-Competition Agreement . In this agreement, we and Solar each define our current areas of business and our competitors, and agree not to directly or
indirectly engage in the other’s business for three years. Our area of business is defined as residential and commercial automation and security products
and services, energy management (i.e., wireless or remote management and control of energy controlling or consuming devices in a residence, including
thermostats, HVAC, lighting, other appliances and in-house consumption monitoring), products and services for accessing and using the Internet, products
and services for the storage, access, retrieval, and sharing of data, fixed and mobile data services, audio/video entertainment services, healthcare and
wellness services, content distribution network services, wholesale cloud computing services, demand response services and information security. Solar’s
area of business is defined as selling renewable energy and energy storage products and services. We and Solar may each engage in the business of energy
inverters, aggregate consumption monitoring and micro-grid technology. We may not sell products and services to Solar’s competitors. Solar may
purchase products and services from specified Vivint competitors. Although Solar may not engage in our business for three years, we may engage in
Solar’s business in markets where Solar is not yet operating, including by selling customer leads to Solar’s competitors (other than SolarCity
Corporation). Once Solar begins operating in a market, we will provide those leads exclusively to Solar. This agreement permits us and Solar to make
investments of up to 2.5% in any publicly traded company without violating the commitments in this agreement. This agreement also permits Solar to
obtain financing from a Vivint competitor. Finally, in this agreement we also each agree that for five years, unless we or Solar obtain prior written
permission from the other party, neither of us will solicit for employment any member of the other’s executive or senior management team, or any of the
other’s employees who primarily manage sales, installation or servicing of the other’s products and services. The commitment not to solicit those
employees lasts for 180 days after the employee finishes employment with us or Solar. General purpose employment advertisements and contact initiated
by an employee are not, however, considered solicitation.
Transition Services Agreement . Pursuant to this agreement we will provide to Solar various enterprise services, including services relating to information
technology and infrastructure, human resources and employee benefits, administration services and facilities-related services. We agreed to perform the
services with the same degree of care and diligence that we take in performing services for our own operations. We also agreed to provide Solar with
reasonable assistance with Solar’s eventual transition to providing those services in-house or through the use of third-party service providers. Solar will
pay us a sum of $313,000 per month for the services, which represents our good faith estimate of our full cost of providing the services to Solar, without
markup or surcharge. As Solar transitions any
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service from us to an alternate provider or in-house, the fees paid to us will be reduced accordingly, except for any third party license fees related to
services we obtains for Solar that cannot be terminated or assigned to Solar. The agreement will also account for the possibility that new services will be
required from us that were not initially addressed in the agreement. The initial term of this agreement is six months; however, we and Solar will seek to
complete the transition of the services contemplated by this agreement as soon as commercially practicable.
•
Product Development and Supply Agreement . Pursuant to this agreement, one of Solar’s wholly owned subsidiaries will collaborate with us to develop
certain monitoring and communications equipment that will be compatible with other equipment used in Solar’s solar energy systems and will replace
equipment Solar currently procures from third parties. The initial term of the agreement is three years, and it will automatically renew for successive one-
year periods unless either party elects otherwise.
• Marketing and Customer Relations Agreement . This agreement governs various cross-marketing initiatives between us and Solar, in particular the
provision of sales leads from each company to the other. In November 2016, the parties amended this agreement to update certain terms and conditions
governing existing cross-marketing initiatives and to introduce new cross-marketing initiatives, including a pilot program with the purpose of exploring
potential opportunities for each company to offer, sell and integrate the other company’s respective products and services with its standard product
offering. The term of this agreement, as amended, including the terms of the schedules defining the various cross-marketing initiatives, is up to three
years.
•
•
Bill of Sale . This agreement governs the transfer of certain assets such as office equipment from us to Solar.
Trademark License Agreement . Pursuant to this agreement, the licensor, a special purpose subsidiary majority-owned by us and minority-owned by Solar,
will grant Solar a royalty-free exclusive license to the trademark “VIVINT SOLAR” in the field of selling renewable energy or energy storage products
and services. The agreement enables Solar to sublicense the Vivint Solar trademark to its subsidiaries and to certain third parties, such as suppliers and
distributors, to the extent necessary for Solar to operate its business. The agreement governs how Solar may use and display the Vivint Solar trademark
and provides that Solar may create new marks that incorporate “VIVINT SOLAR” with licensor’s reasonable approval. The agreement also provides that
the licensor will apply to register Vivint Solar trademarks as reasonably requested by Solar, and that Solar will work together with the licensor in
enforcing and protecting the Vivint Solar trademarks. The agreement is perpetual but may be terminated voluntarily by Solar or by the licensor if (1) a
court finds that Solar have materially breached the agreement and not cured such breach within 30 days after notice, (2) Solar becomes insolvent, makes
an assignment for the benefit of creditors, or becomes subject to bankruptcy proceedings, (3) one of the parties (or us, with respect to the licensor) is
acquired by a competitor of the other party, or (4) Solar ceases using the “VIVINT SOLAR” mark worldwide. We retain ownership of the Vivint
trademark and Solar has no right to use “Vivint” except as part of “VIVINT SOLAR”.
Procedures
with
Respect
to
Review
and
Approval
of
Related
Person
Transactions
From time to time, we may do business with certain companies affiliated with Blackstone. The board of directors has not adopted a formal written policy for
the review and approval of transactions with related persons. However, the board of directors reviews and approves transactions with related persons as
appropriate.
Independence
of
Directors
The information contained under the heading "Corporate Governance Matters - Independence of Directors" in Part III, Item 10. Directors, Executive Officers
and Corporate Governance is incorporated by reference herein.
ITEM
14.
PRINCIPAL
ACCOUNTANT
FEES
AND
SERVICES
Disclosure
of
Fees
Paid
to
Independent
Registered
Public
Accounting
Firm
Aggregate fees billed to the Company for the fiscal year ended December 31, 2016 and 2015 represent fees billed by the Company’s principal independent
registered public accounting firm, Ernst & Young LLP.
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Fee
Category
Audit Fees (a)
Audit-Related Fees
Total Audit and Audit-Related Fees
Tax Fees (b)
All Other Fees
Total
Year
ended
December
31,
2016
1,656,000 $
$
—
2015
1,197,000
—
1,656,000
1,197,000
51,000
—
54,000
—
$
1,707,000 $
1,251,000
(a) Audit Fees primarily consisted of audit work performed for the preparation of the Company’s annual consolidated financial statements and reviews of
interim consolidated financial information and in connection with regulatory filings.
(b) Tax Fees included tax compliance, planning and support services.
The audit committee pre-approves all audit and non-audit services provided by its independent registered public accounting firm. The audit committee
considered whether the non-audit services rendered by Ernst & Young LLP were compatible with maintaining Ernst & Young LLP’s independence as the
independent registered public accounting firm of the Company’s consolidated financial statements and concluded they were.
133
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PART
IV
134
Table of Contents
ITEM
15.
EXHIBITS
AND
FINANCIAL
STATEMENT
SCHEDULES
(a)
Financial
Statements
and
Financial
Statement
Schedules
1. Financial
Statements:
Included in Part II, Item 8 of this Report.
2. Financial
Statement
Schedules:
All other financial schedules are omitted because they are not applicable or not required, or because the information is included herein in our financial
statements or the notes related thereto.
(b)
Exhibits
Exhibit
No.
EXHIBIT
INDEX
Description
3.3
3.4
4.1
4.2
4.3
4.4
4.5
Certificate of Incorporation of APX Group Holdings, Inc. (incorporated by reference to Exhibit 3.3 to the Registration
Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein (File Number: 333-191132-02))
Bylaws of APX Group Holdings, Inc. (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-4 of
APX Group Holdings, Inc. and the other registrants listed therein (File Number: 333-191132-02))
Indenture, dated as of November 16, 2012, among APX Group, Inc., the guarantors named therein and Wilmington Trust,
National Association, as trustee, relating to the Company’s 6.375% Senior Secured Notes due 2019 (incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
First Supplemental Indenture, dated as of December 20, 2012, among 313 Aviation, LLC and Wilmington Trust, National
Association, as trustee, relating to the Company’s 6.375% Senior Secured Notes due 2019 (incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
Second Supplemental Indenture, dated as of May 14, 2013, among Vivint Wireless, Inc. and Wilmington Trust, National
Association, as trustee, relating to the Company’s 6.375% Senior Secured Notes due 2019 (incorporated by reference to Exhibit
4.3 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
Third Supplemental Indenture, dated as of December 18, 2014, among Vivint Wireless, Inc. and Wilmington Trust, National
Association, as trustee, relating to the Company’s 6.375% Senior Secured Notes due 2019 (incorporated by reference to Exhibit
4.4 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
Form of Note relating to Company’s 6.375% Senior Secured Notes due 2019 (attached as exhibit to Exhibit 4.1) (incorporated
by reference to Exhibit 4.4 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants
listed therein (File Number: 333-191132-02))
135
Table of Contents
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Indenture, dated as of November 16, 2012, among APX Group, Inc., the guarantors named therein and Wilmington Trust,
National Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein (File
Number: 333-191132-02))
First Supplemental Indenture, dated as of December 20, 2012, among 313 Aviation, LLC and Wilmington Trust, National
Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein (File Number: 333-
191132-02))
Second Supplemental Indenture, dated as of May 14, 2013, among Vivint Wireless, Inc. and Wilmington Trust,
National Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by reference to Exhibit
4.7 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
Third Supplemental Indenture, dated as of May 31, 2013, among APX Group, Inc., the guarantors named therein and
Wilmington Trust, National Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by
reference to Exhibit 4.8 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed
therein (File Number: 333-191132-02))
Fourth Supplemental Indenture, dated as of December 13, 2013, among APX Group, Inc., the guarantors named therein and
Wilmington Trust, National Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed on December 13, 2013 (File
Number: 333-191132-02))
Fifth Supplemental Indenture, dated as of July 1, 2014, among APX Group, Inc., the guarantors named therein and Wilmington
Trust, National Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed on July 1, 2014 (File Number: 333-191132-
02))
Sixth Supplemental Indenture, dated as of December 18, 2014, among APX Group, Inc., the guarantors named therein and
Wilmington Trust, National Association, as trustee, relating to the Company’s 8.75% Senior Notes due 2020 (incorporated by
reference to Exhibit 4.12 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants
listed therein (File Number: 333-191132-02))
Form of Note relating to Company’s 8.75% Senior Notes due 2020 (attached as exhibit to Exhibit 4.6) (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed
therein (File Number: 333-191132-02))
Indenture, dated as of May 26, 2016, among APX Group, Inc., the guarantors party thereto and Wilmington Trust, National
Association, as trustee and collateral agent, relating to the Company’s 7.875% Senior Secured Notes due 2022 (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed on May 26, 2016 (File Number:
333-191132-02))
First Supplemental Indenture, dated as of August 17, 2016, among APX Group, Inc., the guarantors party thereto and
Wilmington Trust, National Association, as trustee and collateral agent, relating to the Company’s 7.875% Senior Secured
Notes due 2022 (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed
on August 17, 2016 (File Number: 333-191132-02))
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Table of Contents
10.1
10.2
10.3
10.4
10.5
10.6
10.7†
10.8†
10.9†
10.10†
10.11†
Amended and Restated Credit Agreement, dated as of June 28, 2013, among APX Group, Inc., the other guarantors party
thereto, Bank of America, N.A., as Administrative Agent and the other lenders and parties thereto (incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
Second Amended and Restated Credit Agreement, dated as of March 6, 2015, among APX Group, Inc., the other guarantors
party thereto, Bank of America, N.A., as Administrative Agent and the other lenders and parties thereto (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed on March 11, 2015. (File
Number: 333-191132-02))
Security Agreement, dated as of November 16, 2012, among the grantors named therein and Bank of America, N.A., as
Administrative Agent (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of APX Group
Holdings, Inc. and the other registrants listed therein (File Number: 333-191132-02))
Security Agreement, dated as of November 16, 2012, among the grantors named therein and Wilmington Trust, National
Association, as Collateral Agent (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-4 of APX
Group Holdings, Inc. and the other registrants listed therein (File Number: 333-191132-02))
Intercreditor Agreement and Collateral Agency Agreement, dated as of November 16, 2012, among 313 Group Inc., the other
grantors named therein, Bank of America, N.A., as Credit Agreement Collateral Agent, Wilmington Trust, National
Association, as Notes Collateral Agent, and each Additional Collateral Agent from time to time party thereto (incorporated by
reference to Exhibit 10.4 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants
listed therein (File Number: 333-191132-02))
Transaction Agreement, dated September 16, 2012, by and among 313 Acquisition LLC, 313 Group, Inc., 313 Solar, Inc., 313
Technologies, Inc., APX Group, Inc., V Solar Holdings, Inc. and 2GIG Technologies, Inc. (incorporated by reference to Exhibit
2.1 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein
(File Number: 333-191132-02))
Management Subscription Agreement (Co-Investment Units), dated as of November 16, 2012, between 313 Acquisition LLC
and Todd Pedersen (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-4 of APX Group
Holdings, Inc. and the other registrants listed therein (File Number: 333-191132-02))
Management Subscription Agreement (Co-Investment Units), dated as of November 16, 2012, between 313 Acquisition LLC
and Alex Dunn (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-4 of APX Group Holdings,
Inc. and the other registrants listed therein (File Number: 333-191132-02))
Management Subscription Agreement (Incentive Units), dated as of November 16, 2012, between Acquisition LLC and Todd
Pedersen (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of APX Group Holdings, Inc.
and the other registrants listed therein (File Number: 333-191132-02))
Management Subscription Agreement (Incentive Units), dated as of November 16, 2012, between Acquisition LLC and Alex
Dunn (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-4 of APX Group Holdings, Inc. and
the other registrants listed therein (File Number: 333-191132-02))
Form of Management Subscription Agreement (Incentive Units) (incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein (File Number: 333-191132-02))
137
Table of Contents
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
Form of Management Subscription Agreement (Co-Investment Units) (incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-4 of APX Group Holdings, Inc. and the other registrants listed therein (File Number: 333-
191132-02))
Amended and Restated 313 Acquisition LLC Unit Plan (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K of APX Group Holdings, Inc. filed on September 23, 2016 (File Number: 333-191132-02))
Form of Aircraft Time-Sharing Agreement (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form
S-4 of APX Group Holdings, Inc. and the other registrants listed therein (File Number 333-191132-02))
Employment Agreement, dated as of August 7, 2014, between APX Group, Inc. and Alex Dunn (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of APX Group Holdings, Inc. for the quarterly period ended September 30,
2015 (File Number: 333-191132-02))
Employment Agreement, dated as of August 7, 2014, between APX Group, Inc. and Todd Pedersen (incorporated by reference
to Exhibit 10.2 to the Quarterly Report on Form 10-Q of APX Group Holdings, Inc. for the quarterly period ended September
30, 2015 (File Number: 333-193639))
Employment Agreement, dated March 8, 2016, by and between APX Group, Inc. and Mark Davies (incorporated by reference
to Exhibit 10.17 to the Annual Report on Form 10-K of APX Group Holdings, Inc. for the fiscal year ended December 31, 2015
(File Number 333-191132-02))
Employment Agreement, dated March 8, 2016, by and between APX Group, Inc. and Todd Santiago (incorporated by reference
to Exhibit 10.18 to the Annual Report on Form 10-K of APX Group Holdings, Inc. for the fiscal year ended December 31, 2015
(File Number 333-191132-02))
10.19*†
Employment Agreement, dated March 8, 2016, by and between APX Group, Inc. and Matthew Eyring
10.20†
10.21
10.22
12.1*
21.1*
31.1*
31.2*
Form of Letter Amendment, dated March 8, 2016, to Management Subscription Agreement (Incentive Units) (incorporated by
reference to Exhibit 10.20 to the Annual Report on Form 10-K of APX Group Holdings, Inc. for the fiscal year ended
December 31, 2015 (File Number 333-191132-02))
Form of Outside Director Offer Letter (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of APX
Group Holdings, Inc. for the quarterly period ended September 30, 2015 (File Number: 333-191132-02))
Form of Note Purchase Agreement, relating to the Company’s 8.875% Senior Secured Notes due 2022 (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed on October 19, 2015 (File
Number: 333-191132-02))
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of APX Group, Inc.
Certification of the Registrant’s Chief Executive Officer, Todd Pedersen, pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934
Certification of the Registrant’s Chief Financial Officer, Mark Davies, pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934
138
Table of Contents
32.1*
32.2*
99.1*
99.2
99.3
101.1*
Certification of the Registrant’s Chief Executive Officer, Todd Pedersen, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Registrant’s Chief Financial Officer, Mark Davies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Section 13(r) Disclosure
Stock Purchase Agreement, dated as of February 13, 2013, by and among Nortek, Inc. and APX Group, Inc. (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of Nortek, Inc. filed on April 1, 2013 (File Number: 001-34697))
Letter Agreement, dated as of July 20, 2015, between SunEdison, Inc., Vivint, Inc. and Vivint Solar, Inc. (incorporated by
reference to Exhibit 99.1 to the Current Report on Form 8-K of APX Group Holdings, Inc. filed on July 22, 2015 (File Number:
333-191132-02))
The following materials are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the
Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows, (vi) Notes to Consolidated
Financial Statements, and (vii) document and entity information. (A)
*
†
Filed herewith.
Identifies exhibits that consist of a management contract or compensatory plan or arrangement.
(A) Pursuant to Rule 406T of Regulation S-T, the Interactive Data files on Exhibit 101.1 hereto are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities
and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
139
Table of Contents
ITEM
16.
FORM
10-K
SUMMARY
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APX GROUP HOLDINGS, INC.
By: /s/ MARK J. DAVIES
Mark J. Davies
Chief Financial Officer
Date: March 2, 2017
140
Table of Contents
POWER
OF
ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Todd R. Pedersen and Mark J.
Davies, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities as of March 2, 2017 .
Name
Title
/s/ Todd R. Pedersen
TODD R. PEDERSEN
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Mark J. Davies
MARK J. DAVIES
Chief Financial Officer
(Principal Financial Officer)
/s/ Patrick E. Kelliher
PATRICK E. KELLIHER
Chief Accounting Officer
(Principal Accounting Officer)
/s/ Alex J. Dunn
ALEX J. DUNN
President and Director
/s/ David F. D’Alessandro
Director
DAVID F. D’ALESSANDRO
/s/ Paul S. Galant
PAUL S. GALANT
/s/ Bruce McEvoy
BRUCE MCEVOY
/s/ Jay D. Pauley
JAY D. PAULEY
/s/ Joseph S. Tibbetts, Jr.
JOSEPH S. TIBBETTS, JR.
/s/ Peter F. Wallace
PETER F. WALLACE
Director
Director
Director
Director
Director
141
Exhibit
10.19
[Execution Copy]
EMPLOYMENT
AGREEMENT
(Matt
Eyring)
EMPLOYMENT AGREEMENT (the “ Agreement ”) dated March 8, 2016 (the “ Effective Date ”) by and between
APX Group, Inc., a Delaware corporation (the “ Company ”) and Matt Eyring (“ Executive ”).
The Company desires for one or more of its subsidiaries to employ Executive and Executive desires to accept such
employment, in each case effective as of the Effective Date (as defined below); and
The Company and Executive desire to enter into an agreement embodying the terms of such employment;
In consideration of the premises and mutual covenants herein and for other good and valuable consideration, the
parties agree as follows:
1.
Term of Employment . Subject to the provisions of Section 5 of this Agreement, Executive shall continue to be
employed by the Company and/or one or more of its subsidiaries for a period commencing on the Effective Date and ending on the
third anniversary of the Effective Date (the “ Employment Term ”) on the terms and subject to the conditions set forth in this
Agreement; provided , however , the Employment Term shall be automatically extended for an additional one-year period
commencing with the third anniversary of the Effective Date and, thereafter, on each such successive anniversary of the Effective
Date thereafter (each an “ Extension Date ”), unless the Company or Executive provides the other party hereto at least 90 days prior
written notice before the next Extension Date that the Employment Term shall not be so extended.
2. Position, Duties and Authority .
(a) During the Employment Term, Executive shall serve as the Company’s Chief Strategy & Innovation Officer. In
such position, Executive shall have such duties, functions, responsibilities and authority as shall be determined from time to time by
the Chief Executive Officer (the “ CEO ”) and the President (the “ President ”) of the Company. Executive shall report directly to the
CEO and the President. If requested by the Board of Directors of the Company (the “ Board ”), Executive shall also serve as a
member of the Board without additional compensation.
(b) Executive will devote substantially all of Executive’s business time and reasonable best efforts to the operation
and oversight of the Company’s businesses and performance of Executive’s duties hereunder (excluding periods of vacation and sick
leave) and will not engage in any other business activities that could conflict with his duties or services to
1
the Company; provided that nothing herein shall preclude Executive, subject to obtaining consent of the Board (not to be
unreasonably withheld), from (i) accepting appointment to or continuing to serve on any board of directors or trustees of any
business corporation, and (ii) serving as an officer or director or otherwise participating in non-profit educational, welfare, social,
religious and civil organizations.
3. Compensation .
(a) Base Salary . During the Employment Term, the Company shall pay Executive a base salary (“ Base Salary ”)
at the annual rate of $515,000, payable in regular installments in accordance with the Company’s usual payment practices.
Executive’s Base Salary shall be subject to annual review and subject to increase, if any, as may be determined from time to time in
the sole discretion of the Board or the Compensation Committee of any direct or indirect parent of the Company, but in no event
shall the Company be entitled to reduce Executive’s Base Salary.
(b) Annual Bonus . During the Employment Term, Executive shall be eligible to earn an annual bonus award (an “
Annual Bonus ”) with a target amount equal to 50% of Executive’s Base Salary at the end of the performance period (the “ Annual
Target Bonus ”). The Annual Bonus, if any, shall be paid to Executive within two and one-half months after the end of the applicable
fiscal year. Except as provided in Section 5, no Annual Bonus shall be payable in respect of any fiscal year in which Executive’s
employment is terminated.
4. Benefits .
(a) General . During the Employment Term, Executive shall be entitled to participate in the Company’s employee
benefit, fringe and perquisite plans, practices, policies and arrangements as in effect from time to time (collectively, “ Employee
Benefits ”), on generally the same terms and conditions as each of the Employee Benefits are made available to other senior
executives of the Company (other than with respect to annual bonuses, incentive plans and severance plans (as well as any other
terms and conditions specifically determined under this Agreement), the benefits for each which shall be determined instead in
accordance with this Agreement); provided that Executive shall be entitled to no less than four (4) weeks’ vacation per calendar
year.
(b) Reimbursement of Business Expenses . During the Employment Term, the Company shall reimburse Executive
for reasonable and necessary business expenses incurred by Executive in the performance of Executive’s duties hereunder in
accordance with its then prevailing policy for senior executives (which shall include appropriate itemization and substantiation of
expenses incurred).
5. Termination .
(a) The Employment Term and Executive’s employment hereunder may be terminated by either party at any time
and for any reason, subject to the notice and cure provisions set forth below. Notwithstanding any other provision of this Agreement,
the
2
provisions of this Section 5 shall exclusively govern Executive’s rights upon termination of employment with the Company and its
affiliates.
(b) By the Company for Cause or by Executive for any reason.
(i) The Employment Term and Executive’s employment hereunder may be terminated by the Company for
Cause and shall terminate automatically upon the effective date of Executive’s resignation for any reason).
(ii) Definition of Cause . For purposes of this Agreement, “Cause” shall mean (A) Executive’s continued
failure substantially to perform Executive’s employment duties (other than as a result of total or partial incapacity due to
physical or mental illness) for a period of 10 days following written notice by the Company to Executive of such failure, (B)
dishonesty in the performance of Executive’s employment duties that is materially injurious to the Company, (C) an act or
acts on Executive’s part constituting (x) a felony charge under the laws of the United States or any state thereof or (y) a
misdemeanor charge involving moral turpitude, (D) Executive’s willful malfeasance or willful misconduct in connection
with Executive’s employment duties which causes substantial injury to the financial condition or business reputation of the
Company or any of its subsidiaries or affiliates or (E) the Executive’s breach of any of the covenants set forth in Section 6
(other than any action taken in good faith and in a manner not opposed to the best interests of the Company, and which is
promptly remedied by Executive upon notice by the Board); provided that none of the foregoing events shall constitute Cause
unless Executive fails to cure such event and remedy any adverse or injurious consequences arising from such events within
10 days after receipt from the Company of written notice of the event which constitutes Cause (except that no cure or remedy
period shall be provided if the event or such consequences are not capable of being cured and remedied).
(iii) If Executive’s employment is terminated by the Company for Cause, Executive shall be entitled to
receive:
termination;
(A) no later than 10 days following the date of termination, the Base Salary through the date of
(B) reimbursement, within 60 days following receipt by the Company of Executive’s claim for such
reimbursement (including appropriate supporting documentation), for any unreimbursed business expenses properly
incurred by Executive in accordance with Company policy prior to Executive’s termination; provided that such
claims for such reimbursement are submitted to the Company within 90 days following the date of Executive’s
termination of employment; and
(C) such Employee Benefits, if any, as to which Executive may be entitled under the tax qualified
employee benefit plans of the Company, payable in accordance with the terms and conditions of such tax qualified
3
employee benefit plans (the amounts described in clauses (A) through (C) hereof being referred to as the “ Accrued
Rights ”).
For the avoidance of doubt, in any legal proceeding to determine whether grounds for Cause existed on any date that the Company
took action on the basis of the existence of Cause, the Company shall bear the burden of demonstrating grounds for Cause existed on
such date.
Following such termination of Executive’s employment by the Company for Cause, except as set forth in this Section 5(b)(iii),
Executive shall have no further rights to any compensation or any other benefits under this Agreement.
(iv) If Executive resigns for any reason, provided that Executive will be required to give the Company at
least 60 days advance written notice of such resignation of Executive’s employment, Executive shall be entitled to receive
the Accrued Rights. Following such resignation by Executive for any reason, except as set forth in this Section 5(b)(iv),
Executive shall have no further rights to any compensation or any other benefits under this Agreement.
(c) Disability or Death .
(i) Disability. During any period that Executive fails to perform his duties hereunder as a result of
incapacity due to physical or mental illness or injury (the “ Disability Period ”), Executive shall continue to receive his full
Base Salary set forth in Section 3(a) until his employment is terminated pursuant to Section 5(a). For purposes of this
Agreement, “ Disability ” shall mean Executive’s inability to perform, with or without reasonable accommodation,
Executive’s duties under this Agreement due to a physical or mental illness or injury for a period of six consecutive months
or for an aggregate of 12 months in any consecutive 24-month period. Any question as to the existence of the Disability of
Executive as to which Executive and the Company cannot agree shall be determined in writing by a qualified independent
physician mutually acceptable to Executive and the Company. If Executive and the Company cannot agree as to a qualified
independent physician, each shall appoint such a physician and those two physicians shall select a third physician who shall
make such determination in writing. The determination of Disability made in writing to the Company and Executive shall be
final and conclusive for all purposes of this Agreement.
(ii) Upon termination of Executive’s employment hereunder for either Disability or death, Executive or
Executive’s estate, survivors or beneficiaries (as the case may be) shall be entitled to receive:
(A) the Accrued Rights;
(B) any Annual Bonus earned, but unpaid, as of the date of termination for the immediately
preceding fiscal year, paid in accordance with Section 3(b) (except to the extent payment is otherwise deferred
pursuant to any applicable deferred compensation arrangement with the Company, in which case
4
such payment shall be made in accordance with the terms and conditions of such deferred compensation
arrangement);
(C) no later than 10 days following the date of termination, a pro rata portion of the Annual Target
Bonus payable for the fiscal year in which such termination occurs, based on a fraction, the numerator of which is the
number of days during the fiscal year up to and including the date of termination of Executive’s employment and the
denominator of which is the number of days in such fiscal year (the “ Pro-Rated Bonus ”); and
(D) death or disability benefits under any applicable plans and programs of the Company in
accordance with the terms and provisions of such plans and programs.
(d) By the Company Without Cause (other than by reason of death or Disability).
(i) If Executive’s employment is terminated by the Company without Cause (other than by reason of death
or Disability), Executive shall be entitled to receive:
(A) the Accrued Rights;
(B) the Pro-Rated Bonus;
(C) subject to Executive’s continued compliance with Section 6 and material compliance with
Section 7 hereof, and the execution and non-revocation of the Release (as defined below), a lump-sum cash payment
within 55 days after such termination and effectiveness of the Release equal to the sum of (x) 150% of Executive’s
Base Salary as of the date immediately prior to Executive’s termination of employment and (y) 150% of the actual
Annual Bonus paid in respect of the immediately preceding fiscal year (or, if such termination occurs prior to the first
date on which an Annual Bonus would have been paid had any payment been due, the Target Annual Bonus for the
immediately preceding fiscal year), and (z) a cash payment representing the COBRA costs of providing health and
welfare benefits for Executive and Executive’s dependents under the plans in which Executive was participating on
the date of the applicable “COBRA qualifying event” for 18 months (the “ COBRA Payment ”).
(ii) Release . Amounts payable to Executive under Section 5(c)(ii)(C) or Sections 5(d)(i)(B) and 5(d)(i)(C)
(collectively, the “ Conditioned Benefits ”) are subject to (i) Executive’s execution and non-revocation of a release of claims,
substantially in the form attached hereto as Exhibit I (the “ Release ”), within 60 days of the date of termination and (ii) the
expiration of any revocation period contained in such Release. Further, to the extent that any of the Conditioned Benefits
constitutes “nonqualified deferred compensation” for purposes of Section 409A of the Internal Revenue Code of 1986, as
amended (the “ Code ”), any payment of any amount or
5
provision of any benefit otherwise scheduled to occur prior to the sixtieth (60 th ) day following the date of Executive’s
termination of employment hereunder, but for the condition on executing the Release as set forth herein, shall not be made
until the first regularly scheduled payroll date following such sixtieth (60 th ) day, after which any remaining Conditioned
Benefits shall thereafter be provided to Executive according to the applicable schedule set forth herein.
(e) Expiration of Employment Term . Unless the parties otherwise agree in writing, continuation of Executive’s
employment with the Company following the expiration of the Employment Term shall be deemed an employment at-will and shall
not be deemed to extend any of the provisions of this Agreement and Executive’s employment may thereafter be terminated at will
by either Executive or the Company; provided that the provisions of Sections 6, 7 and 8 of this Agreement shall survive any
termination of this Agreement or Executive’s termination of employment hereunder.
(f) Notice of Termination; Board/Committee Resignation . Any purported termination of employment by the
Company or by Executive (other than due to Executive’s death) pursuant to Section 5 of this Agreement shall be communicated by
written Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a
notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. Upon
termination of Executive’s employment for any reason, Executive agrees to resign, as of the date of such termination and to the
extent applicable, from the Board (and any committees thereof) and the Board of Directors (and any committees thereof) of any of
the Company’s affiliates (except to the extent Executive is otherwise entitled pursuant to a separate contractual arrangement to
continue to serve as a member of the Board).
6. Non-Competition; Non-Solicitation . Executive acknowledges and recognizes the highly competitive nature of the
businesses of the Company and its affiliates and accordingly agrees as follows:
(a) Non-Competition .
(i) During Executive’s employment hereunder and, for a period of 18 months following the date Executive
ceases to be employed by the Company (the “ Restricted Period ”), Executive will not, whether on Executive’s own behalf or
on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business
organization, entity or enterprise whatsoever (“ Person ”), directly or indirectly solicit or assist in soliciting in competition
with the Restricted Group in the Business the business of any then current or prospective client or customer with whom
Executive (or Executive’s direct reports) had personal contact or dealings on behalf of the Company during the one-year
period preceding Executive’s termination of employment.
6
(ii) During the Restricted Period, Executive will not directly or indirectly:
(A) engage in the Business anywhere in the United States, or in any geographical area that is within
100 miles of any geographical area where the Restricted Group engages in the Business, including, for the avoidance
of doubt, by entering into the employment of or rending any services to a Core Competitor, except where such
employment or services do not relate in any manner to the Business;
(B) acquire a financial interest in, or otherwise become actively involved with, any Person engaged
in the Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee
or consultant; or
(C) intentionally and adversely interfere with, or attempt to adversely interfere with, business
relationships between the members of the Restricted Group and any of their clients, customers, suppliers, partners,
members or investors.
(iii) Notwithstanding anything to the contrary in this Agreement, Executive may, directly or indirectly own,
solely as an investment, securities of any Person engaged in a Business (including, without limitation, a Core Competitor)
which are publicly traded on a national or regional stock exchange or on the over-the-counter market if Executive (i) is not a
controlling person of, or a member of a group which controls, such person and (ii) does not, directly or indirectly, own 2% or
more of any class of securities of such Person.
(b) Non-Solicitation . During Executive’s employment hereunder and the Restricted Period, Executive will not,
whether on Executive’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly:
(i) solicit or encourage any employee of the Restricted Group to leave the employment of the Restricted
Group;
(ii) hire any executive-level employee who was employed by the Restricted Group as of the date of
Executive’s termination of employment with the Company or who left the employment of the Restricted Group coincident
with, or within one year prior to or one year after, the date of Executive’s termination of employment with the Company; or
(iii) encourage any material consultant of the Restricted Group to cease working with the Restricted Group.
(iv) For purposes of this Agreement:
7
(A) “ Restricted Group ” shall mean, collectively, the Company and its subsidiaries and, to the
extent engaged in the Business, their respective Affiliates (including The Blackstone Group L.P. and its Affiliates).
(B) “ Business ” shall mean (1) origination, installation, or monitoring services related to residential
or commercial security, life-safety, energy management or home automation services, (2) installation or servicing of
residential or commercial solar panels or sale of electricity generated by solar panels, (3) design, engineering or
manufacturing of technology or products related to residential or commercial security, life-safety, energy
management or home automation services and/or (4) provision of wireless voice or data services, including internet,
into the home.
(C) “ Core Competitor ” shall mean The ADT Corporation, Tyco Integrated Security, Protection 1,
Inc., Protect America, Inc., Stanley Security Solutions, Inc., Vector Security, Inc., Slomins, Inc., Monitronics
International, Inc., Life Alert, Comcast Corporation, Time Warner Inc., AT&T Inc., Verizon Communications, Inc.,
DISH Network Corp., DIRECTV, JAB Wireless, Inc., Clearwire Corporation, CenturyLink, Inc., Cox
Communication, Inc. and any of their respective Affiliates and current or future dealers, and Sungevity, Inc., RPS,
Sunrun Inc., Solar City Corporation, Clean Power Finance, SunPower Corporation, Corbin Solar Solutions LLC,
Galkos Construction, Inc., Zing Solar, Terrawatt, Inc., and any of their respective affiliates or current or future
dealers.
(c) During the Restricted Period, Executive agrees not to make, or cause any other person to make, any
communication that is intended to criticize or disparage, or has the effect of criticizing or disparaging, the Company or any of its
affiliates, agents or advisors (or any of its or their respective employees, officers or directors (it being understood that comments
made in Executive’s good faith performance of his duties hereunder shall not be deemed disparaging or defamatory for purposes of
this Agreement).
(d) It is expressly understood and agreed that although Executive and the Company consider the restrictions
contained in this Section 6 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the
time or territory or any other restriction contained in this Section 6 is an unenforceable restriction against Executive, the provisions
of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to
such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent
jurisdiction finds that any restriction contained in this Section 6 is unenforceable, and such restriction cannot be amended so as to
make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein
(e) The period of time during which the provisions of this Section 6 shall be in effect shall be extended by the
length of time during which Executive is in breach of the terms hereof as determined by any court of competent jurisdiction on the
Company’s application for injunctive relief.
8
(f) The provisions of this Section 6 shall survive the termination of Executive’s employment for any reason,
including but not limited to, any termination other than for Cause.
7. Confidentiality; Intellectual Property .
(a) Confidentiality .
(i) Executive will not at any time (whether during or after Executive’s employment with the Company), (x)
retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal,
communicate, share, transfer or provide access to any Person outside the Company (other than Executive’s professional
advisers who are bound by confidentiality obligations or otherwise in performance of Executive’s duties under Executive’s
employment and pursuant to customary industry practice), any non-public, proprietary or confidential information –
including, without limitation, trade secrets, know-how, research and development, software, databases, inventions, processes,
formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing,
costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training,
advertising, sales, marketing, promotions, government and regulatory activities and approvals – concerning the past, current
or future business, activities and operations of the Company, its subsidiaries or Affiliates and/or any third party that has
disclosed or provided any of same to the Company on a confidential basis (“ Confidential Information ”) without the prior
written authorization of the Board.
(ii) “Confidential Information” shall not include any information that is (a) generally known to the industry
or the public other than as a result of Executive’s breach of this covenant; (b) made legitimately available to Executive by a
third party without breach of any confidentiality obligation of which Executive has knowledge; or (c) required by law to be
disclosed; provided that with respect to subsection (c) Executive shall give prompt written notice to the Company of such
requirement, disclose no more information than is so required, and reasonably cooperate with any attempts by the Company
to obtain a protective order or similar treatment.
(iii) Except as required by law, Executive will not disclose to anyone, other than Executive’s family (it
being understood that, in this Agreement, the term “family” refers to Executive, Executive’s spouse, children, parents and
spouse’s parents) and advisors, the existence or contents of this Agreement; provided that Executive may disclose to any
prospective future employer the provisions of Sections 6 and 7 of this Agreement. This Section 7(a)(iii) shall terminate if the
Company publicly discloses a copy of this Agreement (or, if the Company publicly discloses summaries or excerpts of this
Agreement, to the extent so disclosed).
(iv) Upon termination of Executive’s employment with the Company for any reason, Executive shall (A)
cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation,
any
9
patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned or used
by the Company, its subsidiaries or affiliates; and (B) immediately destroy, delete, or return to the Company, at the
Company’s option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer
files, letters and other data) in Executive’s possession or control (including any of the foregoing stored or located in
Executive’s office, home, laptop or other computer, whether or not Company property) that contain Confidential
Information, except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not
contain any Confidential Information.
(b) Intellectual Property .
(i) If Executive creates, invents, designs, develops, contributes to or improves any works of authorship,
inventions, intellectual property, materials, documents or other work product (including without limitation, research, reports,
software, databases, systems, applications, presentations, textual works, content, or audiovisual materials) (“ Works ”), either
alone or with third parties, at any time during Executive’s employment by the Company and within the scope of such
employment and/or with the use of any the Company resources (“ Company Works ”), Executive shall promptly and fully
disclose same to the Company and hereby irrevocably assigns, transfers and conveys, to the maximum extent permitted by
applicable law, all of Executive’s right, title, and interest therein (including rights under patent, industrial property, copyright,
trademark, trade secret, unfair competition, other intellectual property laws, and related laws) to the Company to the extent
ownership of any such rights does not vest originally in the Company. If Executive creates any written records (in the form of
notes, sketches, drawings, or any other tangible form or media) of any Company Works, Executive will keep and maintain
same. The records will be available to and remain the sole property and intellectual property of the Company at all times.
(ii) Executive shall take all requested actions and execute all requested documents (including any licenses
or assignments required by a government contract) at the Company’s expense (but without further remuneration) to assist the
Company in validating, maintaining, protecting, enforcing, perfecting, recording, patenting or registering any of the
Company’s rights in the Company Works.
(iii) Executive shall not improperly use for the benefit of, bring to any premises of, divulge, disclose,
communicate, reveal, transfer or provide access to, or share with the Company any confidential, proprietary or non-public
information or intellectual property relating to a former employer or other third party without the prior written permission of
such third party. Executive shall comply with all relevant policies and guidelines of the Company that are from time to time
previously disclosed to Executive, including regarding the protection of Confidential Information and intellectual property
and potential conflicts of interest.
10
(iv) The provisions of Section 7 hereof shall survive the termination of Executive’s employment for any
reason (except as otherwise set forth in Section 7(a)(iv) hereof).
8. Specific Performance . Executive acknowledges and agrees that the Company’s remedies at law for a breach or
threatened breach of any of the provisions of Section 6 and Section 7 of this Agreement would be inadequate and the Company
would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be
entitled, in addition to any other remedy available at law or equity, to cease making any payments or providing any benefit otherwise
required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or
permanent injunction or any other equitable remedy which may then be available. In addition, upon any breach of Section 6 or any
material breach of Section 7 of this Agreement, Executive shall promptly return to the Company upon request all cash payments
made to Executive pursuant to Section 5 (if any), less any amounts paid by Executive as taxes in respect of such payments (unless
such taxes are actually recovered by Executive from the relevant governmental authority, in which case such tax amounts also shall
be returned to the Company). Any determination under this Section 8 of whether Executive is in compliance with Section 6 hereof
and material compliance with Section 7 hereof shall be determined based solely on the contractual provisions provided therein and
the facts and circumstances of Executive's actions without regard to whether the Company could obtain an injunction or other relief
under the law of any particular jurisdiction.
9. Miscellaneous .
(a) Indemnification; Directors’ and Officers’ Insurance . The Company shall indemnify and hold Executive
harmless for all acts and omissions occurring during his employment with the Company or service as a member of the Board to the
extent provided under the Company’s charter, by-laws and applicable law, and shall promptly advance to Executive or Executive’s
heirs or representatives all damages, costs, liabilities, losses and expenses (including reasonable attorneys’ fees and expenses)
(collectively, “ Expenses ”) as a result of any claim, demand, request, investigation, dispute, controversy, threat, discovery request or
request for testimony or information (collectively, a “ Claim ”) or any proceeding (whether civil, criminal, administrative or
investigative), or any threatened Claim or proceeding (whether civil, criminal, administrative or investigative), against Executive
that arises out of or relates to Executive’s service as an officer, director or employee, as the case may be, of the Company, or
Executive’s service in any such capacity or similar capacity with an affiliate of the Company or other entity at the request of the
Company, upon receipt by the Company of a written request with appropriate documentation of such Expenses, and an undertaking
by Executive to repay the amount advanced if it shall ultimately be determined that Executive is not entitled to be indemnified by the
Company against such Expenses. During the Employment Term and for a term of six years thereafter, the Company, or any
successor to the Company, shall purchase and maintain, at its own expense, directors and officers liability insurance providing
coverage for Executive in the same amount as for members of the Board.
11
(b) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State
of Utah, without regard to conflicts of laws principles thereof.
(c) Jurisdiction; Venue . Except as otherwise provided in Section 8 in connection with equitable remedies, each of
the parties hereto hereby irrevocably submits to the exclusive jurisdiction of any federal or state court sitting in the Utah over any
suit, action or proceeding arising out of or relating to this Agreement and each of the parties agrees that any action relating in any
way to this Agreement must be commenced only in the courts of the State of Utah, federal or state. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted or not prohibited by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or
proceeding brought in such a court has been brought in an inconvenient forum. Each of the parties hereto hereby irrevocably
consents to the service of process in any suit, action or proceeding by sending the same by certified mail, return receipt requested, or
by recognized overnight courier service, to the address of such party set forth in Section 9(j).
(d) Entire Agreement; Amendments . This Agreement (including, without limitation, the schedules and exhibits
attached hereto) contains the entire understanding of the parties with respect to the employment of Executive by the Company, and
supersedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its
current or former affiliates regarding the terms and conditions of Executive’s employment with the Company and/or its current or
former affiliates. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with
respect to the subject matter herein other than those expressly set forth herein. This Agreement (including, without limitation, the
schedules and exhibits attached hereto) may not be altered, modified, or amended except by written instrument signed by the parties
hereto.
(e) No Waiver . The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion
shall not be considered a waiver of such party’s rights or deprive such party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
(f) Severability . In the event that any one or more of the provisions of this Agreement shall be or become invalid,
illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall
not be affected thereby.
(g) Assignment . This Agreement, and all of Executive’s rights and duties hereunder, shall not be assignable or
delegable by Executive. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab
initio and of no force and effect. This Agreement shall be assigned by the Company to a person or entity which is a successor in
interest (“ Successor ”) to substantially all of the business operations of the Company. Upon such assignment, the rights and
obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity.
12
(h) Set Off; No Mitigation . Executive shall not be required to mitigate the amount of any payment provided for
pursuant to this Agreement by seeking other employment, and such payments shall not be reduced by any compensation or benefits
received from any subsequent employer or other endeavor. Any amounts due under Section 5 of this Agreement are considered
reasonable by the Company and are not in the nature of a penalty.
(i) Compliance with Code Section 409A .
(i) The intent of the parties is that payments and benefits under this Agreement comply with or be exempt
from Code Section 409A and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in
compliance therewith. If any provision of this Agreement (or of any award of compensation, including equity compensation
or benefits) would cause Executive to incur any additional tax or interest under Code Section 409A, the Company shall, after
consulting with and receiving the approval of Executive, reform such provision in a manner intended to avoid the incurrence
by Executive of any such additional tax or interest.
(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of
this Agreement providing for the payment of any amounts or benefits that are considered nonqualified deferred compensation
under Code Section 409A upon or following a termination of employment unless such termination is also a “separation from
service” within the meaning of Code Section 409A, and, for purposes of any such provision of this Agreement, references to
a “termination,” “termination of employment” or like terms shall mean “separation from service.” The determination of
whether and when a separation from service has occurred for proposes of this Agreement shall be made in accordance with
the presumptions set forth in Section 1.409A-1(h) of the Treasury Regulations.
(iii) Any provision of this Agreement to the contrary notwithstanding, if at the time of Executive’s
separation from service, the Company determines that Executive is a “specified employee,” within the meaning of Code
Section 409A, then to the extent any payment or benefit that Executive becomes entitled to under this Agreement on account
of such separation from service would be considered nonqualified deferred compensation under Code Section 409A, such
payment or benefit shall be paid or provided at the date which is the earlier of (i) six (6) months and one day after such
separation from service and (ii) the date of Executive’s death (the “ Delay Period ”). Upon the expiration of the Delay Period,
all payments and benefits delayed pursuant to this Section 9(i) (whether they would have otherwise been payable in a single
sum or in installments in the absence of such delay) shall be paid or provided to Executive in a lump-sum, and any remaining
payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates
specified for them herein.
(iv) Any reimbursements and in-kind benefits provided under this Agreement that constitute deferred
compensation within the meaning of Code Section 409A shall be made or provided in accordance with the requirements of
Code Section 409A, including that (A) in no event shall any fees, expenses or other amounts eligible to
13
be reimbursed by the Company under this Agreement be paid later than the last day of the calendar year next following the
calendar year in which the applicable fees, expenses or other amounts were incurred; (B) the amount of expenses eligible for
reimbursement, or in-kind benefits that the Company is obligated to pay or provide, in any given calendar year shall not
affect the expenses that the Company is obligated to reimburse, or the in-kind benefits that the Company is obligated to pay
or provide, in any other calendar year, provided that the foregoing clause (B) shall not be violated with regard to expenses
reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit
related to the period the arrangement is in effect; and (C) Executive’s right to have the Company pay or provide such
reimbursements and in-kind benefits may not be liquidated or exchanged for any other benefit.
(v) For purposes of Code Section 409A, Executive’s right to receive any installment payments shall be
treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a
payment period with reference to a number of days (for example, “payment shall be made within thirty (30) days following
the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the
Company. In no event may Executive, directly or indirectly, designate the calendar year of any payment to be made under
this Agreement, to the extent such payment is subject to Code Section 409A.
(j) Notice . For the purpose of this Agreement, notices and all other communications provided for in the Agreement
shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it
has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set
forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon receipt.
If to the Company:
APX Group, Inc.
c/o 313 Acquisition LLC
4931 North 300 West
Provo, Utah 84604
Attention: General Counsel
with a copy (which shall not constitute notice) to:
The Blackstone Group
345 Park Avenue
New York, New York 10154
Attention: Peter Wallace
and
14
Simpson Thacher & Bartlett LLP
425 Lexington Avenue,
New York, New York 10017
Attention: Gregory T. Grogan
If to Executive:
To the most recent address of Executive set forth in the personnel records of the Company.
(k) Executive Representation . Executive hereby represents to the Company that the execution and delivery of this
Agreement by Executive and the Company and the performance by Executive of Executive’s duties hereunder shall not constitute a
breach of the terms of any employment agreement or other agreement or written policy to which Executive is a party or otherwise
bound. Executive hereby further represents that he is not subject to any restrictions on his ability to solicit, hire or engage any
employee or other service-provider. Executive agrees that the Company is relying on the foregoing representations in entering into
this Agreement and related equity-based award agreements.
(l) Withholding Taxes . The Company may withhold from any amounts payable under this Agreement such
Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
(m) Counterparts . This Agreement may be signed in counterparts, each of which shall be an original, with the
same effect as if the signatures thereto and hereto were upon the same instrument.
[ Signatures Follow ]
15
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
APX GROUP, INC.
/s/ Alex J. Dunn
By: Alex J. Dunn
Title: President
EXECUTIVE
/s/ Matthew J. Eyring
Matthew J. Eyring
Exhibit
I
RELEASE
AND
WAIVER
OF
CLAIMS
This Release and Waiver of Claims (“ Release ”) is entered into and delivered to 313 Acquisition LLC (the “ Company ”) as of this
[●] day of _________, 201[_], by Matt Eyring (the “ Executive ”). The Executive agrees as follows:
1.
The employment relationship between the Executive and the Company and its subsidiaries and affiliates, as applicable,
terminated on the [●] day of _______, 201[_] (the “ Termination Date ”) pursuant to Section [__] of the Employment Agreement
between the Company and Executive dated March 8, 2016 (“ Employment Agreement ”).
2.
In consideration of the payments, rights and benefits provided for in Sections 5(d)(ii)(B) and 5(d)(ii)(C) of the
Employment Agreement (collectively, as applicable, the “ Separation Terms ”) and this Release, the sufficiency of which the
Executive hereby acknowledges, the Executive, on behalf of himself and his agents, representatives, attorneys, administrators, heirs,
executors and assigns (collectively, the “ Employee Releasing Parties ”), hereby releases and forever discharges the Company
Released Parties (as defined below), from all claims, charges, causes of action, obligations, expenses, damages of any kind
(including attorneys fees and costs actually incurred) or demands, in law or in equity, whether known or unknown, which may have
existed or which may now exist from the beginning of time to the date of this Release, arising from or relating to Executive’s
employment or termination from employment with the Company or otherwise, including a release of any rights or claims the
Executive may have under Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Age Discrimination in
Employment Act of 1967, as amended (“ ADEA ”); the Older Workers Benefit Protection Act; the Americans with Disabilities Act
of 1990; the Rehabilitation Act of 1973; the Family and Medical Leave Act of 1993; Section 1981 of the Civil Rights Act of 1866;
Section 1985(3) of the Civil Rights Act of 1871; the Employee Retirement Income Security Act of 1974; the Fair Labor Standards
Act; any other federal, state or local laws against discrimination; or any other federal, state, or local statute, regulation or common
law relating to employment, wages, hours, or any other terms and conditions of employment. This includes a release by the
Executive of any and all claims or rights arising under contract (whether written or oral, express or implied), covenant, public policy,
tort or otherwise. For purposes hereof, “Company Released Parties” shall mean the Company and any of its past or present
employees, agents, insurers, attorneys, administrators, officials, directors, shareholders, divisions, parents, members, subsidiaries,
affiliates, predecessors, successors, employee benefit plans, and the sponsors, fiduciaries, or administrators of the Company’s
employee benefit plans.
3.
The Executive acknowledges that the Executive is waiving and releasing rights that the Executive may have under the
ADEA and other federal, state and local statutes contract and the common law and that this Release is knowing and voluntary. The
Executive and the Company agree that this Release does not apply to any rights or claims that may arise after the date of execution
by Executive of this Release. The Executive acknowledges that the consideration given for this Release is in addition to anything of
value to which the Executive is already entitled. The Executive further acknowledges that the Executive has been advised by this
writing that: (i) the Executive should consult with an attorney prior to executing this Release; (ii) the Executive has up to twenty-one
(21) days within which to consider this Release, although the Executive may, at the Executive’s discretion, sign and return this
Release at an earlier time, in which case the Executive waives all rights to the balance of this twenty-one (21) day review period; and
(iii) for a period of 7 days following the execution of this Release in duplicate originals, the Executive may revoke this Release in a
writing delivered to the Chairman of the Board of Directors of the Company, and this Release shall not become effective or
enforceable until the revocation period has expired.
4.
This Release does not release the Company Released Parties from (i) any obligations due to the Executive under the
Separation Terms, (ii) any rights Executive has to indemnification by the Company and to directors and officers liability insurance
coverage, (iii) any vested rights the Executive has under the Company’s employee pension benefit and group healthcare benefit
plans as a result of Executive’s actual service with the Company, (iv) any fully vested and nonforfeitable rights of the Executive as a
plans as a result of Executive’s actual service with the Company, (iv) any fully vested and nonforfeitable rights of the Executive as a
shareholder or member of the Company or its affiliates, (v) any rights of the Executive pursuant to any equity or incentive award
agreement with the Company, or (vi) any rights which cannot be waived by an employee under applicable law.
5.
The Executive represents and warrants that he has not filed any action, complaint, charge, grievance, arbitration or
similar proceeding against the Company Released Parties.
6.
This Release is not an admission by the Company Released Parties or the Employee Releasing Parties of any
wrongdoing, liability or violation of law.
7.
The Executive shall continue to be bound by the restrictive covenants contained in the Employment Agreement.
8.
This Release shall be governed by and construed in accordance with the laws of the State of New York, without
reference to the principles of conflict of laws.
9.
Each of the sections contained in this Release shall be enforceable independently of every other section in this Release,
and the invalidity or unenforceability of any section shall not invalidate or render unenforceable any other section contained in this
Release.
10.
The
Executive
acknowledges
that
the
Executive
has
carefully
read
and
understands
this
Release,
that
the
Executive
has
the
right
to
consult
an
attorney
with
respect
to
its
provisions
and
that
this
Release
has
been
entered
into
knowingly
and
voluntarily.
The
Executive
acknowledges
that
no
representation,
statement,
promise,
inducement,
threat
or
suggestion
has
been
made
by
any
of
the
Company
Released
Parties
to
influence
the
Executive
to
sign
this
Release
except
such
statements
as
are
expressly
set
forth
herein
or
in
the
Employment
Agreement.
Executive has executed this Release as of the day and year first written above.
EXECUTIVE
____________________________________
Matt Eyring
16
COMPUTATION
OF
RATIO
OF
EARNINGS
TO
FIXED
CHARGES
Successor
Year
Ended
December
31,
2016
2015
2014
2013
(in
thousands)
Exhibit
12.1
Period
from
November
17,
through
December
31,
2012
Predecessor
Period
from
January
1,
through
November
16,
2012
$
197,965 $
161,339 $
147,511 $
114,476 $
12,645 $
106,620
5,318
5,047
3,624
2,028
217
1,649
203,283
166,386
151,135
116,504
12,862
108,269
Fixed
Charges:
Interest expense
Capitalized interest
Portion of rental expense which represents
interest factor (1)
Total Fixed Charges
Earnings
Available
for
Fixed
Charges:
Pretax loss from continuing operations
(275,957)
(278,756)
(238,146)
(120,921)
(41,005)
(149,674)
Distributed equity income of affiliated
companies
—
—
—
—
Add: Fixed Charges
203,283
166,386
151,135
116,504
216
12,862
Total earnings available for fixed charges
$
(72,674) $
(112,370) $
(87,011) $
(4,417) $
(27,927) $
6
108,269
(41,399)
Earnings for the period were insufficient to
cover fixed charges by the following
amounts:
(275,957)
(278,756)
(238,146)
(120,921)
(40,789)
(149,668)
Ratio of earnings to fixed charges (2)
NM
NM
NM
NM
NM
NM
(1) Represents the portion of rental expense deemed to be attributable to interest
(2) NM - Not meaningful
Name
313 Aviation, LLC
Smart Home Pros, Inc.
Vivint, Inc.
Vivint Purchasing, LLC
AP AL LLC
IPR LLC
Farmington IP LLC
Smartrove Inc.
Space Monkey, LLC
Vivint Firewild, LLC
Vivint Funding US LLC
Vivint Funding Holdings LLC
Vivint Group, Inc.
Vivint Servicing, LLC
Vivint Solar Licensing, LLC
Vivint Wireless, Inc.
Vivint Louisiana LLC
Vivint Australia Pty Ltd.
Vivint Canada, Inc.
Vivint New Zealand Ltd.
Vivint Canada Servicing, LP
Vivint Funding Canada LP
Vivint Puerto Rico, LLC
Subsidiaries
of
APX
Group,
Inc.
Jurisdiction
of
Incorporation
/
Organization
Exhibit
21.1
Utah
Utah
Utah
Utah
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Louisiana
Australia
Canada
New Zealand
Ontario
Ontario
Puerto Rico
I, Todd Pedersen, certify that:
CERTIFICATION
OF
PERIODIC
REPORT
UNDER
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2016 of APX Group Holdings, Inc.;
Exhibit
31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 2, 2017
/s/ Todd Pedersen
Todd Pedersen
Chief Executive Officer and Director
(Principal Executive Officer)
I, Mark Davies, certify that:
CERTIFICATION
OF
PERIODIC
REPORT
UNDER
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2016 of APX Group Holdings, Inc.;
Exhibit
31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 2, 2017
/s/ Mark Davies
Mark Davies
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
Exhibit
32.1
In connection with the Annual Report of APX Group Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Todd Pedersen, Chief Executive Officer and Director of the Company, do hereby certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
•
•
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the
periods presented therein.
Date: March 2, 2017
/s/ Todd Pedersen
Todd Pedersen
Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
Exhibit
32.2
In connection with the Annual Report of APX Group Holdings, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Davies, Chief Financial Officer of the Company, do hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
•
•
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the
periods presented therein.
Date: March 2, 2017
/s/ Mark Davies
Mark Davies
Chief Financial Officer
(Principal Financial Officer)
SECTION
13(r)
DISCLOSURE
Exhibit
99.1
The disclosures reproduced below were initially included in periodic reports filed with the Securities and Exchange Commission by Travelport
Worldwide Limited (“Travelport”) for its fiscal quarter ended March 31, 2016 and by NCR Corporation (“NCR”) for its fiscal year ended December 31, 2016, in
each case in accordance with Section 13(r) of the Securities Exchange Act of 1934, as amended. During all or a portion of fiscal 2016, each of Travelport and
NCR may be considered to have been affiliates of The Blackstone Group L.P. (“Blackstone”), and, therefore, during such time, also affiliates of APX Group
Holdings, Inc. (“APX”). APX did not independently verify or participate in the preparation of any of these disclosures.
Travelport included the following disclosure in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 :
“Trade Sanctions Disclosure
The following activities are disclosed as required by Section 13(r)(1)(D)(iii) of the Exchange Act.
As part of our global business in the travel industry, we provide certain passenger travel related Travel Commerce Platform and Technology Services to Iran
Air. We also provide certain Technology Services to Iran Air Tours. All of these services are either exempt from applicable sanctions prohibitions pursuant to a
statutory exemption permitting transactions ordinarily incident to travel or, to the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign
Assets Control. Subject to any changes in the exempt/licensed status of such activities, we intend to continue these business activities, which are directly related to
and promote the arrangement of travel for individuals.
The gross revenue and net profit attributable to these activities in the quarter ended March 31, 2016 were approximately $156,000 and $109,000,
respectively.”
NCR included the following disclosure in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016 :
“ Disclosure
Pursuant
to
Section
13(r)(1)(D)(ii)
of
the
Securities
Exchange
Act.
Pursuant to Section 13(r)(1)(D)(ii) of the Securities Exchange Act of 1934, as
amended, we note that, during the period from January 1, 2016 through April 30, 2016, we continued to maintain a bank account and guarantees at the Commercial
Bank of Syria (“CBS”), which was designated as a Specially Designated National pursuant to Executive Order 13382 (“EO 13382”) on August 10, 2011. This bank
account and the guarantees at CBS were maintained in the normal course of business prior to the listing of CBS pursuant to EO 13382. We note that the last known
account balance was approximately $3,468 at April 30, 2016. The bank account did not generate interest from January 1, 2016 through April 30, 2016, and the
guarantees did not generate any revenue or profits for the Company. Pursuant to a license granted to the Company by OFAC on January 3, 2013, and subsequent
licenses granted on April 29, 2013, July 12, 2013, February 28, 2014, November 12, 2014, and October 24, 2015, the Company had been engaged in winding down
its past operations in Syria. The Company’s last such license expired on April 30, 2016. In addition, the Company’s application to renew its license to transact
business with CBS, which was submitted to OFAC on May 18, 2015, was not acted upon prior to the expiration of the Company’s last such license. As a result,
and in connection with the license expiration, the Company abandoned its remaining property in Syria, which, including the CBS account, was commercially
insignificant, and ended the employment of its final two employees in Syria, who had remained employed by the Company to assist with the execution of the
Company’s wind-down activities pursuant to authority granted by the OFAC licenses. The Company does not intend to engage in any further business activities
with CBS.”