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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, 2017
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, 2017 until the effectiveness of the registrant’s Registration Statement on Form S-4 (File No. 333-216972) on April 3, 2017 the registrant
was, and from January 1, 2018 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 6, 2018 , 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 Accounting Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
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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 contained in this annual report on Form 10-K include, but are not limited to,
statements about our ability to:
accelerate adoption of our smart home solution;
establish and grow through new customer acquisition channels;
increase brand awareness;
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• meet customer expectations and address key friction points for smart home adoption and use;
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• meet future liquidity requirements and comply with restrictive covenants related to our long-term indebtedness;
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expand our ecosystem with third-party and proprietary devices;
reduce subscriber attrition;
lower net subscriber acquisition costs;
improve unit economics and grow subscription revenues per customer over time;
increase new customer originations, customer usage, and customer satisfaction;
develop, design, and sell our own products and services that are differentiated from those of our competitors;
attract, train and retain an effective sales force and other key personnel;
upgrade and maintain our information technology systems;
acquire and protect intellectual property;
enhance our future operating and financial results;
comply with laws and regulations applicable to our business; and
successfully defend litigation brought against us.
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:
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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;
privacy and data protection laws, privacy or data breaches, or the loss of data; and
the impact to our business, results of operations, financial condition, regulatory compliance and customer experience of the Vivint Flex Pay plan (as
defined in Note 2 - Basis of Presentation in the consolidated financial statements) and the Best Buy Smart Home powered by Vivint program.
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
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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.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this annual report on Form 10-K, and while we believe such information forms a reasonable basis for such statements,
such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of,
all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
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 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
As used in this annual report on Form 10-K, unless otherwise noted or the context otherwise requires:
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references to “Vivint,” “we,” “us,” “our” and “the Company” are to APX Group Holdings, Inc. and its consolidated subsidiaries;
references to “2GIG” are to 2GIG Technologies, Inc., our affiliate;
references to “Acquisition LLC” are to 313 Acquisition LLC, the Company's indirect parent;
references to “AMRU” are to average monthly revenue per user, which consists of Total MR (as defined below) divided by Total Subscribers (as defined
below) at the end of a given period;
references to “APX Group” are to APX Group, Inc., an indirect wholly-owned subsidiary of the Company;
references to the “Consumer Financing Program” or “CFP” are to the program, launched in the first quarter of 2017 under the Vivint Flex Pay plan,
pursuant to which we offer to qualified customers in the United States an opportunity to finance the purchase of products and installation fees in
connection with the services through a third-party financing provider;
references to “Holdings” and “Parent Guarantor” are to APX Group Holdings, Inc., a wholly- owned subsidiary of the Company;
references to “Notes” are to the 6.375% Senior Secured Notes due 2019 (“2019 notes”), 8.75% Senior Notes due 2020 (“2020 notes”), 8.875% Senior
Secured Notes due 2022 (“2022 private placement notes”), 7.875% Senior Secured Notes due 2022 (“2022 notes”) and 7.625% Senior Notes due 2023
(“2023 notes”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources”;
references to “Revolving Credit Facility” are to the senior secured revolving credit facility. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations- Liquidity and Capital Resources-Revolving Credit Facility”;
references to “RICs” are to retail installment contracts offered under the Vivint Flex Pay plan with respect to the purchase of products and installation fees
to certain of our customers who do not qualify for the CFP but qualify under our historical underwriting criteria;
references to “Solar” are to Vivint Solar, Inc., our affiliate;
references to “our Sponsor” are to certain investment funds affiliated with The Blackstone Group L.P.;
references to “Total MR” are to the aggregate, contracted recurring monthly service billings to our smart home and security subscribers, based on the
Total Subscribers number as of the end of a given period, plus deferred product and interest revenue recognized during the last month of the period;
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references to “Total Subscribers” are to the aggregate number of active smart home and security subscribers at the end of a given period, excluding
subscribers acquired under pilot programs; and
references to the “Vivint Flex Pay” plan are to the plan, introduced in January 2017, under which we launched the Consumer Financing Program and
began to offer RICs as well as the option to pay in full at the time of purchase.
On November 16, 2012, APX Group and two of its affiliates, Solar and 2GIG, were acquired by an investor group comprised of certain investment funds
affiliated with our Sponsor, and certain co- investors and management investors (the “Investor Group”). 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, Solar and 2GIG became indirect wholly-owned subsidiaries of Acquisition LLC, an entity wholly-owned by the Investor Group. Upon the
consummation of the Merger, APX Group and 2GIG became consolidated subsidiaries of Holdings, which in turn is wholly owned by the Issuer, which in turn is
owned by Acquisition LLC, and Solar became a direct wholly-owned subsidiary of Acquisition LLC. Acquisition LLC, the Issuer and Holdings had no
independent operations and were formed for the purpose of facilitating the Merger.
Our statement of operations and balance sheet data included under “Item 7. Selected Financial Data” included in this annual report on Form 10-K include the
results of operations of 2GIG up through April 1, 2013, which was the date we completed the sale of 2GIG and its subsidiary (the “2GIG Sale”) to Nortek, Inc. In
connection with the 2GIG Sale, 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 as provided in the supply agreement. Due to our continuing involvement with 2GIG under the supply agreement, it is
not considered a discontinued operation. 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.
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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 a smart home company. Our mission is to redefine the home experience through intelligently designed devices and cloud-enabled services delivered
to every home by people who care.
Our leading smart home platform has approximately 1.3 million customers and a nationwide sales and service footprint that covers 98% of U.S. zip codes.
Through our cloud-enabled software platform, we manage over 16.8 million devices in our customers’ homes and process approximately 700 million home-related
events each day, as of December 31, 2017 .
We provide comprehensive, secure, and simple to use smart home solutions for the broad consumer market. We believe that compelling smart home use
cases require the careful orchestration of multiple devices, and that our cloud-enabled software platform is best positioned to deliver this value. Our curated
ecosystem of products includes cameras, sensors, door locks, thermostats, garage door controllers, voice-control speakers, and dedicated touchscreens. Our
customers can access their smart homes with a single app, from anywhere in the world.
The smart home market is global and in the early stages of broad consumer adoption. We employ an integrated business model that leverages Vivint’s
technology and people to reduce key consumer friction points limiting smart home adoption and use. Our trained professionals educate consumers on the value and
affordability of smart home, customize systems for their homes, install systems, and provide ongoing monitoring, customer service and in-home support. We
believe our end-to-end approach gives us traction with a broad customer footprint and is a key differentiator relative to point product and do-it-yourself, or DIY,
providers. We are expanding our go-to-market strategy through new channels, including retail, to further drive adoption as smart home awareness grows.
To achieve broad consumer market adoption, we believe that smart home solutions must deliver a truly intelligent experience, as opposed to simple remote
control of the home. A smart home must understand the state of the home and its occupants; interact with users to preserve awareness and control; and take
coordinated action with minimal user effort. Our comprehensive smart home systems are professionally installed, with an average of over 14 devices in each
customer’s home. The combination of our broad device offering and professional installation results in the right devices being installed in the right places,
providing valuable insight into the home. Our artificial intelligence platform, Vivint Sky, processes over 8,000 events per second from those devices to understand
the state of the home. We believe that no other company is as well positioned to capitalize on the opportunity to deliver a truly smart home.
A focus on unit economics and customer lifetime value underpins our investment and strategy. We generate subscription-based, high-margin recurring
revenue from customers who sign up for our smart home services. We also generate revenue from the sale of smart home devices. As we continue to focus on
product, service and business model innovation, we believe that we will be able to further improve customer lifetime value and returns.
We see growth opportunities in the near-term as we open new sales channels and develop new smart home use cases. In addition to providing consultative
sales in the home and over the telephone, we recently began a large-scale rollout of consultative sales in retail locations. We believe that as smart home sensors
become increasingly ubiquitous and artificial intelligence improves, additional commerce opportunities will emerge for Vivint.
In 2017 and 2016 , we generated revenue of $882.0 million and $757.9 million , respectively along with a net loss of $410.2 million and $276.0 million ,
respectively. As of December 31, 2017 and 2016 , we had approximately $2.8 billion and $2.5 billion of total debt outstanding, respectively.
Our Industry
The smart home market is in the beginning stages of its evolution. To date, the market has primarily focused on stand-
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alone devices with relatively narrow capabilities, such as connected thermostats, lightbulbs, or cameras. While these products have attracted some early adopters
and technology enthusiasts, they have not adequately met expectations for a more comprehensive and fully integrated smart home experience that we believe is
necessary for broad consumer market adoption.
We believe there is a significant opportunity for companies that can address key friction points to smart home adoption and use. These include:
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educating consumers on the benefits of a smart home;
delivering compelling use cases;
enabling seamless integration and interoperability of smart home devices;
helping consumers personalize their smart home experience;
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providing worry-free installation and support; and
addressing security and privacy concerns.
We believe that our fully integrated, end-to-end product, sales and service approach successfully addresses these key points of friction, and positions us to
drive broad consumer market adoption.
End-to-End Business Model Built to Drive Broad Consumer Market Adoption
We execute across every stage of the customer lifecycle to eliminate or minimize the factors that might prevent consumers from buying, using, and valuing
our smart home solution. We believe that this approach enables us to overcome the barriers that have generally kept the industry limited to early adopters and
technology enthusiasts.
Our technology and people are the foundation of our business model. Our technology is based on seamless integration of devices and cloud-enabled services
and delivers a highly rated, everyday consumer experience from interacting with a visitor at your front door to automatically saving energy while you are away. By
combining our technology solution with our salespeople, technicians, monitoring center operators, and customer support agents, we strive to make the entire
customer journey smooth and successful.
Our direct relationship with customers from sales and installation to service gives us a real-time view into their smart home needs. This enables us to better
innovate by adapting our product functionality and roadmap, as well as to track market trends as they develop. Our approach also allows us to identify and resolve
product and operational issues faster. We are convinced that owning technology development, sales, installation and support provides us with a distinct competitive
advantage that enhances our agility and responsiveness to consumer needs.
We believe that our purpose-built, end-to-end business model best positions Vivint to deliver on the promise of the smart home.
Customer-Facing Technology
Curated Ecosystem of Award-Winning Devices
At the center of the Vivint solution is the SkyControl panel, which serves as the hub for the smart home. SkyControl manages secure and reliable
communications among connected devices in the home and our cloud-enabled software platform. Each SkyControl contains a cellular radio and a battery backup to
enable the smart home to continue functioning smoothly even in the event of internet and power outages. Its touchscreen interface enables intuitive control of the
home.
We offer a range of both proprietary and third-party devices that our software combines into a comprehensive smart home experience. Our continually
evolving lineup includes indoor, outdoor, and doorbell cameras; door locks; thermostats; voice control speakers; lighting products; garage door controllers; data
storage devices; and dedicated in-home touchscreens. We also offer door and window sensors; motion detectors; smoke and carbon monoxide detectors; flood/leak
sensors; freeze sensors; and glass-break detectors. We believe that our broad set of seamlessly integrated and elegantly designed devices is an important
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competitive differentiator.
We have introduced a carefully selected set of popular third-party devices into our ecosystem. We choose these devices based on a combination of their
popularity and distinctive functionality as well as their ability to meet our high standards for reliability and security. Examples of third-party devices in our
ecosystem include the Amazon Echo and other Amazon Alexa-compatible voice control devices; Google Home; the Nest Learning Thermostat; Kwikset locks; and
Philips Hue lighting products. We provide a deep and seamless integration that results in a valuable and intuitive user experience and support these devices in the
same way as our proprietary devices. We plan to continue expanding our ecosystem with third-party integrations as new devices are introduced to the market to
deliver the best possible experience to our customers.
Cloud-Enabled Software Platform
Our cloud-enabled software platform delivers to customers an easy, enjoyable smart home experience. Leveraging of software running in the home, in the
cloud and on customers’ mobile devices, our platform securely manages real-time communications across the system; executes rules and notifications triggered by
defined home-related events; and provides a means for users to interact with their homes from around the globe.
We provide customers multiple methods to access and to interact with their smart homes. In addition to dedicated in-home touchscreens and our
comprehensive integrations with voice-control devices, we provide apps for Android and iOS mobile devices and a web-based application for access from desktop
and laptop computers.
We believe that compelling smart home use cases-from interacting with a visitor at your front door to automatically saving energy while you are away-
require the careful orchestration of multiple devices. Our software platform creates the seamless integration required to do so. Because of our software, our
comprehensive lineup of devices, and our 2017 average of over 14 devices installed per home, we are well positioned to deliver on these complex yet valuable use
cases for the smart home.
Artificial Intelligence-Driven Smart Home
We believe that smart home solutions must deliver a truly intelligent experience. A smart home must:
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predict and detect the current state of the home, its systems, and occupants;
interact with occupants as necessary to preserve awareness and control;
predict occupants’ preferences based on these interactions; and
take coordinated action with minimal user effort.
We offer more than simple remote control or a few connected devices, and believe we have moved beyond serving technology enthusiasts and early adopters
to meaningfully addressing the broad consumer market. A compelling smart home experience must provide customers with valuable personalized insight and the
ability to effect coordinated action, transforming today’s connected home into tomorrow’s true smart home. We believe that our artificial intelligence platform,
Vivint Sky, is a key differentiator that improves the customer experience and engagement by predicting and reacting to users’ needs, and ultimately accelerates
consumer adoption.
Vivint Sky processes and stores over 700 million events each day from the devices in customers’ homes. Vivint Sky uses the data to understand the state of
the home in real-time, which enables it to intelligently manage the home on the homeowners’ behalf, while still keeping them informed and in control. Through
Vivint Sky’s continual interactions with homeowners it gains insight into their preferences, which we plan to use to improve future interactions.
Our broad device offering and professional installation are important enablers of our artificial intelligence capability. With the large number of installed
devices per customer, we are able to generate a much more complete picture of home activity. Our professionals install the right devices in the right places in the
home to maximize Vivint Sky’s ability to gain valuable insights. This provides a distinct advantage over do-it-yourself, or DIY, systems, where the customer would
need to both purchase the right devices and know where to install them.
As we continue to scale and install additional devices, the increasing quantity of data Vivint Sky processes will further
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enhance the quality of insights and automation we deliver to our customers.
People
Realizing the full value of a smart home requires the involvement of well-trained professionals at every step of the customer journey. Our professionals
facilitate sales, installation, monitoring, customer care and in-home service, and we empower them with proprietary technology.
Sales
Vivint has made a significant and sustained investment to develop a differentiated consultative sales capability. We have created a systematic method to
recruit, train and deploy our high-performance sales professionals at scale. We believe that our consultative sales approach is essential to helping prospective
customers:
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understand the value proposition and affordability of a smart home;
customize their smart home system; and
schedule a professional installation.
We conduct consultative sales in the home, over the phone, and in retail stores. The consultative sales process also provides our product and technology
groups with real-time feedback directly from customers. Our sales professionals work closely with the installation teams to ensure the customer’s tailored smart
home solution is installed quickly and professionally.
Installation
Installation of a smart home system is complex, and often consumers do not have the skills, desire, or time to handle the installation themselves. In our
experience, most consumers are not able or willing to spend the time required to replace door locks and thermostats, install doorbell and outdoor cameras, and
place sensors around the house. Our licensed and highly trained installation professionals provide a worry-free installation experience for our customers and ensure
successful integration and interoperability of the system. They install and optimize our customers’ tailored smart home solutions, verify that everything works
properly, and educate them on the capabilities and functionality of their systems. We strongly believe that our installation force is critical for reducing friction to
enable broad consumer market adoption of smart home solutions.
Monitoring
Smart home systems are connected to our monitoring centers. In the case of certain defined events, including fire or carbon monoxide alarms, burglar alarms,
or medical emergencies, the customer is immediately notified, and we dispatch appropriate responders, if necessary. Our two fully redundant monitoring facilities
operate 24/7.
Customer Care
Our U.S.-based customer service centers operate 24/7 to provide post-installation support by telephone or online. Our customer care representatives leverage
proprietary technology to enable remote diagnosis and quick resolution of issues that arise. Whether answering questions about functionality or assisting users with
system features, our care representatives help ensure our customers are satisfied, leading to greater subscriber retention.
In-Home Service
We deploy full-time in-home Vivint service professionals throughout North America to provide prompt service to our subscribers when required. Our in-
home service professionals are highly trained to address maintenance and service issues. They leverage proprietary technology to schedule appointments for
installations and service with customers to ensure high satisfaction. We believe that in-home service is necessary to meet the needs of the broad consumer market.
Technology to Support Our People
We have developed proprietary technology to empower our sales representatives, installation professionals and service technicians to deliver our smart home
solution:
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• StreetGenie. Our go-to-market software application allows us to target prospective customers efficiently and maintain detailed records of past interactions
with each home. It coordinates activities among our sales teams and guides sales representatives through our finely-tuned process.
• TechGenie. Our in-home technician software application enables them to receive schedules, manage inventory and interact with the customer service
center remotely to maximize productivity.
• CareGenie. Our customer service software application equips our care representatives with case history, diagnostic capabilities and proactive tools to help
them deliver a positive service experience.
High-Performing Scalable Economic Model
We believe our end-to-end business model, sticky customer relationships, and subscription-based, high-margin recurring revenues drive significant long-term
value. Our focus on unit economics underpins our investments and strategy. Vivint Flex Pay, under which customers pay separately for Vivint products and
services, is a financial model innovation we introduced in early 2017 that significantly enhances our unit economics and the capital efficiency of our business. A
significant amount of financing is provided through our third-party financing partner and the remainder is provided by us. As a result of this program, we receive
more cash up front, lowering our net subscriber acquisition cost. We intend to further improve our unit economics through additional product, service, and business
model innovations.
Over the past five years, we have increased the average customer lifetime value by growing our AMRU and achieving strong customer retention. Our
subscription revenues per customer have increased over this period with adoption of our smart home platform. We expect to continue to grow subscription
revenues per customer over time, although the separation of product and service revenues associated with our introduction of Vivint Flex Pay results in lower
average revenue per new user, beginning in 2017, notwithstanding the very positive impact to us from the now upfront payment for products and installation that
are not included in the average revenue per new user. As average revenue per customer has expanded, net service costs per customer have remained relatively
stable. This service cost efficiency is a result of our end-to-end business model. This business model has contributed to achieving low customer attrition. We
experienced customer attrition of 11% for 2017 , which implies an average customer lifetime of over eight years.
Our focus on customer lifetime value relative to low subscriber acquisition costs yields compelling returns on a per customer basis. We intend to focus on
improving the lifetime value of our customers and unit economics of our business by continuing to enhance the customer experience and innovating on our
platform. In addition, we intend to continue to lower customer acquisition costs by offering innovative financing and payment options such as Vivint Flex Pay and
further expanding into new channels, such as retail.
As we continue to focus on innovation and improving the customer experience, we believe we will be able to improve lifetime value and unit economics.
Growth Strategy
Our objective is to be the leading provider of smart home products and services worldwide. To accomplish this, we intend to:
• Grow Existing Channels. We have immediate opportunities for growth in our existing sales channels, and in our emerging retail channels.
• Expand into New Channels. We intend to expand into new distribution channels, including E-commerce and multi-family units.
• Upsell to Customer Base. We intend to expand efforts to market our latest smart home solutions to existing customers.
• Accelerate Product Innovation and Integrations. We will continue to expand the value of our platform and marketing reach by accelerating our product
innovation as well as integrations with third-party smart home devices and software applications.
• Capitalize on Our AI Platform Opportunities. Our artificial intelligence capabilities will enable us to better
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anticipate and meet customer needs with additional services and commerce, increasing customer lifetime value.
Our Products and Services
Our portfolio of integrated smart home products and services allows customers to remotely access and manage their homes from mobile devices, through our
Vivint Smart Home app, or their desktop or laptop. Subscribers can create a customized Vivint smart home by choosing from our broad product offering. We strive
to bring easy-to-use technologies to our subscribers.
Our
proprietary
products
include:
• Vivint SkyControl Panel. The system hub has a 7-inch touchscreen to connect and control the whole system-locks, lights, thermostats, cameras, sensors
and more. It includes battery backup and cellular radio for reliable and secure communications.
• Vivint Glance Display. The secondary panel gives complete control of the smart home from any room in the home. It is mounted on the wall or placed on
a counter.
• Vivint Doorbell Camera. The doorbell camera enables the customer to see and speak with doorstep visitors from anywhere. Integration with locks and
garage doors gives them full control of access to their home.
• Vivint Ping Camera. The indoor camera enables customers to connect with loved ones with two-way audio and one-way video. It provides a unique one-
touch callout button to instantly connect to family members by mobile devices.
• Vivint Outdoor Camera. Customers can look after their property outside the home even when they are away with the outdoor cameras.
• Vivint Playback. Customers can record 30 days of continuous video from up to four cameras to their Vivint Smart Drive and access it remotely from their
mobile device.
• Vivint Element Thermostat. Paired with Vivint Sky, the Element thermostat saves customers money by automatically adjusting the temperature based on
when customers are home, away or asleep. Customers can easily control the temperature from their panel, app, thermostat or even with their voice.
• Door/Window Contact Sensor. Customers can ensure doors and windows are secure with a Vivint Door/Window Contact Sensor.
• Motion Detector. Customers can track movement in their house with this passive infrared motion sensor.
• Garage Door Controller. Customers can open or close their garage door remotely from our mobile app with this controller.
• Wireless Smoke Detector. Customers can keep their home safer with this battery-powered wireless smoke detector. When smoke, excessive heat or cold is
detected, the sensor sends a signal to the panel, which sounds a loud local alarm, and the Vivint monitoring team immediately dispatches authorities.
• Flood Sensor. Customers are notified when their basement floods or reaches freezing temperatures with this sensor.
• Carbon Monoxide Detector. When excessive carbon monoxide levels are detected, the sensor sends a signal to the panel, which sounds a loud local alarm,
and the Vivint monitoring team immediately dispatches authorities.
• Glass-Break Detector. Customers are alerted if a window is broken in the home with this sensor.
Third-party
products
include:
• Kwikset Smart Lock. Customers can control their locks with an access code or from anywhere via the mobile app. With one-touch lockup, they can
control their security, lights and thermostat when locking up to leave.
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• Amazon Echo. Customers can control their smart home with the Amazon Echo voice-controlled speaker. Our software integration lets them control their
entire smart home with just their voice.
• Nest Learning Thermostat. The Nest Learning Thermostat integrates with the Vivint smart home system to save money and keep customers comfortable.
They can control it with their voice, app, panel, or at the thermostat.
• Google Home. Customers can control their smart home with the Google Home voice-controlled speaker. Our software integration lets them control their
entire smart home with just their voice.
• Philips Hue. Customers can use their Philips Hue lighting to create custom lighting schedules for rooms, floors or their entire home, including having the
lights on to imitate home occupancy while away. They can control Philips Hue lighting through the panel, app or with their voice using Amazon Echo or
Google Home devices.
Our Customers
We had approximately 1.3 million customers in North America with an average FICO score of 710 at the point of sale, as of December 31, 2017 . Our
subscriber base consisted of 92% having FICO scores of 625 or greater and only 2% having sub-600 FICO scores, as of December 31, 2017 .
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 1% of our consolidated 2017 revenue.
Subscriber Contracts
We seek to ensure that our customers understand our product and service offerings, along with the key terms of their contracts by conducting two surveys
with every customer. 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 surveys are stored in our customer relationship management and billing system software, or CMS software, enabling
easy access and review.
Term and Termination
Historically, we have generally offered contracts to customers 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 majority of new customers have entered into 60 -month contracts. Customers have a right of rescission
period prescribed by applicable law during which such customers may cancel their contract without penalty or obligation. These rescission periods range from 3 to
15 days, depending on the jurisdiction in which a customer resides. As a company policy we provide new customers 70 years of age and older a 30 -day right of
rescission period. If the customer rescinds during the applicable recession period under the terms of the contract, the customer is required to return the applicable
equipment. Once the applicable rescission period expires, the customer is responsible for the monthly services fees under the contract.
Other Terms
We provide our customers with maintenance free of charge for the first 120 days after their installation. After 120 days, we will repair or replace defective
equipment without charge, but we typically bill the customer 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 customer 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, customer bankruptcy or non-
payment by customers after we have given notice that their service is being cancelled due to such non-payment.
Sales and Marketing
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We acquire customers through direct to home, inside sales, and retail sales channels. Our sales professionals take a consultative approach to the sales process,
educate potential customers on the benefits of smart home technology and tailor a solution that serves their unique needs. This consultative sales process has
enabled us to achieve a high adoption rate of our smart home solutions and we are continually evaluating ways to improve customer acquisition efficiency across
all of our sales channels. For the years ended December 31, 2017 and 2016 , we generated approximately 52% and 64% , respectively, of our new subscribers
through our direct to home sales channel.
Marketing
Strategy
We leverage the Vivint brand across all our channels. We invest in certain marketing strategies which amplify the brand and awareness of our solutions,
including through general paid media outlets. Vivint has exclusive brand naming rights for the Vivint Smart Home Arena, home of the NBA’s Utah Jazz.
Direct
to
Home
Sales
Our direct to home sales team is comprised of up to 2,800 representatives at our peak selling season. They benefit from our recruiting and training programs
designed to promote sales productivity. Our sales teams work in 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 channels are directly correlated with new subscriber acquisition, the majority of the costs
associated with this channel is variable and can scale with customer acquisition.
Inside
Sales
Our inside sales channel provides a consultative experience for consumers who contact us. Driven by increasing brand awareness and marketing
effectiveness, the number of new customers acquired through this channel in 2017 increased 14.4% compared to 2016 .
The inside sales team utilizes leads generated through multiple sources, both digital and traditional, including paid, organic and local search and display
advertising. We believe that we will continue to experience strong growth in this channel and that as Vivint’s brand awareness improves, customers’ understanding
of the smart home increases. Customers originated through our inside sales channel has grown as a percentage of our total originations from approximately 10% in
2009 to approximately 41% for the year ended December 31, 2017 .
Retail
Our entrance into the retail channel is a significant opportunity to expand our reach to the broad consumer market. It provides us with the opportunity to
engage consumers that have not considered purchasing a smart home, those that have already purchased a device that has not met their expectations, and those that
want to experience and buy smart home solutions in a traditional retail setting. The high volume of customer traffic provides the opportunity for our consultative
approach to operate at scale. In order to ensure the quality of the consultative sales approach in this setting, we deploy our own professionals on site.
In 2017, we launched a nationwide partnership with Best Buy. We market and sell our smart home products and services using a store-within-a-store
approach. Our display in Best Buy is set up to simulate an in-home experience. As of December 31, 2017 , we were selling in approximately 450 Best Buy stores.
We are also conducting pilots in other retail formats.
Customer Financing - Vivint Flex Pay
Vivint Flex Pay is a business model innovation we introduced in early 2017 that significantly enhances our unit economics and the capital efficiency of our
business. Vivint Flex Pay provides the following options for our customers:
• Consumer Financing Program. As of the second quarter of 2017, qualified customers in the United States may finance the purchase of our products
through a third-party financing provider, Citizens Bank. Customers electing to
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participate in the Consumer Financing Program receive 0% APR interest installment loans of up to $4,000 for either a 42 or 60 month term.
• Paid in Full . Customers may either pay in full at the time of installation with cash, ACH, credit or debit card.
• Retail Installment Contract. Customers not eligible for the CFP, but who qualify under our underwriting criteria, may enter into a retail installment
contract, or RIC, directly with Vivint.
Along with the purchase of the products, customers enter into a service agreement with simple pricing of $39.99 per month for smart home services or
$49.99 per month for smart home and video services with the same term lengths as their installment loan agreements or RICs.
Operations
We believe that our end-to-end business model with ownership of each step of the overall customer journey enables us to provide the customer with a
seamless user experience that enhances our brand and improves satisfaction.
In-Home
Service
We deploy full-time in-home service professionals throughout North America to provide prompt service to our subscribers when required. Our in-home
service professionals are highly trained to address maintenance and service issues. They leverage proprietary technology to schedule appointments for installations
and service with customers to ensure high satisfaction. We believe that in-home service is necessary to meet the needs of the broad consumer market.
We provide our customers with in-home service free of charge for the first 120 days after installation. After 120 days, we repair or replace faulty equipment
without charge, but typically bill the customer for each service visit.
We do not provide insurance or warrant that the system will prevent a burglary, fire, 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.
Customer
Service
and
Monitoring
Our customer service centers are located in Utah and operate 24/7/365. All employees who work in customer service undergo training on billing related
issues and 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.
Our two central monitoring facilities are located in Utah and Minnesota and are fully able to be primary backups for each other and operate 24/7/365. 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.
Billing
and
Collections
Our billing and collections representatives are located in our Utah offices. We cross-train our billing and collections representatives to also handle general
customer service inquiries with the goal of improving the customer experience and to increase personnel flexibility. Billing and collections 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 customers pay
electronically either via ACH, credit or debit card. A customer who pays electronically is generally placed on a billing cycle based on their contract origination date
and, in certain instances, the customer 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. Customers are billed in advance for their monthly services based on the customer’s billing cycle and not calendar
month.
Key
Systems
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In 2014, we implemented an integrated customer relationship management and billing system software, based on a well-established enterprise-scale cloud
solution. This customer relationship management software, or 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, or 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, or 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.
Suppliers
We provide our services through a panel installed in our customers’ homes. Since early 2014, nearly all new customers are using the Vivint SkyControl
panel. From 2010 through 2014, 2GIG Go!Control was our primary panel. As of December 31, 2017 , approximately 70% of our customer base use SkyControl
panels, 28% use 2GIG Go!Control panels and 2% use other panels.
In 2013, we completed the sale of 2GIG Technologies, Inc., or 2GIG. In connection with the 2GIG sale, 2GIG assigned to us their intellectual property rights
in 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 would be the exclusive provider of our control panel requirements and certain peripheral equipment, subject to certain
exceptions, during the term. This agreement will be completed April 2018.
We license certain communications infrastructure, software and services from Alarm.com to support customers with the 2GIG Go!Control panel. These
2GIG Go!Control panels are connected to Alarm.com’s hosted platform. Alarm.com also provides an interface to enable these customers to access their systems
remotely. We also license certain intellectual property from Alarm.com for our customers using the SkyControl panel.
Generally, our hardware device suppliers maintain a stock of devices and key components 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. However, we also rely on a number of sole source suppliers for
critical components of our solution. In particular we rely on Vivotek and Alpha Networks for certain cameras. Replacing any of these sole source suppliers could
require the expenditure of significant resources and time to redesign and resource these products.
Research and Development
Our innovation center is headquartered in Lehi, Utah, with recently-opened offices in Santa Clara, California and Boston, Massachusetts, and focuses on the
research and development of new products and services, both within and beyond our existing offerings. Our professionals are trained in our proprietary innovation
management process, from customer needs assessment to product and service launch. Our innovation center includes people with expertise in all aspects of the
development process, including hardware development, software development, design and quality assurance.
By focusing on innovation, and continually enhancing our product and service offerings, we believe we can increase new customer originations, customer
usage and customer satisfaction, thereby potentially increasing AMRU and lowering customer attrition.
We believe that developing, designing and selling our own product solution that is differentiated from those of our competitors will be a critical driver of our
future success. For example:
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• In 2015 we introduced our award-winning Vivint Doorbell Camera, which enables homeowners to see, hear and speak to anyone on their doorstep, and
customers to decide whether to remotely unlock the door for visitors or open the garage door for a package delivery.
• In 2016, we introduced the Vivint Ping indoor camera, with two-way audio, one-way video and one-touch callout.
• In 2016, we launched the Vivint Element thermostat, an award winning, elegant thermostat at a lower cost than other brand name smart thermostats, and
improved performance as a result of the connection to the Vivint platform.
We expect to continue introducing new, innovative devices and software features. We design these new products and, where appropriate, leverage
partnerships for their manufacture.
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.
During the years ended December 31, 2017 , 2016 and 2015 , we spent approximately $26.8 million , $24.2 million , and $16.4 million , respectively on
associated research and development costs.
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 over 100 issued U.S. patents and over 250 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.
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 ADT Inc. (formerly Protection One, Inc. and ADT Corporation); AT&T; Comcast Corporation; Stanley Security
Solutions, a subsidiary of Stanley Black and Decker; MONI, also known as Brink's Home Security, 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 connected devices. Having installed over two million smart home and security systems, we believe we are well positioned to
compete with them because we benefit from more than 18 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 and 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.
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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 customers an integrated smart home, along with an attractive value proposition, and our proven, award-winning
customer service.
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 customer or the company) for false alarms, discontinuing police response to notification of an alarm
activation after a customer 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 customer and, in addition, may prohibit the inclusion of certain terms or
conditions of sale in such contracts.
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 customer.
A number of Canadian municipalities require customers 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.
Seasonality
Our direct to home sales are seasonal in nature with a substantial majority of our new customer 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 customer 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 customer originations.
Segment Information
We conduct business through one segment, Vivint. Historically, we primarily operated in three geographic regions:
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United States, Canada and New Zealand. During the year ended December 31, 2016, we sold all of our New Zealand customer 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 14
to the accompanying audited consolidated financial statements for more information about our business and geographic segments.
Employees
As of December 31, 2017 , we had approximately 6,800 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 full-time smart home professionals, who service our customers 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.
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 and Industry
Our
industry
is
highly
competitive.
We operate in a highly competitive industry. We 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 we do. We also face competition from large residential security companies that have or may have greater capital and other 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 bundled 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, or 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
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could prevent us from maintaining competitive price points for our products and services resulting in lost customers or in our 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, microeconomic 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. In
addition, we generally experience an increased level of subscriber cancellations in the months surrounding the expiration of such subscribers’ initial contract term.
We benefited from lower attrition rates following the 2013 introduction of a 60-month contract term, but our attrition rates may increase when those contracts
begin to expire in 2018. 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
or
unauthorized
use
of
our
brand
name
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.
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.
Unauthorized use of our brand name by third parties may also adversely affect our business and reputation, including the perceived quality and reliability of
our products and services. We rely on trademark law, internal policies and agreements with our employees, customers, business partners and others to protect the
value of our brand name. Despite our precautions, we cannot provide assurance that those procedures are sufficiently effective to protect against unauthorized
third-party use of our brand name. We may not be successful in investigating, preventing or prosecuting all unauthorized third-party use of our brand name. Future
litigation with respect to such unauthorized use could also result in substantial costs and diversion of our resources. These factors could adversely affect our
reputation, business, financial condition, results of operations and cash flows.
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,
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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.
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 United States have a legal obligation to allow their customers to access services such as ours without interference. The Federal
Communications Commission has recently announced its intention to seek to revise the “net neutrality” rules, which is expected to occur later this year. The rules
were designed to ensure that all providers of internet-protocol-enabled services are treated the same by broadband internet access service providers. The largest
providers of broadband internet access services have publicly stated that such rules are not required as they would not engage in some of the practices that the rules
prohibit. While it is difficult to predict what would occur in the absence of such rules, it is possible that as a result of the lack of network neutrality rules, we could
incur greater operating expenses which could harm our results of operations. While we think it is unlikely and that other laws may be implicated should broadband
internet access providers affirmatively interfere with the delivery of our services that rely on broadband internet connections, interference with our services by
broadband internet access 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
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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 customer resource management, or 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 seeks to identify and remediate issues, we can
provide no assurance that our identification and 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
concerns,
and
laws,
and
regulations
relating
to
privacy,
data
protection
and
information
security
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 may use this information for operational and marketing purposes in the course of operating our business.
Our collection, retention, transfer and use of this information are governed by U.S. and foreign laws and regulations relating to privacy, data protection and
information security, industry standards and protocols or it may be asserted that such industry standards or protocols apply to us. The regulatory framework for
privacy and information security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. In North America, federal and
various state and provincial governmental bodies and agencies have adopted or are considering adopting laws and regulations limiting, or laws and regulations
regarding the collection, distribution, use, disclosure, storage, and security of certain categories of information. Some of these requirements include obligations of
companies to notify individuals of security breaches involving particular personal information, which could result from exploitation of a vulnerability in our
systems or services or breaches experienced by our service providers and/or partners. We are also subject to state and federal laws and regulations regarding
telemarketing and other telephonic communications and state and federal laws regarding unsolicited commercial emails, as well as regulations relating to
automated telemarketing calls, texts or SMS messages.
Many jurisdictions have established their own data security and privacy legal framework with which we or our vendors or partners must comply to the extent
our operations expand into these geographies. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of
data that identifies or may be used to identify or locate an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol addresses. We
also may agree to contractual requirements relating to privacy, data protection and information security.
Our compliance with these various requirements increases our operating costs, and additional laws, regulations, standards or protocols (or new interpretations
of existing laws, regulations, standards or protocols) in these areas may further increase our operating costs and adversely affect our ability to effectively market
our products and services. In view of new or modified legal obligations relating to privacy, data protection or information security, or any changes in their
interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our
products and services and otherwise adapt to these changes. We may be unable to make such changes and modifications in a commercially reasonable manner or at
all, and our ability to develop new services and features could be limited.
Further, our failure or perceived failure to comply with any of these laws, regulations, standards, protocols or other obligations 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, protocols or other obligations could result in a material adverse effect on our reputation, subscriber attrition,
new subscriber origination, financial condition, cash flows or results of operations.
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If
our
security
controls
are
breached
or
unauthorized
or
inadvertent
access
to
subscriber
information
or
other
data
is
otherwise
obtained,
our
services
may
be
perceived
as
insecure,
we
may
lose
existing
subscribers
or
fail
to
attract
new
subscribers,
our
business
may
be
harmed,
and
we
may
incur
significant
liabilities.
Use of our solutions involves the storage, transmission and processing of personal, payment, credit and other confidential and private information of our
subscribers, and may in certain cases permit access to our subscribers’ homes or property or help secure them. We also maintain and process other confidential and
proprietary information in our business, including our employees’ and contractors’ personal information and confidential business information. We rely on
proprietary and commercially available systems, software, tools and monitoring to protect against unauthorized use or access of the information we process and
maintain. Our services and the networks and information systems we utilize in our business are at risk for breaches as a result of third-party action, employee,
vendor or partner error, malfeasance, or other factors.
Criminals and other nefarious actors are using increasingly sophisticated methods, including cyber-attacks, phishing, social engineering and other illicit acts
to capture, access or alter various types of information, 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 networks and data storage devices that
process and store subscriber confidential and private information, the loss of such information or the deployment of malware or other harmful code to our services
or our networks or systems, may result in negative consequences including the actual or alleged malfunction of our products or services. In addition, third parties,
including our partners and vendors, could also be sources of security risks to us in the event of a failure of their own security systems and infrastructure. The threats
we and our partners and vendors face continue to evolve and are difficult to predict due to advances in computer capabilities, new discoveries in the field of
cryptography and new and sophisticated methods used by criminals. There can be no assurances that our defensive measures will prevent cyber-attacks or that we
will discover network or system intrusions or other breaches on a timely basis or at all. We cannot be certain that we will not suffer a compromise or breach of the
technology protecting the systems or networks that house or access our products and services or on which we or our partners or vendors process or store personal
information or other sensitive information or data, or that any such incident will not be believed or reported to have occurred. Any such actual or perceived
compromises or breaches to systems, or unauthorized access to, or acquisition or loss of, data, whether suffered by us, our partners or vendors, or other third
parties, whether as a result of employee error or malfeasance or otherwise, could cause interruptions in operations, loss of data, and damage to our reputation,
subject us to costs, regulatory investigations and orders, litigation, contract damages, indemnity demands and other 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.
Further, if a high profile security breach occurs with respect to another provider of smart home solutions, our subscribers and potential subscribers may lose
trust in the security of our services or in the smart home space generally, which could adversely impact our ability to retain existing subscribers or attract new ones.
Even in the absence of any security breach, subscriber concerns about security, privacy or data protection may deter them from using our service. Our errors and
omissions insurance policies covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all potential liability.
Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will
continue to be available to us on economically reasonable terms, or at all.
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 concerns, and laws and regulations relating to privacy, data protection and information security, could have a material adverse effect on our
business” and “-If our security controls are breached or unauthorized or inadvertent access to subscriber information or other data is otherwise obtained, our
services may be perceived as insecure, we may lose existing subscribers or fail to attract new
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subscribers, our business may be harmed, and we may incur significant liabilities.”
We
may
fail
to
obtain
or
maintain
necessary
licenses
or
otherwise
fail
to
comply
with
applicable
laws
and
regulations.
Our business focuses on contracts and transactions with residential customers and therefore is subject to a variety of laws, regulations and licensing
requirements that govern our interactions with residential consumers, including those pertaining to privacy and data security, consumer financial and credit
transactions, home improvements, warranties and door-to-door solicitation. We are a licensed service provider in each market where such licensure is required and
we are responsible for every customer installation. Our business 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 marketing and sales efforts, installation of equipment or servicing of subscribers,
monitoring station employee selection and training and to meet certain standards in the conduct of our business. These laws and regulations are dynamic and
subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current laws or regulations, or enact new laws and
regulations, regarding these matters. We strive to comply with all applicable laws and regulations relating to our interactions with residential customers. It is
possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with
other rules or our practices. Our non-compliance with any such law or regulations could also expose us to claims, proceedings, litigation and investigations by
private parties and regulatory authorities, as well as substantial fines and negative publicity, each of which may materially and adversely affect our business. We
have incurred, and will continue to incur, significant expenses to comply with such laws and regulations, and increased regulation of matters relating to our
interactions with residential consumers could require us to modify our operations and incur significant additional expenses, which could have an adverse effect on
our business, financial condition and results of operations. 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.
Changes in these laws or regulations or their interpretation, as well as new laws, regulations or licensing requirements which may be enacted, could
dramatically affect how we do business, acquire customers, and manage and use information we collect from and about current and prospective customers and the
costs associated therewith. 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: (1) subjecting companies to fines or penalties for transmitting false alarms, (2) imposing fines on subscribers for false alarms or
(3) imposing limitations on law enforcement response. These measures could 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, or FTC, FCC, and Canadian Radio-Television and Telecommunications Commission, or
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 FTC regulates both general sales practices and telemarketing specifically and has broad authority to prohibit a variety of advertising or marketing
practices that may constitute “unfair or deceptive acts or practices.” The CRTC has enforcement authority under the Canadian Anti-Spam Law, or CASL, which
prohibits the sending of commercial emails without prior consent of the recipient 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. Similarly, most of the statutes and regulations in the United States
allow a private right of action for the recovery of damages or provide for enforcement by the FTC, state attorneys general or state agencies permitting the recovery
of significant civil or criminal penalties, costs and attorneys’ fees in the event that regulations are violated. Any new or changed laws, regulations or licensing
requirements, or the interpretation of such laws, regulations or licensing requirements could have a material adverse effect on our business, financial condition,
cash flows or results of operations. We strive to comply with all such applicable regulations, but cannot assure you that we or third parties that we may rely on for
telemarketing, email marketing and other lead generation activities will be in compliance with all applicable regulations at all times. Although our contractual
arrangements with such third parties expressly require them to comply with all such regulations and to indemnify us for their failure to do so, we cannot assure you
that the FTC, FCC, CRTC, private litigants or others will not attempt to hold us responsible for any unlawful acts conducted by such third parties or that we could
successfully enforce or collect upon such indemnities. Additionally, certain FCC rulings and/or FTC enforcement actions may support the legal position that we
may be
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held vicariously liable for the actions of third parties, including any telemarketing violations by our independent, third party authorized dealers that are performed
without our authorization or that are otherwise prohibited by our policies. Both the FCC and the FTC have relied on certain actions to support the notion of
vicarious liability, including but not limited to, the use of the company brand or trademark, the authorization or approval of telemarketing scripts or the sharing of
consumer prospect lists. Changes in such regulations or the interpretation thereof that further restrict such activities could result in a material reduction in the
number of leads for our business and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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, may increase our subscriber acquisition costs and may 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
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, (1) we launched the Consumer Financing Program pursuant
to which we offer to our qualified customers an opportunity to finance the purchase of products and related installation used in connection with our smart home and
security services, (2) customers may either pay in full at the time of installation with cash, ACH, credit or debit card, and (3) we offer Retail Installment Contracts,
or RICs, with respect to the purchase of products to certain of our customers who do not qualify for the Consumer Financing Program. Under the Vivint Flex Pay
plan, customers pay separately for the products and our smart home and security services. Alternatively, customers are able to purchase the products with cash or
credit card.
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. or other companies will continue to provide
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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. In particular, the Vivint Flex Pay plan
may require that we be licensed as a lender in certain jurisdictions in which we operate. 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 currently offer RICs in all of the jurisdictions in which we operate and therefore are subject to
regulation by state and local authorities for the use of RICs. We provide intensive training to our employees regarding sales practices and the content of our RICs
and strive to comply in all material respects with these laws; however, we cannot be certain that our employees will abide by our policies and applicable laws,
which violations could have a material and adverse impact on our business. 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. In addition, as Vivint Flex Pay evolves, we may become subject to additional regulatory requirements and compliance obligations.
Our
new
retail
strategy
may
subject
us
to
additional
risks.
Historically, we have primarily originated customers through our direct-to-home and inside sales channels. On May 4, 2017, we announced the Best Buy
Agreement, pursuant to which the parties will jointly market and sell smart home products and services. Under the terms of the Best Buy Agreement, Best Buy
currently offers certain Vivint smart home products and services in approximately 450 Best Buy retail stores. Although we are devoting significant management
attention as well as significant capital and other resources to our partnership with Best Buy, there is no assurance that our retail partnership with Best Buy or other
third-party distribution arrangements will become a significant source of customer originations or revenue for us. There is also no assurance that Best Buy will
continue to distribute our products and services after the expiration or termination of the Best Buy Agreement. If the Best Buy Agreement expires or is terminated
or if Best Buy otherwise ceases to distribute our products and services, we may not be able to establish alternative retail distribution channels for our products and
services.
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 technological 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: (1) our ability to renew and/or upgrade contracts with existing subscribers and maintain
customer satisfaction with existing subscribers, (2) our ability to generate new subscribers, including our ability to scale the number of new subscribers generated
through inside sales and other channels, (3) our ability to increase the density of our subscriber base for existing service locations or continue to expand into new
geographic markets, (4) our ability to successfully develop and market new and innovative products and services, (5) the level of product, service and price
competition, (6) the degree of saturation in, and our ability to further penetrate, existing markets, (7) 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 (8) 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.
There
can
be
no
assurance
that
we
will
be
able
to
achieve
or
maintain
profitability
or
positive
cash
flow
from
operations.
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Our ability to generate future positive operating results and cash flows depends, in part, on our ability to generate new subscribers in a cost effective manner,
while minimizing attrition of existing subscribers. New subscriber acquisitions play a particularly important role in our financial model as they not only increase
our future operating cash flows, but also help to replace the cash flows lost as a result of subscriber attrition. If we are unable to cost-effectively generate new
subscribers or retain our existing subscribers, our business, operating results and financial condition would be materially adversely affected. In addition, to drive
our growth, we have made significant upfront investments in subscriber acquisition costs, as well as technology and infrastructure to support our growing
subscriber base. As a result of these investments, we have incurred losses and used significant amounts of cash to fund operations. As our business scales, we
expect recurring revenue to increase due to growth in our total subscribers. If such increase occurs, a greater percentage of our net acquisition costs for new
subscribers may be funded through revenues generated by our existing subscriber base. We also expect the number of new subscribers to decrease as a percentage
of our total subscribers as our business scales, which we believe, along with the expected growth in recurring revenue, will improve operating results and operating
cash flows over time. Our ability to improve our operating results and cash flows, however, is subject to a number of risks and uncertainties and there can be no
assurance that we will achieve such improvements. To the extent the number of new subscribers does not decrease as a percentage of our total subscribers or we do
not reduce the percentage of our revenue used to support new investments, we will continue to incur losses and require a significant amount of cash to fund our
operations, which in turn could have a material adverse effect on our business, cash flows, operating results and financial condition.
Our
business
is
subject
to
economic
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.
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 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
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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 results of operations.
The
policies
of
the
U.S.
President
and
his
administration
may
adversely
impact
our
business,
financial
condition
and
results
of
operations.
While the current administration’s policies in many areas are still uncertain at this time, certain 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. While there is currently a substantial lack of clarity and uncertainty 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 our securities.
On December 22, 2017, the U.S. President signed into law the “Tax Cuts and Jobs Act” (the “Act”). Among other changes, the Act imposes limitations on
the deductibility of interest. Moreover, the effects of the Act are not yet entirely clear and will depend on, among other things, additional regulatory and
administrative guidance, as well as any statutory technical corrections that are subsequently enacted, which could have an adverse effect on the U.S. federal income
taxation of our and our subsidiaries’ operations.
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, 2017 , approximately 70% of our installed panels
were SkyControl panels, 28% were 2GIG Go!Control panels and 2% were other panels. Since early 2014, our primary panel installed has been 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 Sale, 2GIG assigned to us their intellectual property rights in 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. We also rely on a number of sole source suppliers for critical components of our
solution. In particular we rely on Vivotek and Alpha Networks for certain cameras. Replacing any of these sole source suppliers could require the expenditure of
significant resources and time to redesign and resource these products. 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.
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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, 2017 , before intercompany eliminations,
approximately $66.0 million of our revenues were denominated in Canadian Dollars. As of December 31, 2017 , $209.1 million of our total assets and $160.1
million 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.
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
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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 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.
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 proprietary technology, brands and other intellectual property against dilution, infringement,
misappropriation 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 United States, Canada and other countries and a combination of confidentiality procedures, contractual
provisions and other methods, all of which offer only limited protection. 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 United States.
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 may file additional patent applications in the future in the United States and internationally. The process of
obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable
cost or in a timely manner all the way through to the successful issuance of a patent. We may choose not to seek patent protection for certain innovations and may
choose not to pursue patent protection in certain jurisdictions. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the
patented invention.
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. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued
patents will be insufficient or not have the coverage originally sought, and that our issued patents will not provide us with any competitive advantages. Our
competitors may challenge, invalidate or avoid the application of our existing or future intellectual property rights that we obtain 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
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material adverse effect on our business, financial condition, cash flows or results of operations.
Our policy is to require our employees that were hired to develop material intellectual property included in our products to execute written agreements in
which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or, with respect to
consultants and service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately protected our rights in
every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from the protection of patents and other intellectual
property rights, we must monitor and detect infringement, misappropriation or other violations of our intellectual property rights and pursue infringement,
misappropriation or other claims in certain circumstances in relevant jurisdictions, all of which are costly and time-consuming. As a result, we may not be able to
obtain adequate protection or to effectively enforce our issued patents or other intellectual property rights.
In addition to patents and registered trademarks, we rely on trade secret rights, copyrights and other rights to protect our unpatented proprietary intellectual
property and technology. Despite our efforts to protect our proprietary technologies and our intellectual property rights, unauthorized parties, including our
employees, consultants, service providers or customers, may attempt to copy aspects of our products or obtain and use our trade secrets or other confidential
information. We generally enter into confidentiality agreements with our employees and third parties that have access to our material confidential information, and
generally limit access to and distribution of our proprietary information and proprietary technology through certain procedural safeguards. These agreements may
not effectively prevent unauthorized use or disclosure of our intellectual property or technology, could be breached or otherwise may not provide meaningful
protection for our trade secrets and know-how related to the design, manufacture or operation of our products and may not provide an adequate remedy in the event
of unauthorized use or disclosure. We cannot assure you that the steps taken by us will prevent misappropriation of our intellectual property or technology or
infringement of our intellectual property rights. Competitors may independently develop technologies or products that are substantially equivalent or superior to
our solutions or that inappropriately incorporate our proprietary technology into their products or they may hire our former employees who may misappropriate our
proprietary technology or misuse our confidential information. In addition, if we expand the geography of our service offerings, the laws of some foreign countries
where we may do business in the future do not protect intellectual property rights and technology to the same extent as the laws of the United States, and these
countries may not enforce these laws as diligently as government agencies and private parties in the United States.
From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the intellectual property rights of others or to defend against claims of infringement, misappropriation or invalidity. Such litigation could
result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect
our intellectual property and technology, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort
required to create the innovative products that have enabled us to be successful to date.
From
time
to
time,
we
are
subject
to
claims
for
infringing,
misappropriating
or
otherwise
violating
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. Many of our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have.
We have been in the past, and may be in the future, subject to claims based on allegations of infringement, misappropriation 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 and against whom our patents may therefore provide little or no deterrence or protection. 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 (including, for example, treble damages if we are found to have willfully infringed patents and
increased statutory damages if we are found to have willfully infringed copyrights) 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. Defending against claims of infringement, misappropriation or other
violation or being deemed to be infringing, misappropriating or otherwise violating the intellectual property rights of others could impair our ability to innovate,
develop, distribute and sell our current and planned products and services. 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.
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In some cases, we indemnify our channel partners against claims that our products infringe, misappropriate or otherwise violate the intellectual property
rights of third parties. Such claims could arise out of our indemnification obligation with our channel partners and end-customers, whom we typically indemnify
against such claims. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that
some of our confidential information could be compromised by the discovery process. Although claims of this kind have not materially affected our business to
date, there can be no assurance material claims will not arise in the future.
Although third parties may offer a license to their technology or other intellectual property, the terms of any offered license may not be acceptable, and the
failure to obtain a license or the costs associated with any license could cause our business, financial condition and results of operations to be materially and
adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If a
third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be enjoined from continued use of such
intellectual property. As a result, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we
could be unable to continue to offer our affected products, subscriptions or services), effort, and expense and may ultimately not be successful. Furthermore, a
successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products, providing certain subscriptions or
performing certain services or that requires us to pay substantial damages, royalties or other fees. Any of these events could harm our business, financial condition
and results of operations.
Our
solutions
contain
third-party
open
source
software
components,
and
failure
to
comply
with
the
terms
of
the
underlying
open
source
software
licenses
could
restrict
our
ability
to
sell
our
products
and
subscriptions.
Certain of our solutions contain software modules licensed to us by third-party authors under “open source” licenses. The use and distribution of open source
software may entail greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual
protections regarding infringement claims or the quality of the code.
Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of
open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses,
be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar products with lower
development effort and time and ultimately could result in a loss of sales for us.
Although we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source
code or that would otherwise breach the terms of an open source agreement, the terms of many open source licenses have not been interpreted by U.S. courts, and
there is a risk that these licenses could be construed in ways that could impose unanticipated conditions or restrictions on our ability to commercialize solutions
incorporating such software. Moreover, we cannot assure you that our processes for controlling our use of open source software in our solutions will be effective.
From time to time, we may face claims from third parties asserting ownership of, or demanding release of, the open source software or derivative works that we
developed using such software (which could include our proprietary source code), or otherwise seeking to enforce the terms of the applicable open source license.
These claims could result in litigation. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from
third parties to continue offering our products on terms that are not economically feasible, to re-engineer our products, to discontinue the sale of our products if re-
engineering could not be accomplished on a timely or cost-effective basis, or to make generally available, in source code form, our proprietary code, any of which
could adversely affect our business, results of operations and financial condition.
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.
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. If material weaknesses in
our internal controls are discovered, 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
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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: (1) availability of financing, (2) difficulties related to integrating previously separate businesses into a single
unit, including product and service offerings, distribution and operational capabilities and business cultures, (3) general business disruption, (4) managing the
integration process, (5) diversion of management’s attention from day-to-day operations, (6) assumption of costs and liabilities of an acquired business, including
unforeseen or contingent liabilities or liabilities in excess of the amounts estimated, (7) failure to realize anticipated benefits and synergies, such as cost savings and
revenue enhancements, (8) potentially substantial costs and expenses associated with acquisitions and dispositions, (9) failure to retain and motivate key employees
and (10) 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, 2017 , we had approximately $1.2 billion of goodwill and identifiable intangible assets. Goodwill and other identifiable intangible assets
are recorded at fair value on the date of acquisition. In addition, as of December 31, 2017 , we had $1.3 billion 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 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
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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, 2017 , subscribers in Texas and California represented approximately 19% 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 United
States, 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.
We
have
recorded
net
losses
in
the
past
and
we
may
experience
net
losses
in
the
future.
We have recorded consolidated net losses in each of the previous three years ended December 31, 2017 , 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.
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The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, or
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 ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, which will
supersede nearly all existing revenue recognition guidance. The effective date of the new revenue standard is our first quarter of fiscal 2018, and accordingly, we
will adopt the new standard effective January 1, 2018. The new standard permits adoption either by using (1) a full retrospective approach for all periods presented
in the period of adoption or (2) 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 intend to adopt using the modified retrospective approach.
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 will 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.
Our
substantial
indebtedness
could
adversely
affect
our
financial
condition.
Risks Relating to Our Indebtedness
Net cash interest paid for the years ended December 31, 2017 and 2016 related to our indebtedness (excluding capital leases) totaled $203.4 million and
$188.1 million , respectively. Our net cash used in operating activities for the years ended December 31, 2017 and 2016 , before these interest payments, was
$105.9 million and $177.6 million , respectively. Accordingly, our net cash provided by operating activities for the years ended December 31, 2017 and 2016 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, 2017 , we had
approximately $2.8 billion aggregate principal amount of total debt outstanding, $1.5 billion of which was secured debt, which requires significant interest and
principal payments. Subject to the limits contained in the agreements governing our existing indebtedness, 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 and future borrowings available for working capital, capital expenditures (including subscriber acquisition costs), 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;
• placing us at a disadvantage compared to other, less leveraged competitors; and
• increasing our cost of borrowing.
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We
may
be
able
to
incur
significant
additional
indebtedness
in
the
future.
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. As of December 31, 2017 , we had $234.1 million of availability under the revolving credit facility (after
giving effect to $9.5 million of letters of credit outstanding and $60.0 million of borrowings). We will be permitted to add, in addition to the revolving credit
facility, incremental facilities of up to $225 million, subject to certain conditions being satisfied, of which up to $60 million may be incurred on the same
“superpriority” basis as the revolving credit facility. Moreover, although the debt agreements governing our existing indebtedness 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.
Accordingly, subject to market conditions, we opportunistically seek to access the credit and capital markets from time to time, whether to refinance or retire
our existing indebtedness, for the investment in and operation of our business, or for other general corporate purposes. Such transactions may take the form of new
or amended senior secured credit facilities, including term or revolving loans, secured or unsecured notes and/or other instruments or indebtedness. These
transactions may result in an increase in our total indebtedness, secured indebtedness and/or debt service costs.
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 (including funding
subscriber acquisition costs).
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 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.
The
debt
agreements
governing
our
existing
indebtedness
impose
significant
operating
and
financial
restrictions
on
us
and
our
subsidiaries,
which
may
prevent
us
from
capitalizing
on
business
opportunities.
The debt agreements governing our existing indebtedness impose significant operating and financial restrictions on us. These restrictions limit our ability to,
among other things:
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•
•
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 certain subsidiaries to make dividends or other payments to us; and
transfer or sell assets.
In addition, our revolving credit facility requires that we maintain a consolidated first lien net leverage ratio of not more than 5.35 to 1.0 on the last day of
each applicable test period.
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.
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 United States and Canada for offices, warehousing, recruiting, and training purposes. We also have a new sales recruiting, training, and call center facility in
Logan, Utah, which was completed in the second 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.
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Table of Contents
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 12 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 Vivint Smart Home, Inc., which in turn is wholly owned through intermediate holding companies by the Investor
Group. Presently, there is no public trading market for our common stock.
ITEM 6.
SELECTED FINANCIAL DATA
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.
The selected historical consolidated financial information and other data presented below for the years ended December 31, 2017 , 2016 and 2015 and the
selected consolidated balance sheet data as of December 31, 2017 and 2016 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, 2015,
2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015, 2014 and 2013 have been derived from our audited consolidated
financial statements which are not included in this annual report on Form 10-K.
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.
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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
Other (expenses) income
Loss from continuing operations before income taxes
Income tax expense
Net loss
Balance Sheet Data (at period end):
Cash
Working capital (deficit)
Adjusted working capital deficit (excluding cash and capital lease
obligation)
Total assets
Total debt
December 31, 2017 December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013
(in thousands)
$
881,983 $
757,907 $
653,721 $
563,677 $
1,037,476
(155,493)
829,009
(71,102)
762,396
(108,675)
657,546
(93,869)
500,908
555,788
(54,880)
(225,772)
(197,965)
(161,339)
(147,511)
(114,476)
130
—
(27,986)
(409,121)
1,078
432
—
90
—
(7,255)
(8,832)
1,455
—
1,779
1,493
46,866
76
(275,890)
(278,756)
(238,146)
(120,921)
67
351
514
3,592
(410,199)
(275,957)
(279,107)
(238,660)
(124,513)
$
3,872 $
43,520 $
2,559 $
10,807 $
(162,406)
(80,170)
(120,952)
(51,569)
(155,664)
2,868,847
2,820,297
(113,893)
2,547,662
2,486,700
(115,895)
2,303,644
2,138,112
(56,827)
2,255,586
1,835,068
261,905
187,781
(69,925)
2,370,544
1,708,159
Total shareholders’ (deficit) equity
Ratio of earnings to fixed charges (1)
$
(653,526) $
(245,182) $
(76,993) $
224,486 $
490,243
NM
NM
NM
NM
NM
NM—Not meaningful.
(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,
2017
December 31,
2016
December 31,
2015
(in thousands)
December 31,
2014
December 31,
2013
$
(409,121) $
(275,957) $
(278,756) $
(238,146) $
(120,921)
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 a smart home company providing comprehensive, secure, and simple to use smart home solutions for the broad
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Table of Contents
consumer market. Our smart home platform has approximately 1.3 million customers and a nationwide sales and service footprint that covers 98% of U.S. zip
codes. Our curated ecosystem of products includes cameras, sensors, door locks, thermostats, garage door controllers, voice-control speakers, and dedicated
touchscreens. Our artificial intelligence platform, Vivint Sky, processes thousands of events per second from those devices to understand the state of the home, and
our customers can access their smart homes with a single app, from anywhere in the world. We employ an integrated business model that leverages Vivint
technology and people to reduce key consumer friction points that have historically limited smart home adoption and use. Our trained professionals educate
consumers on the value and affordability of smart home, customize systems for their homes, install systems, and provide ongoing monitoring, customer service and
in-home support.
Our go-to-market strategy is focused on three primary sales channels: direct-to-home, inside sales and retail. Our direct-to-home sales team is comprised of
up to 2,800 representatives during our peak selling season, working across approximately 120 pre-selected markets throughout North America. Our inside sales
channel provides a consultative experience for consumers who contact us directly. Our retail channel reaches customers through retail locations across the United
States and was launched in May 2017 when we announced our nationwide partnership with Best Buy. Through these channels, we generate subscription-based,
high margin, recurring revenue from customers who sign up for our smart home services. We also generate revenue from the sale of smart home devices.
We were founded by Todd Pedersen in 1999 as APX Alarm, which quickly became one of the largest residential security companies in North America. In
February 2011, we rebranded the company and changed our name to Vivint, commensurate with our transition from residential security to smart home services.
Since transitioning our focus to smart home services, we have consistently innovated to enhance our service and product offerings, including the following key
milestones:
•
•
•
•
•
•
•
•
•
In 2006, we launched our inside sales channel to provide a consultative experience to potential new customers who contact us directly.
In 2010, we launched a smart thermostat, our first smart home device, which enabled remote energy management through an app and allowed the
customer to create advanced energy management rules.
In 2012, we were acquired by investment funds affiliated with The Blackstone Group L.P., our Sponsor.
In 2013, we opened our innovation center in Lehi, Utah, which focuses on the research and development of new products within our existing offerings, as
well as developing new technology to expand beyond our current products and services. Since its opening, our innovation center has developed a number
of industry leading products and software solutions.
In 2014, we launched our proprietary Vivint Smart Home Cloud software platform, SkyControl panel and Vivint app. Through the Vivint app’s
integration with the Vivint Smart Home Cloud, customers can remotely manage their smart home devices, view the cameras in their home and create
various alerts and system rules.
In 2015, we surpassed 1 million active subscribers.
In 2016, we closed equity investments totaling approximately $100 million, which were co-led by Peter Thiel, a venture capitalist and entrepreneur who
co-founded PayPal, and investment firm Solamere Capital. These strategic investments helped further advance our growth and product innovation.
In 2017, we introduced the Vivint Flex Pay plan, which we believe will enhance our unit economics and the capital efficiency of our business, and which
became our primary sales model in March 2017. Under Vivint Flex Pay, qualified customers in the United States are eligible for unsecured, zero-interest
installment loans through a third-party financing provider to finance their purchase of our products. Under Vivint Flex Pay, customers pay separately for
our products and services.
In 2017, we launched our retail sales channel by entering into a strategic relationship with Best Buy to jointly sell our products and services in their retail
locations nationwide. Under this strategic relationship, Best Buy offered our products and services in approximately 450 Best Buy retail stores at the end
of 2017.
We have experienced significant growth in our revenues and Total Subscribers in recent years. Our revenues increased to $882.0 million for the year ended
December 31, 2017 from $500.9 million for the year ended December 31, 2013, an increase of 76% . Our revenues were $882.0 million for the year ended
December 31, 2017 , compared to $757.9 million for the year ended December 31, 2016 . Our Total Subscribers increased from 671,818 as of December 31, 2012
to 1,292,698 as of December 31, 2017 , an increase of 92% .
Recent Developments
On January 10, 2018, Vivint Wireless, Inc. (“Vivint Wireless”), one of our indirect, wholly owned subsidiaries and Verizon Communications Inc.
(“Verizon”) consummated the transactions contemplated by a termination agreement dated
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December 23, 2017, between Vivint Wireless and Verizon, pursuant to which the parties agreed, among other things, to terminate certain spectrum leases between
Vivint Wireless and Nextlink Wireless, LLC, a subsidiary of Verizon, in exchange for a payment by Verizon to Vivint Wireless in the amount of $55 million . We
expect to use these proceeds for general corporate purposes.
Our Business Model
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 billings generated from our product sales,
monitoring and additional services. Therefore, 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. Because of the significant upfront investment associated
with generating new subscribers, our cash flows and associated margins are directly impacted by the duration of our subscriber relationships. Currently, the cash
received for product sales from subscribers generated under the Consumer Financing Program, and those that are paid-in-full at the time of product sale, offset a
portion of the upfront investment associated with subscriber acquisition costs. Because we directly fund product purchases financed through retail installment
contracts, or RICs, the mix of financing methods under Vivint Flex Pay affects the amount of cash we receive at the time of subscriber origination to offset this
upfront investment.
We have experienced significant historical subscriber growth. For example, our Total Subscribers increased by 92% from December 31, 2012 to
December 31, 2017 . To drive this growth, we have made significant upfront investments in subscriber acquisition costs, as well as technology and infrastructure to
support our growing subscriber base. As a result of these investments, we have incurred losses and used significant amounts of cash to fund operations. As our
business scales, we expect recurring revenue to increase due to growth in our Total Subscribers. If such increase occurs, a greater percentage of our net acquisition
costs for New Subscribers may be funded through revenues generated by our existing subscriber base. We also expect the number of New Subscribers to decrease
as a percentage of our Total Subscribers as our business scales, which we believe, along with the expected growth in recurring revenue, will improve operating
results and operating cash flows over time. Our ability to improve our operating results and cash flows, however, is subject to a number of risks and uncertainties as
described in greater detail elsewhere in this annual Form 10-K and there can be no assurance that we will achieve such improvements. To the extent the number of
New Subscribers does not decrease as a percentage of our Total Subscribers or we do not reduce the percentage of our revenue used to support new investments,
we will continue to incur losses and require a significant amount of cash to fund our operations, which in turn could have a material adverse effect on our business,
cash flows, operating results and financial condition.
Historically, we generally marketed our products and services through two sales channels, direct- to-home and inside sales, with a majority of our new
subscriber accounts generated through direct-to- home sales, primarily from April through August. As we have increasingly focused our marketing efforts on inside
sales, this channel has grown to become a larger percentage of our business. For example, new subscribers generated through inside sales comprised approximately
41% of total new subscriber additions in the year ended December 31, 2017 , as compared to 36% of total new subscribers in the year ended December 31, 2016 .
On May 4, 2017 we announced a retail partnership with Best Buy, under which we are selling our products and services in certain Best Buy retail locations.
Over time we expect the percentage of subscribers originated through inside sales and our retail sales channel to continue to increase.
We seek to increase our average monthly revenue per user, or AMRU, by continually evaluating the viability of additional product and service offerings that
could further leverage the investments made to date in our existing technology platform and sales channels. As evidence of this focus on new products and services,
since 2010, we have successfully expanded our offerings from residential security to smart home services, which has allowed us to charge higher service fees and
generate higher product revenue from new subscribers for these additional offerings. These expanded offerings include our proprietary Vivint Smart Home Cloud,
Vivint Smart Drive, Vivint Doorbell Camera, Vivint Ping Camera and Vivint Element Thermostat. Due to the high rate of adoption of additional smart home
product and service offerings, our AMRU has increased from $43.75 in 2009 to $58.29 for the year ended December 31, 2017 , an increase of 33% .
In 2017, we announced the introduction of the Vivint Flex Pay plan, which we believe will further enhance our unit economics and the capital efficiency of
our business. Vivint Flex Pay became our primary sales model in March 2017. Under the Vivint Flex Pay plan, (1) as of the first quarter of 2017, qualified
customers in the United States may finance the purchase of our products and related installation used in connection with Vivint’s smart home services through a
third-party financing provider, (2) customers may either pay in full at the time of installation with cash, automated clearing house, or ACH, credit or debit card, and
(3) certain customers who do not qualify to participate in the Consumer Financing Program but qualify under our historical underwriting criteria may enter into a
RIC with respect to the purchase of products. We may also establish credit
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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 at the outset of the service contract with cash or
credit card.
Under the Vivint Flex Pay plan, customers pay separately for the products and our services. Under the Consumer Financing Program, qualified customers are
eligible for unsecured, zero-interest installment loans of up to $4,000 for either 42 or 60 months. These installment loans are between the customer and Citizens
Bank, N.A., or Citizens, as the exclusive provider of the installment loans under the Consumer Financing Program for our customers who are eligible for such
loans pursuant to the agreement between us and Citizens, which we refer to as the CFP Agreement. Pursuant to the CFP Agreement, we pay a monthly fee to
Citizens based on the average daily outstanding balance of the loans provided by Citizens to our customers and we share with Citizens liability for credit losses,
with our company being responsible for approximately 5% to 100% of lost principal balances, depending on factors specified in the CFP Agreement. Additionally,
we are responsible for reimbursing Citizens for the credit card and debit card transaction fees associated with these loans. The present value of the estimated total
fees owed by us to Citizens based on current loans outstanding are recorded as a derivative liability on our consolidated balance sheet. 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. Because the Vivint Flex Pay plan
separates payments for our products from payments for our smart home and security services, under the Vivint Flex Pay plan, following the expiration of the term
of subscribers’ installment loans or RICs, annual revenues will primarily be limited to fees from our services. Thus, our revenues and margins are expected to be
lower over the life of the customer than under our historical service contracts.
Key Factors Affecting Operating Results
Our future operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including our ability to efficiently
grow our subscriber base, expand our product and service offerings to generate increased revenue per user, provide high quality products and customer service to
minimize subscriber attrition and improve the leverage of our business model. Key factors affecting our operating results include the following:
•
•
•
•
•
•
•
growth in Total Subscribers and Total MR;
the net acquisition costs associated with New Subscribers;
the value of our products and services purchased by New Subscribers;
the cost to monitor and service our subscriber base;
the level of our general and administrative expenses;
subscriber attrition rates; and
the mix of subscribers purchasing our products through the Consumer Financing Program versus through RICs.
As discussed above, our subscriber base and Total MR have increased significantly in recent years. Our future operating results will be affected, in part, by
our ability to efficiently acquire New Subscribers, while minimizing attrition of existing subscribers, as a portion of our new subscriber additions replace attrited
customers. Our operating results are affected by the level of our net acquisition costs to generate those subscribers and the value of products and services purchased
by them. A reduction in net subscriber acquisition costs or an increase in the total value of products or services purchased by a new subscriber increases the life-
time value of that customer, which in turn, improves our operating results and cash flows.
Our operating results will also depend on the level of our net service margins, which are affected by our AMRU and net service cost per subscriber. A
decrease in our AMRU or an increase in the net service cost per subscriber would reduce our service margins and negatively affect our operating results.
Additionally, our operating results and cash flows will be affected by our ability to successfully reduce general and administrative costs as a percentage of revenue.
Our operating results are further affected by the amount of interest we pay on our debt, resulting from the level and cost of our borrowing. The level of
capital required to grow our business primarily depends on the number of New Subscribers we generate, the percentage of those New Subscribers who finance their
purchases of our Products using RICs, because RICs are underwritten directly by us and the Total MR available to fund New Subscribers after covering our
ongoing operating costs.
Therefore, if in the future we choose to reduce the number of New Subscribers originated, particularly those financed through RICs, our capital requirements
would also decrease.
Cost-Effective Subscriber Growth
Our acquisition of subscribers depends, in part, on our ability to cost-effectively grow our existing sales channels and expand into new ones. We have
historically generated new subscribers through our direct-to-home and inside sales channels.
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Our ability to recruit, train and retain sales personnel affects our ability to increase the number of subscribers. Because such a large percentage of our new
subscribers are currently generated through direct-to-home sales, any actions limiting this sales channel could negatively affect our ability to grow our subscriber
base. We believe that expanding into new sales channels will provide us with a cost-effective means to acquire subscribers. For example, we recently expanded into
the retail sales channel through the Best Buy relationship announced in May 2017. We expect to continue growing our retail presence over time through Best Buy
and other retailers, as well as expand into other sales channels. The number of retail locations our products and services are sold through, and the level of sales at
each location, will affect our ability to effectively grow the number of subscribers. Also, our ability to launch and grow other new channels in a cost effective
manner will also affect our subscriber growth and operating results.
Critical to the effectiveness of subscriber acquisition activities across our various sales channels is our investment in marketing and brand awareness, which
we expect to increase over time.
Successfully generating subscriber growth through these investments will depend on our ability to launch cost-effective marketing campaigns, both online
and offline, which attract potential customers and successfully build awareness of our brand across all our sales channels. We also believe that building brand
awareness is important to countering competition we face from other companies in the geographies we serve, particularly in those markets where our direct-to-
home sales representatives are present or where we are selling our products and services through retail locations.
Leverage Technology Platform - Expanded Products and Services
To date, we have made significant investments in the development of our organization, and expect to leverage these investments to continue expanding our
product and service offerings over time, including integration with third party products to drive future revenue. Our ability to introduce a full suite of high-quality
innovative new offerings that further expands our existing smart home platform will affect our ability to retain, grow and further monetize our subscriber base.
Furthermore, we believe that by vertically integrating the development and design of our products and services with our existing sales and customer service
activities allows us to more quickly respond to market needs, and better understand our subscribers’ interactions and engagement with our products and services.
This provides critical data that we expect to enable us to continue improving the power, usability and intelligence of these products and services.
Minimizing Subscriber Attrition
Subscriber attrition has a direct impact on our financial results, including revenues, operating income and operating cash flows. We focus on providing our
customers with innovative high-quality product offerings and award-winning service quality in order to minimize attrition and maximize the lifetime value of our
existing customers.
A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or may terminate their contracts for a
variety of reasons, including, but not limited to, relocation, cost, switching to a competitor’s service or service issues. We analyze our attrition by tracking the
number of subscribers who cancel as a percentage of the monthly average number of subscribers at the end of each 12 month period. We caution investors that not
all companies, investors and analysts in our industry define attrition in this manner.
The table below presents our subscriber data for the years ended December 31, 2017 , 2016 and 2015 :
Beginning balance of subscribers
Net new additions
Subscriber contracts sold (1)
Attrition
Ending balance of subscribers
Monthly average subscribers
Attrition rate
2017
1,146,746
279,735
—
(133,783)
1,292,698
1,214,696
Year ended December 31,
2016
2015
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
11.0%
12.6%
12.2%
(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 12 month period may be impacted by the number of subscriber
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contracts reaching the end of their initial term in such period. Attrition in the year ended December 31, 2017 , reflects the effect of the 2013 42-month contracts
reaching the end of their initial contract term. We believe this trend in cancellations at the end of the initial contract term is comparable to other companies within
our industry. We benefitted from lower attrition rates following the 2013 introduction of a 60-month contract term, but our attrition rates may increase when those
contracts begin to expire in 2018.
Key Operating Metrics
In evaluating our results, we review several key performance measures discussed below. We believe that the presentation of such metrics is useful to our
investors and lenders because they are used to measure the value of companies such as ours with recurring revenue streams. In addition, beginning with our
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017, we have updated the definitions of certain operating metrics and introduced
certain new operating metrics to reflect the introduction of new financing and payment options under our Vivint Flex Pay program, which became our primary
payment model during the year ended December 31, 2017 .
Total Subscribers
Total subscribers is the aggregate number of active smart home and security subscribers at the end of a given period. This metric excludes subscribers
originated under pilot programs.
Total Monthly Revenue
Total monthly revenue, or Total MR, is the aggregate, contracted recurring monthly service billings to our smart home and security subscribers, based on the
Total Subscribers number as of the end of a given period (“MSR”), plus deferred product and interest revenue recognized during the last month of the period.
Average Monthly Revenue per User
Average monthly revenue per user, or AMRU, is Total MR divided by Total Subscribers at the end of a given period.
Attrition Rate
Attrition rate is the aggregate number of canceled smart home and security subscribers during the prior 12 month period divided by the monthly weighted
average number of Total Subscribers, based on the Total Subscribers at the beginning and end of each month of a given period. Subscribers are considered canceled
when they terminate in accordance with the terms of their contract, are terminated by us or if payment from such subscribers is deemed uncollectible (when at least
four monthly billings become past due). If a sale of a service contract to third parties occurs, or a subscriber relocates but continues their service, we do not
consider this as a cancellation. If a subscriber transfers their service contract to a new subscriber, we do not consider this as a cancellation.
Net Service Cost per User
Net service cost per user is the average monthly service costs for the period, including monitoring, customer service, field service and other service support
costs, less total non-recurring product and service billings for the period divided by average monthly Total Subscribers for the same period.
Net Service Margin
Net service margin is the is the monthly average MSR for the period, less total average net service costs for the period divided by the average MSR for the
period.
New Subscribers
New subscribers is the aggregate number of net new smart home and security subscribers originated during a given period. This metric excludes new
subscribers acquired by the transfer of a service contract from one subscriber to another and subscribers originated under pilot programs.
Net Subscriber Acquisition Costs per New Subscriber
Net subscriber acquisition costs per New Subscriber is the direct and indirect costs to create a new smart home and security subscriber divided by New
Subscribers for a given 12 month period. These costs include commissions, equipment, installation, marketing, sales support and other allocations (general and
administrative and overhead); less cash received from product sales associated with the initial installation, activation fees, installation fees and upsell revenue.
Components of Results of Operations
Historically, our primary source of revenue was generated through recurring monthly services and wireless internet
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services provided to our subscribers in accordance with their subscriber contracts. We historically acquired the products sold to our subscribers with our capital and
recovered our investment from fees earned over the life of customers’ service contracts. Under the Vivint Flex Pay plan, customers pay separately for the products
and our services. The remainder of our revenue is generated through additional services, activation fees, upgrades and maintenance and repair fees. Recurring and
other revenues accounted for over 95% of total revenues for each of the years ended December 31, 2017 , 2016 and 2015 .
Recurring
and
Other
Revenue
Recurring services for our subscriber contracts are billed directly to the subscriber in advance, generally monthly, pursuant to the terms of subscriber
contracts and recognized ratably over the service period. Product revenues are deferred and recognized in a pattern that reflects the estimated life of the subscriber
relationship. Imputed interest associated with RIC receivables is recognized over the initial term of the RIC. The amount of service revenue is dependent upon
which of our service offerings is included in the subscriber contracts. Our smart home and video offerings generally provide higher service revenue than our base
smart home service offering. Historically, we have generally offered contracts to subscribers that range in length from 36 to 60 months 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. Recurring revenue also includes the recognition of deferred revenue associated with the sales
of our products sold at the time of the contract origination. The amount of deferred product revenue recognized is dependent on the total sales price of the products
sold.
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, make adjustments to the estimated subscriber relationship period and amortization method.
Activation fees are not expected to be significant under Vivint Flex Pay, as these fees are no longer billed separately to subscribers at the time of installation. We
do not charge activation fees for customer moves, reactivation, or renewal of monitoring services.
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 subscribers’
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 full-time smart home
professionals, or 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. We generally expect our operating expenses to increase in absolute dollars as the total
number of subscribers we service continues to grow, but to remain relatively constant in the near to intermediate term as a percentage of our revenue.
Selling
Expenses
Selling expenses are primarily comprised of costs associated with housing for our direct-to-home sales representatives, advertising and lead generation,
marketing and recruiting, certain portions of sales commissions (residuals), 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. We generally expect our selling expenses to increase, both in
absolute dollars
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and as a percentage of revenue, in the near to intermediate term due to the expected growth in our new subscriber originations.
General
and
Administrative
Expenses
General and administrative expenses consist largely of finance, legal, research and development, or 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 have historically provided various administrative services to
Solar. We charge Solar the costs associated with these service agreements (see Note 13 to the accompanying consolidated financial statements). We generally
expect our general and administrative expenses to increase in absolute dollars to support the overall growth in our business, but to decrease in the near to
intermediate term as a percentage of our revenue.
Depreciation
and
Amortization
Depreciation and amortization consists of depreciation from property, plant and equipment, amortization of equipment leased under capital leases, capitalized
subscriber acquisition costs and intangible assets. We generally expect our depreciation and amortization expenses to increase in absolute dollars as we grow our
business and increase the number of new subscribers originated on an annual basis, but to remain relatively constant in the near to intermediate term as a
percentage of our revenue.
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 the accompanying audited consolidated financial statements.
Revenue
Recognition
We recognize revenue principally on three types of transactions: (1) recurring and other revenue, which includes revenues for monitoring and other smart
home services, recognition of deferred revenue associated with the sales of products (control panel, security peripheral equipment, and smart home equipment) at
the time of installation, imputed interest associated with the RIC receivables and recurring monthly revenue associated with Vivint Wireless Inc., (2) 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 (i.e., those products sold subsequent to the date of the initial installation) which are generally recognized upon delivery of products and
(3) activation fees on subscriber contracts, which are amortized over the expected life of the customer.
Revenue recognition begins after the customer’s right of rescission period has passed, which is typically three days from the installation date.
Although customers pay separately for the products and services under the Vivint Flex Pay plan, we have determined that the shift in our sales model does
not change our conclusion that the product sales and services are one combined unit of accounting. As a result, all forms of transactions under Vivint Flex Pay
create deferred revenue for the gross amount of products sold. Gross deferred revenues are reduced by imputed interest on the RICs and the present value of
expected payments due to the third-party financing provider under the Consumer Financing Program. These deferred revenues are recognized in a pattern that
reflects the estimated life of the subscriber relationships. We amortize these deferred revenues 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.
Under the Consumer Financing Program, qualified customers are eligible for installment loans provided by a third-party
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financing provider of up to $4,000 for either 42 or 60 months. We pay a monthly fee to the third-party financing provider based on the average daily outstanding
balance of the installment loans. Additionally, we share the liability for credit losses depending on the credit quality of the customer. Because of the nature of these
provisions under the Consumer Financing Program, we record a derivative liability at its fair value when the third-party financing provider originates installment
loans to customers, which reduces the amount of revenue recognized on the provision of the services. The derivative liability is reduced as payments are made from
the Company to the third-party financing provider. Subsequent changes to the fair value of the derivative liability are realized through other loss/ (income), net in
the consolidated statement of operations.
Recurring and other revenue includes: (1) our subscriber contracts associated with services, which are billed directly to the subscriber in advance, generally
monthly, pursuant to the terms of subscriber contracts and recognized ratably over the service period, (2) monthly recognition of deferred product revenue related
to the sale of our products (control panel, security peripheral equipment, smart home equipment, and related installation), at the time the customer enters into the
contractual agreement and (3) imputed interest associated with the RIC receivables, which is recognized over the initial term of the RIC.
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 service offering (i.e., those products sold subsequent to the date of the initial installation) 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. We amortize deferred activation fees 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. Activation fees are no
longer charged under Vivint Flex Pay, as these fees will no longer be billed separately to subscribers at the time of installation. We do not charge activation fees for
customer moves, reactivation, or renewal of monitoring services.
Deferred
Revenue
Our deferred revenues primarily consist of amounts for sales (including cash sales) of products and services. Deferred product revenues are recorded at the
time equipment is installed and subsequently recognized as revenue in a pattern that reflects the estimated life of the subscriber relationships. We amortize these
deferred revenues 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. Deferred service revenues represent the amounts billed, generally monthly, in advance and
collected from customers for services yet to be performed.
Subscriber
Acquisition
Costs
Subscriber acquisition costs represent the costs directly related and incremental to the origination of new subscribers. These include commissions, other
compensation and related costs paid directly for the generation and installation of new customer contracts, as well as the cost of equipment installed in the customer
home at the commencement of the contract. These costs are deferred and amortized in a pattern that reflects the estimated life of the subscriber relationships.
Amortization of subscriber acquisition costs, which includes the amortization of deferred commissions, is included in “Depreciation and Amortization” on the
consolidated statements of operations. The remaining subscriber acquisition costs are expensed as incurred. These costs include those 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. We amortize the deferred subscriber acquisition costs in the same manner as deferred revenue. 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.
On the accompanying audited 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 consolidated statements of cash flows as these assets represent deferred costs associated with customer contracts.
Retail
Installment
Contract
Receivables
For customers that enter into a RIC under the Vivint Flex Pay plan, we record a receivable for the amount financed. The RIC
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receivables are recorded at their present value, net of the imputed interest. At the time of installation, we record a long-term note receivable within long-term
investments and other assets, net on the consolidated balance sheets for the present value of the receivables that are expected to be collected beyond 12 months of
the reporting date. The unbilled receivable amounts that are expected to be collected within 12 months of the reporting date are included as a short-term notes
receivable within accounts and notes receivable, net on the consolidated balance sheets. The billed amounts of notes receivables are included in accounts receivable
within accounts and notes receivable, net on the consolidated balance sheets.
We impute the interest on the RIC receivable using a risk adjusted market interest rate and record it as an adjustment to deferred revenue and as an
adjustment to the face amount of the related receivable. The imputed interest income is recognized over the term of the RIC contract as recurring and other revenue
on the consolidated statement of operations.
When we determine that there are RIC receivables that have become uncollectible, we record an allowance for credit losses and bad debt expense. The
estimate of allowance for credit losses considers a number of factors, including collection experience, aging of the remaining RIC receivable portfolios, credit
quality of the subscriber base and other qualitative considerations, including macro-economic factors. Account balances are written-off if collection efforts are
unsuccessful and future collection is unlikely based on the length of time from the day accounts become past due. As of December 31, 2017 and December 31,
2016 there was no allowance for credit losses associated with RIC receivables.
Accounts
Receivable
Accounts receivable consists primarily of amounts due from customers for recurring monthly monitoring services and the billed portion of RIC receivables.
The accounts receivable are recorded at invoiced amounts and are non-interest bearing and are included within accounts and notes receivable, net on the
consolidated balance sheets. Accounts receivable totaled $24.3 million and $12.9 million and December 31, 2017 and 2016 , respectively net of the allowance for
doubtful accounts of $5.4 million and $4.1 million at December 31, 2017 and 2016 , respectively. We estimate this allowance based on historical collection
experience and subscriber attrition rates. When we determine that there are accounts receivable that are uncollectible, they are charged off against the allowance for
doubtful accounts. As of December 31, 2017 and 2016 , no accounts receivable were classified as held for sale. The provision for doubtful accounts is included in
general and administrative expenses in the accompanying consolidated statements of operations and totaled $22.5 million and $19.6 million for the years ended
December 31, 2017 and 2016 , 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 $377.5 million and $475.4 million as of December 31, 2017 and 2016 , respectively. Goodwill represents the excess
of cost over the fair value of net assets acquired and was $837.0 million and $835.2 million as of December 31, 2017 and 2016 , respectively.
The estimated fair values and useful lives of identified intangible assets are based on many factors, including estimates and assumptions of future operating
performance and cash flows of the acquired business, estimates of cost avoidance, the nature of the business acquired, the specific characteristics of the identified
intangible assets and our historical experience and that of the acquired business. The estimates and assumptions used to determine the fair values and useful lives of
identified intangible assets could change due to numerous factors, including product demand, market conditions, regulations affecting the business model of our
operations, technological developments, economic conditions and competition. The carrying values and useful lives for amortization of identified intangible assets
are reviewed annually during our fourth fiscal quarter and as
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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. 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,
Plant
and
Equipment
Property, plant and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives of the assets or the lease term for
assets under capital leases, whichever is shorter. 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, plant and equipment and
perform an impairment review whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
In 2016, because of our involvement in certain aspects of the construction of a new building constructed in Logan, Utah as a location to further sales
recruitment and training, as well as conduct research and development, or the Logan Facility, per the terms of the lease, we were deemed the owner of the building
for accounting purposes during the construction period. Accordingly, we recorded a build-to-suit lease asset and a corresponding build-to-suit lease liability during
the construction period.
In April 2017, construction on the Logan Facility was completed and we commenced occupancy. In accordance with ASC 840-40 Sale-Leaseback
Transactions, the building did not qualify for sale-leaseback treatment. As such, we will retain the building asset and corresponding lease obligation on the balance
sheet. Accordingly, we have a build-to-suit building asset, which totaled $8.3 million and $5.0 million as of December 31, 2017 and 2016 .
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 bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets when it is
determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
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
See Note 2 to our accompanying audited Consolidated Financial Statements.
Basis of Presentation
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We conduct business through one operating segment, Vivint. Historically, we primarily operated in three geographic regions: the United States, Canada and
New Zealand. During the three months ended September 30, 2016, we sold all our New Zealand and Puerto Rico subscriber contracts and ceased operations in
these geographical regions, or the 2016 Contract Sales. Historically, our operations in both regions were considered immaterial and reported in conjunction with the
United States. See Note 14 in the accompanying consolidated financial statements for more information about our geographic segments.
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 (1)
Total subscribers, as of December 31 (in thousands)
Total MR (in thousands)
AMRU
Net service cost per user
Net service margin
Net subscriber acquisition costs per new subscriber
Year ended December 31,
2017
2016
(in thousands)
$
881,983
$
757,907
$
1,037,476
(155,493)
253,628
(409,121)
1,078
829,009
(71,102)
204,788
(275,890)
67
2015
653,721
762,396
(108,675)
170,081
(278,756)
351
$
$
$
$
$
(410,199)
$
(275,957)
$
(279,107)
1,292.7
75,355
58.29
15.69
$
$
$
1,146.7
65,633
57.23
14.72
$
$
$
72%
74%
1,594
$
1,996
$
1,013.9
55,689
54.92
14.33
74%
1,899
(1) All subscriber data presented excludes wireless internet business and pilot programs.
Year
Ended
December
31,
2017
Compared
to
the
Year
Ended
December
31,
2016
Revenues
The following table provides the significant components of our revenue for the years ended December 31, 2017 and 2016 :
Recurring and other revenue
Service and other sales revenue
Activation fees
Total revenues
Year ended December 31,
2017
2016
% Change
$
$
(in thousands)
843,420 $
724,478
26,988
11,575
22,855
10,574
881,983 $
757,907
16%
18%
9%
16%
Total revenues increased $124.1 million , or 16% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , primarily due
to the growth in recurring and other revenue, which increased $118.9 million , or 16% . Approximately $87.0 million of the increase in recurring and other revenue
was due to Service revenue associated with the increase in Total Subscribers of approximately 13% and approximately $4.7 million was due to increases in
contracted Services across our subscriber base. Recurring and other revenue for the year ended December 31, 2017 included recognized deferred Product revenue
and RIC imputed interest of $21.4 million and $7.3 million , respectively. Recurring and other revenues associated with our wireless internet business decreased
$1.4 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 . Currency translation positively affected total revenues by
$1.4 million , as computed on a constant currency basis.
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Total service and other sales revenue increased $4.1 million , or 18% for the year ended December 31, 2017 as compared to the year ended December 31,
2016 , primarily due to due to increased service billings.
The revenue associated with activation fees is deferred upon billing and recognized over the estimated life of the subscriber relationship. Revenues
recognized related to activation fees increased $1.0 million , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 , primarily
due to the acceleration of recognizing deferred activation fees as a result of a change in the estimated timing related to amortization.
Costs and Expenses
The following table provides the significant components of our costs and expenses for the years ended December 31, 2017 and 2016 :
Operating expenses
Selling expenses
General and administrative
Depreciation and amortization
Restructuring and asset impairment charges
Total costs and expenses
Year ended December 31,
2017
2016
% Change
(in thousands)
$
321,476 $
198,348
188,397
329,255
—
$
1,037,476 $
264,865
131,421
143,168
288,542
1,013
829,009
21%
51%
32%
14%
NM
25%
Operating expenses increased $56.6 million , or 21% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 . Excluding
the $16.2 million in operating expenses directly associated with efforts to expand sales channels, operating expense increased $40.4 million, or 15%. The costs
associated with this $40.4 million increase were primarily driven by an increase in personnel and related costs of $28.0 million associated primarily with field
service and customer care, an increase in equipment and shipping costs of $8.7 million , an increase in IT related services of $3.4 million , and a $1.6 million
increase in payment processing and bank fees associated with the increase in Total Subscribers and the Company’s introduction of Vivint Flex Pay, which requires
a customer to use a credit or debit card as their payment method.
Selling expenses, excluding amortization of capitalized subscriber acquisition costs, increased $66.9 million , or 51% , for the year ended December 31, 2017
as compared to the year ended December 31, 2016 . Selling expenses associated with expanding our sales channels increased by $47.2 million . We also had
increases in personnel and related costs of $6.2 million , an increase in facility and housing related costs of $5.7 million , an increase in IT costs of $3.8 million ,
and an increase in marketing costs of $2.7 million primarily associated with lead generation.
General and administrative expenses increased $45.2 million , or 32% , for the year ended December 31, 2017 as compared to the year ended December 31,
2016 . Increases were primarily related to an increase in personnel and associated costs of $15.8 million , an increase of $10.9 million in costs to support the
Company's expansion of new sales channels, an increase in contracted services of $2.3 million and an increase in advertising costs of $2.2 million , all to support
the growth in our business. In addition, we recorded $10.0 million in 2017 related to the settlement of litigation with ADT and bad debt increased by $2.9 million ,
primarily due to the growth in our customer base.
Depreciation and amortization increased $40.7 million , or 14% , for the year ended December 31, 2017 as compared to the year ended December 31, 2016 .
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 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. (See Note 10 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, 2017 and 2016 :
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Interest expense
Interest income
Other loss, net
Total other expenses, net
Year ended December 31,
2017
2016
% Change
$
$
(in thousands)
225,772 $
(130)
27,986
253,628 $
197,965
(432)
7,255
204,788
14%
NM
NM
24%
Interest expense increased $27.8 million , or 14% , for the year ended December 31, 2017 , as compared with the year ended December 31, 2016 , due to a
higher principal balance on our debt. See Note 4 to our accompanying Consolidated Financial Statements for further information on our long-term debt.
Other loss, net, increased by $20.7 million , for the year ended December 31, 2017 , as compared with the year ended December 31, 2016 . The primary
component of other loss, net was from the loss and expenses of $23.0 million and $10.1 million resulting from our debt modification and extinguishments during
the years ended December 31, 2017 and 2016, respectively. Other loss, net for the year ended December 31, 2017 also included the loss on our derivative liability
of $9.6 million . In addition, the foreign currency exchange gain increased $2.8 million for the year ended December 31, 2017 , as compared with the year ended
December 31, 2016 .
Income Taxes
The following table provides the significant components of our income tax expense for the years ended December 31, 2017 and 2016 :
Income tax expense
Year ended December 31,
2017
2016
% Change
$
(in thousands)
1,078 $
67
NM
Income tax expense increased $1.0 million for the year ended December 31, 2017 , as compared with the year ended December 31, 2016 . Our tax expense
for the years ended December 31, 2017 and 2016 resulted primarily from earnings in our Canadian subsidiary, as well as U.S. minimum state taxes.
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 and other 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 and other revenue, which increased $99.5 million, or 16%. $83.3 million of the increase in recurring and other revenue was due to an
increase in Total Subscribers and $15.5 million of the
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increase was due to increases in AMRU. Recurring and other 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 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%
NM
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
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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 :
Interest expense
Interest income
Other loss (income), 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.
Unaudited Quarterly Results of Operations
The following tables present our unaudited quarterly consolidated results of operations for the four quarters ended December 31, 2017 and 2016 . 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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Statement of operations data
Revenue
Loss from operations
Net loss
Statement of operations data
Revenue
Loss from operations
Net loss
Liquidity and Capital Resources
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
(in thousands)
Three Months Ended
$
235,846 $
228,658 $
212,126 $
(68,356)
(135,406)
(40,147)
(107,920)
(30,463)
(84,237)
205,353
(16,527)
(82,636)
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2015 (1)
Three Months Ended
(in thousands)
$
204,512 $
198,335 $
180,807 $
(16,818)
(71,168)
(17,736)
(69,974)
(32,873)
(89,722)
174,253
(3,675)
(45,093)
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, 2017 , we had $3.9 million of cash and cash equivalents and $234.1
million of availability under our revolving credit facility (after giving effect to $9.5 million of letters of credit outstanding and $60.0 million of 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, 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 and $30 million of the 2022 private placement notes in privately negotiated transactions in conjunction with the issuance of the
2022 notes. 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 used any remaining proceeds for general corporate purposes. In August 2017, we issued $400 million
aggregate principal amount of the 2023 notes. We used the net proceeds from the offering of these 2023 notes to redeem $150 million aggregate principal amount
of the existing 2019 notes and pay the related redemption premium and accrued and unpaid interest thereon, and to pay all fees and expenses related thereto and
used 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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Our cash flows provided by operating activities include recurring monthly billings, cash received for product sales from subscribers either by those that paid-
in-full at the time of product sale or financed their purchase of products under the Consumer Financing Program and other fees received from the subscribers we
service. Cash used in operating activities includes the cash costs to monitor and service our 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. Currently, the cash received for product sales from subscribers generated under the Consumer Financing
Program, and those that are paid-in-full at the time of product sale, 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, prior to and during this time period. The incremental inventory purchased to support the direct-to-home sales season is generally
consumed prior to the end of the calendar year in which it is purchased.
Under the Best Buy Agreement, Best Buy offered Vivint’s products and services in approximately 450 Best Buy retail stores at the end of 2017. We are
devoting, and will continue to devote, significant management attention as well as significant capital, including significant investments in inventory and other
resources to our partnership with Best Buy over the course of the term of the Agreement.
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,
2017
2016
2015
$
(309,332) $
(365,706) $
(21,661)
291,213
(15,147)
422,280
(255,307)
(35,615)
284,400
We generally reinvest the cash flows from our recurring monthly billings and cash received from product sales associated with the initial installation into our
business, primarily to (1) maintain and grow our subscriber base, (2) expand our infrastructure to support this growth, (3) enhance our existing products and service
offerings, (4) develop new product and service offerings and (5) expand into new sales channels. 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, and increasing the productivity and
efficiency of our workforce and back-office functions necessary to scale our business.
For the year ended December 31, 2017 , net cash used in operating activities was $309.3 million . This cash used was primarily from a net loss of $410.2
million , adjusted for:
•
•
•
$337.4 million in non-cash amortization, depreciation, and stock-based compensation,
a $23.1 million loss on early extinguishment of debt, and
a $22.5 million provision for doubtful accounts.
Cash used in operating activities also resulted from changes in operating assets and liabilities, including:
•
•
•
•
•
a $457.7 million increase in subscriber acquisition costs,
a $75.6 million increase in inventories to support our Best Buy relationship and the anticipated sales generated by our inside sales channel,
a $74.8 million increase in other assets primarily due to increases in notes receivables associated with RICs,
a $49.6 million increase in accounts receivable driven primarily by the recognition of billed RICs under Vivint Flex Pay, and
a $6.0 million increase in prepaid expenses and other current assets.
These uses of operating cash were partially offset by:
•
a $247.5 million increase in deferred revenue due to the increased subscriber base and the generation of deferred revenues associated with product
sales under the Vivint Flex Pay plan,
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•
•
a $70.5 million increase in accounts payable due primarily to increases in inventory purchases, and
a $62.2 million increase in accrued expenses and other liabilities due primarily from increases in accrued interest on our long term debt.
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 $19.6 million provision for doubtful accounts,
a $10.1 million loss on early extinguishment of debt, and
$7.1 million in non-cash restructuring and asset impairment charges
Cash used in operating activities also resulted from changes in operating assets and liabilities, including:
•
•
•
•
•
•
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, and
a $5.2 million increase in prepaid expenses and other current assets, and
a $2.8 million decrease in the restructuring liability.
These uses of operating cash were partially offset by:
•
•
a $24.6 million increase in deferred revenue due to the increased subscriber base, and
a $12.7 million increase in accrued expenses and other liabilities due primarily from increases in accrued interest on our long term debt.
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:
•
•
•
$245.5 million in non-cash amortization, depreciation, stock-based compensation, a non-cash gain on settlement of the Merger-related escrow,
$59.2 million restructuring and asset impairment charge related to our Wireless Internet business transition, and
a $14.9 million provision for doubtful accounts
Cash used in operating activities also resulted from changes in operating assets and liabilities, including:
•
•
•
a $354.9 million increase in subscriber acquisition costs, and
a $14.4 million increase in accounts receivable, and
a $1.5 million decrease in the restructuring liability.
These uses of operating cash were partially offset by:
•
•
•
•
•
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, and
a $15.0 million increase in fees paid by our subscribers in advance of when the associated revenue is recognized, and
a $1.5 million decrease in prepaid expenses and other current assets.
Our outstanding debt as of December 31, 2017 was approximately $2.8 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
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December 31, 2017 , 2016 and 2015 related to our indebtedness (excluding capital leases) totaled $203.4 million , $188.1 million and $144.9 million , respectively.
Our net cash used in operating activities for the years ended December 31, 2017 , 2016 and 2015 , before these interest payments, was $105.9 million , $177.6
million and $110.4 million , respectively. Accordingly, our net cash provided by operating activities for the years ended December 31, 2017 , 2016 and 2015 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, 2017 , net cash used in investing activities was $21.7 million . This cash used primarily consisted of capital expenditures of
$20.4 million .
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.
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 or through our
Vivint Flex Pay program. Uses of cash for financing activities are generally associated with the return of capital to our stockholders, the repayment of debt and the
payment of financing costs associated with the issuance of debt.
For the year ended December 31, 2017 , net cash provided by financing activities was $291.2 million , consisting primarily of $724.8 million in borrowings
on notes and $196.9 million in borrowings on the revolving credit facility. This was offset with $450.0 million of repayments on notes, $136.9 million of
repayments on the revolving credit facility, $29.4 million in financing costs and $10.0 million of repayments under our capital lease obligations.
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.
Long-Term Debt
We are a highly leveraged company with significant debt service requirements. As of December 31, 2017 , we had $2,829.5 million of aggregate principal
total debt outstanding, consisting of $269.5 million of outstanding 2019 notes, $930.0 million of outstanding 2020 notes, $270 million of outstanding 2022 private
placement notes, $900.0 million of outstanding 2022 notes and $400.0 million of outstanding 2023 notes with $234.1 million of availability under our revolving
credit facility (after giving effect to $9.5 million of outstanding letters of credit and $60.0 million borrowings).
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 in
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connection with 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. In August 2017, we issued
$400 million aggregate principal amount of the 2023 notes and used the net proceeds from the offering of these 2023 notes to redeem $150 million aggregate
principal amount of the existing 2019 notes.
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.
The 2019 notes mature on December 1, 2019.
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.
The 2020 notes mature on December 1, 2020.
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 in conjunction with 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 104.5%, 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.
The 2022 private placement notes mature on December 1, 2022 unless on September 1, 2020 (i.e. the 91st day prior to the maturity of the 2020 notes) more
than an aggregate principal amount of $190 million of the 2020 notes remain outstanding or have not been refinanced as permitted under the terms of the 2022
private placement notes, in which case the private placement notes mature on September 1, 2020.
2022 Notes
On May 26, 2016, we issued $500.0 million aggregate principal amount of our 2022 notes. On August 17, 2016 and February 1, 2017 we issued an additional
$100 million and $300 million of our 2022 notes, respectively. 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
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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.
The 2022 notes 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.
2023 Notes
On August 10, 2017, we issued $400 million aggregate principal amount of our 7.625% Senior Notes due 2023. Interest on the 2023 notes will be payable
semi-annually in arrears on September 1 and March 1 of each year, commencing on March 1, 2018.
We may, at our option, redeem at any time and from time to time prior to September 1, 2019, some or all of the 2023 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 September 1, 2019, we may, at our option,
redeem at any time and from time to time some or all of the 2023 notes at 105.719%, declining to par from and after September 1, 2022, in each case, plus any
accrued and unpaid interest to the date of redemption. In addition, on or prior to September 1, 2019, we may, at our option, redeem up to 35% of the aggregate
principal amount of the 2023 notes with the proceeds from certain equity offerings at 107.625%, plus accrued and unpaid interest to the date of redemption.
The 2023 notes mature on September 1, 2023.
Revolving Credit Facility
On November 16, 2012, we entered into a $200.0 million senior secured revolving credit facility, with a five year maturity. In addition, we may request one
or more term loan facilities, increased commitments under the revolving credit facility or new revolving credit commitments, in an aggregate amount not to exceed
$225.0 million. Availability of such incremental facilities and/or increased or new commitments will be subject to certain customary conditions.
On June 28, 2013, we amended and restated the credit agreement to provide for a new repriced tranche of revolving credit commitments with a lower interest
rate. Nearly all of the existing tranches of revolving credit commitments was terminated and converted into the repriced tranche, with the unterminated portion of
the existing tranche continuing to accrue interest at the original higher rate.
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.
On August 10, 2017, 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 $289.4 million to $324.3 million and (2) the extension of the maturity date with respect to certain of the previously available
commitments.
As of December 31, 2017 we had $234.1 million of availability under the revolving line of credit facility (after giving effect to $9.5 million of letters of
credit outstanding and $60.0 million borrowings).
Borrowings under the amended and restated revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at APX’s option,
either (1) the base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50% , (b) the prime rate of Bank of America, N.A. and (c) the
LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined
by reference to the London interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based
borrowings (1)(a) under the Series A Revolving Commitments of approximately $267.0 million and Series D Revolving Commitments of approximately $15.4
million is currently 2.0% per annum and (b) under the Series B Revolving Commitments of approximately $21.2 million is currently 3.0% and (2)(a) the
applicable margin for LIBOR rate-based
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borrowings (a) under the Series A Revolving Commitments and Series D Revolving Commitments is currently 3.0% per annum and (b) under the Series B
Revolving Commitments is currently 4.0% . The applicable margin for borrowings under the revolving credit facility is subject to one step-down of 25 basis points
based on APX meeting a consolidated first lien net leverage ratio test at the end of each fiscal quarter. During the year ended December 31, 2017, previous
commitments under the Series C Revolving Commitments had expired. Outstanding borrowings under the amended and restated revolving credit facility are
allocated on a pro-rata basis between each Series based on the total Revolving Commitments.
In addition to paying interest on outstanding principal under the revolving credit facility, APX is required to pay a quarterly commitment fee (which will be
subject to one interest rate step-down of 12.5 basis points, based on APX meeting a consolidated first lien net leverage ratio test) to the lenders under the revolving
credit facility in respect of the unutilized commitments thereunder. As of December 31, 2017 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 D, March 31, 2019 and (3) with respect to the
extended commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2021.
Guarantees and Security
All of the obligations under the revolving credit facility and the existing notes are guaranteed by APX Group Holdings, Inc. and each of APX Group, Inc.'s
existing and future material wholly-owned U.S. restricted subsidiaries to the extent such entities guarantee indebtedness under the revolving credit facility or our
other indebtedness. See Note 16 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 and the existing senior secured notes are secured by a security interest in (1) 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, (2) 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 APX Group, Inc. and the guarantors,
and the proceeds thereof, subject to permitted liens and other customary exceptions, in each case held by APX Group, Inc. and the guarantors and (3) 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.
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 APX Group, Inc. may incur in the future, before the holders of the 2019 notes receive any such proceeds.
Debt Covenants
The credit agreement governing the revolving credit facility and the debt agreements governing the existing notes contain a number of covenants that, among
other things, restrict, subject to certain exceptions, APX Group, Inc. and its 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.;
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•
•
•
designate restricted subsidiaries as unrestricted subsidiaries
amend, prepay, redeem or purchase certain subordinated debt; and
transfer or sell certain 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, 2017 , APX Group, Inc. was in compliance with all covenants related to its long-term
obligations.
Subject to certain exceptions, the credit agreement governing the revolving credit facility and the debt agreements governing the existing notes permit APX
Group, Inc. and its 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 our existing cash, together with cash provided by operations and amounts available through the revolving
credit facility and incremental facilities will be sufficient to meet our operating needs for the next 12 months, including working capital requirements, capital
expenditures, debt service obligations and potential new acquisitions.
Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic,
financial and other factors that are beyond our control and many of which are described under “Risk Factors.” If those factors significantly change or other
unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to
meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under the
revolving credit facility, incurring other indebtedness, additional equity or other financings or a combination of these potential sources of liquidity. We may not be
able to obtain this additional liquidity on terms acceptable to us or at all.
Covenant Compliance
Under the debt agreements governing our existing 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 its ability to satisfy tests based on 12 months ended Adjusted EBITDA. Such tests include an incurrence-based maximum consolidated
secured debt ratio and consolidated total debt ratio of 4.00 to 1.0, an incurrence-based minimum fixed charge coverage ratio of 2.00 to 1.0, and, solely in the case of
the credit agreement governing the revolving credit facility, a maintenance-based maximum consolidated first lien secured debt ratio of 5.35 to 1.0, each as
determined in accordance with the agreements governing our existing notes and the revolving credit facility, as applicable. Non-compliance with these covenants
could restrict our ability to undertake certain activities or result in a default under the agreements governing our existing notes and the revolving credit facility.
“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 agreements 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 the notes and the credit agreement governing the 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 loss or any other
performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity.
The following table sets forth a reconciliation of net loss to Adjusted EBITDA (in thousands):
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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,
2017
2016
2015
$
(410,199) $
(275,957) $
(279,107)
225,642
255,456
206,153
123,102
27,986
1,377
—
1,078
59,733
$
490,328 $
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
(1) Reflects subscriber acquisition costs that are expensed as incurred because they are not directly related to the acquisition of specific subscribers. Certain
other industry participants purchase subscribers through subscriber contract purchases, and as a result, may capitalize the full cost to purchase these
subscriber contracts, as compared to our organic generation of new subscribers, which requires us to expense a portion of our subscriber acquisition costs
under GAAP.
(2) Excludes loan amortization costs that are included in interest expense.
(3) Reflects non-cash compensation costs related to employee and director stock and stock option plans. Excludes non-cash compensation costs included in
non-capitalized subscriber acquisition costs.
(4) 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):
Year ended December 31,
2017
2016
2015
24,189 $
16,423
Product development (a)
Litigation settlement (b)
Certain legal and professional fees (c)
Monitoring fee (d)
Start-up of new strategic initiatives (e)
Purchase accounting deferred revenue fair value adjustment (f)
Information technology implementation (g)
Hiring and termination payments (h)
Projected run-rate restructuring cost savings (i)
Non-cash gain on settlement of Merger-related escrow (j)
One-time deferred revenue adjustment (k)
Excess Inventory (l)
All other adjustments (m)
Total other adjustments
$
26,767 $
10,012
4,986
3,506
3,486
3,280
3,188
386
—
—
—
—
—
6,399
3,746
—
4,410
3,745
1,017
—
—
—
—
$
4,122
59,733 $
2,191
45,697 $
—
3,369
3,580
392
4,710
1,876
1,132
5,485
(12,200)
(2,023)
733
1,867
25,344
(a) Costs related to the development of control panels, including associated software, peripheral devices and Wireless Internet Technology.
(b) ADT litigation settlement.
(c) Legal and related professional fees associated with strategic initiatives and financing transactions.
(d) Blackstone Management Partners L.L.C. monitoring fee (See Note 14 to the accompanying consolidated financial statements).
(e) Costs related to the start-up of potential new service offerings and sales channels.
(f) Add back revenue reduction directly related to purchase accounting deferred revenue adjustments.
(g) Costs related to the implementation of new information technologies.
(h) Signing bonuses and relocation costs related to executive hiring and severance payments primarily related to restructuring plans.
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(i) Run-rate savings related to December 2014 reduction-in-force (“RIF”) and the Wireless Restructuring
RIF.
(j) Gain related to settlement of escrow balance related to the Merger (See Note 14 to the accompanying consolidated financial statements).
(k) 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.)
(l) Represents reserve for excess inventory associated with discontinued product offerings.
(m) Other adjustments primarily reflect costs associated with payments to third parties related to various strategic and financing activities, including the
monthly financing fee paid under the Consumer Financing Plan, and costs to implement Sarbanes-Oxley Section 404.
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, 2017 , our total capital lease
obligations were $21.7 million , of which $10.6 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, 2017 . 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)
$
2,829,465 $
— $
1,202,465 $
1,227,000 $
1,197,010
303,802
591,200
271,508
23,287
131,461
69,799
38,849
11,635
20,276
23,571
5,550
11,601
36,530
13,677
9,013
51
31,733
12,970
7,030
More than
5 Years
400,000
30,500
—
42,922
19,581
17,256
Total contractual obligations
$
4,289,871 $
364,834 $
1,864,486 $
1,550,292 $
510,259
(1) As of December 31, 2017 , we had $60.0 million of borrowings under our revolving credit facility. At December 31, 2017 , our revolving credit facility
provided for availability of $303.6 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 D Revolving Credit Facility, March 31, 2019 and (2) with respect to the extended commitments
under the Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2021. As of December 31, 2017 ,
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there was approximately $234.1 million of availability under our revolving credit facility (after giving effect to $9.5 million of outstanding letters of credit
and $60.0 million borrowings).
(2) Represents aggregate interest payments on aggregate principal amounts of $269.5 million of the outstanding 2019 notes, $930.0 million of outstanding
2020 notes, $270.0 million of the outstanding 2022 private placement notes, $900.0 million of the outstanding 2022 notes, and $400.0 million of the
outstanding 2023 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, 2017 . 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 $3.0 million per annum. We had $60.0 million of borrowings under
the revolving credit facility as of December 31, 2017 .
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, 2017 . 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, 2017 , if foreign currency exchange rates had decreased 10% throughout the year, our revenues would have
decreased by approximately $6.6 million , our total assets would have decreased by $20.9 million and our total liabilities would have decreased by $16.0 million .
We do not currently use derivative financial instruments to hedge investments in foreign subsidiaries. For the year ended December 31, 2017 , before intercompany
eliminations, approximately $66.0 million of our revenues, $209.1 million of our total assets and $160.1 million of our total liabilities were denominated in
Canadian Dollars.
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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, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Equity (Deficit) for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Page
66
67
68
69
70
71
73
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of APX Group Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of APX Group Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2017 and 2016 ,
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, 2017 , and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016 , and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2017 , in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2011.
Salt Lake City, Utah
March 6, 2018
66
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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 and notes receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant 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 12)
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
67
December 31,
2017
2016
$
3,872 $
40,721
115,222
16,150
175,965
78,081
1,308,558
3,099
377,451
836,970
88,723
43,520
12,891
38,452
10,158
105,021
63,626
1,052,434
4,420
475,392
835,233
11,536
$
$
2,868,847 $
2,547,662
107,347 $
57,752
74,321
88,337
10,614
338,371
2,760,297
60,000
11,089
264,555
79,020
9,041
49,119
46,288
34,265
45,722
9,797
185,191
2,486,700
—
7,935
58,734
47,080
7,204
3,522,373
2,792,844
—
732,346
(1,358,571)
(27,301)
(653,526)
—
731,920
(948,339)
(28,763)
(245,182)
$
2,868,847 $
2,547,662
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Revenues:
Recurring and other revenue
Service and other sales revenue
Activation fees
Total revenues
Costs and expenses:
APX Group Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands)
Year ended December 31,
2017
2016
2015
$
843,420 $
724,478 $
26,988
11,575
881,983
22,855
10,574
757,907
624,989
22,700
6,032
653,721
Operating expenses (exclusive of depreciation and amortization shown separately below)
321,476
264,865
228,315
Selling expenses (exclusive of amortization of deferred commissions of $84,152, $64,007
and $38,441, respectively, which are included in depreciation and amortization shown
separately below)
General and administrative expenses
Depreciation and amortization
Restructuring and asset impairment charges
Total costs and expenses
Loss from operations
Other expenses (income):
Interest expense
Interest income
Other loss, net
Loss before income taxes
Income tax expense
Net loss
198,348
188,397
329,255
—
1,037,476
(155,493)
225,772
(130)
27,986
(409,121)
1,078
131,421
143,168
288,542
1,013
829,009
(71,102)
197,965
(432)
7,255
122,948
107,212
244,724
59,197
762,396
(108,675)
161,339
(90)
8,832
(275,890)
(278,756)
67
351
$
(410,199) $
(275,957) $
(279,107)
See accompanying notes to consolidated financial statements
68
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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 (loss) gain on marketable securities
Total other comprehensive income (loss)
Comprehensive loss
Year ended December 31,
2017
2016
2015
(410,199) $
(275,957) $
(279,107)
3,155
(1,693)
1,462
2,482
1,011
3,493
(408,737) $
(272,464) $
(13,293)
—
(13,293)
(292,400)
$
$
See accompanying notes to consolidated financial statements
69
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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, 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
Net Loss
Foreign currency translation adjustment
Unrealized loss on marketable securities
Stock-based compensation
Return of capital to Vivint Smart Home,
Inc.
Balance, December 31, 2017
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
636,724
—
—
3,121
(12,200)
627,645
—
—
—
3,868
100,407
731,920
—
—
—
1,577
(1,151)
(393,275)
(279,107)
—
—
—
(672,382)
(275,957)
—
—
—
—
(948,339)
(410,199)
—
—
(33)
—
(18,963)
—
(13,293)
—
—
(32,256)
—
2,482
1,011
—
—
(28,763)
—
3,155
(1,693)
—
—
732,346 $
(1,358,571) $
(27,301) $
224,486
(279,107)
(13,293)
3,121
(12,200)
(76,993)
(275,957)
2,482
1,011
3,868
100,407
(245,182)
(410,199)
3,155
(1,693)
1,544
(1,151)
(653,526)
See accompanying notes to consolidated financial statements
70
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Cash flows from operating activities:
Net loss from operations
APX Group Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
2017
2016
2015
$
(410,199) $
(275,957) $
(279,107)
Adjustments to reconcile net loss to net cash used in operating activities of operations:
Amortization of subscriber acquisition costs
Amortization of customer relationships
206,153
94,863
154,877
108,178
Depreciation and amortization of property, plant and equipment and other intangible
assets
Amortization of deferred financing costs and bond premiums and discounts
Non-cash gain on settlement of Merger-related escrow
Loss (gain) on sale or disposal of assets
Loss on early extinguishment of debt
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 and notes receivable
Inventories
Prepaid expenses and other current assets
Subscriber acquisition costs – deferred contract costs
Other assets
Accounts payable
Accrued expenses and other current liabilities
Restructuring liability
Deferred revenue
Net cash used in operating activities
Cash flows from investing activities:
Subscriber acquisition costs – company owned equipment
Capital expenditures
Proceeds from the sale of capital assets
Acquisition of intangible assets
Proceeds from insurance claims
Change in restricted cash
Acquisition of other assets
28,239
6,586
—
458
23,062
1,595
22,465
929
—
(49,590)
(75,580)
(5,975)
(457,679)
(74,801)
70,525
62,208
(91)
247,500
(309,332)
—
(20,391)
776
(1,745)
—
—
(301)
25,488
10,447
—
(33)
10,085
3,868
19,624
(478)
7,126
(24,338)
(11,827)
(5,165)
(419,509)
368
(2,978)
12,702
(2,797)
24,613
(5,243)
(11,642)
3,123
(1,385)
—
—
—
Net cash used in investing activities
(21,661)
(15,147)
See accompanying notes to consolidated financial statements
71
(365,706)
(255,307)
92,994
125,451
26,279
9,844
(12,200)
(54)
—
3,121
14,924
(41)
59,197
(14,421)
18,591
1,450
(354,867)
160
21,842
18,019
(1,515)
15,026
(24,740)
(26,982)
480
(1,363)
2,984
14,214
(208)
(35,615)
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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
Repayments of capital lease obligations
Payments of other long-term 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 (decrease) increase 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
Year ended December 31,
2017
2016
2015
724,750
(450,000)
196,895
(136,895)
(10,007)
(2,983)
(18,277)
(11,119)
(1,151)
—
291,213
132
(39,648)
604,000
(235,535)
57,000
(77,000)
(8,315)
—
(9,036)
(9,241)
—
100,407
422,280
(466)
40,961
43,520
3,872 $
2,559
43,520 $
219 $
435 $
207,433 $
189,170 $
296,250
—
271,000
(271,000)
(6,414)
—
—
(5,436)
—
—
284,400
(1,726)
(8,248)
10,807
2,559
290
145,647
14,633 $
8,411 $
11,002
557 $
31,283 $
2,531 $
1,314 $
2,345 $
1,011 $
2,300 $
4,619 $
314
161
—
—
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements
72
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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 Vivint Smart Home, Inc., which is owned by 313 Acquisition, LLC. Vivint Smart Home, 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 and other 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.
Vivint Flex Pay —On January 3, 2017, the Company announced the introduction of the Vivint Flex Pay plan (“Vivint Flex Pay”), which became the
Company’s primary sales model beginning in March 2017. Under Vivint Flex Pay, customers pay separately for the products (control panel, security peripheral
equipment, smart home equipment, and related installation) (“Products”) and Vivint’s smart home and security services (“Services”). The customer has the
following three options to pay for the Products: (1) qualified customers in the United States may finance the purchase of Products through a third-party financing
provider (“Consumer Financing Program”) (2) customers not eligible for the Consumer Financing Program, but who qualify under the Company’s underwriting
criteria, may enter into a retail installment contract (“RIC”) directly with Vivint, or (3) customers may purchase the Products at the outset of the service contract
with cash, ACH, credit or debit card.
Although customers pay separately for the Products and Services under the Vivint Flex Pay plan, the Company has determined that the shift in its sales model
does not change the Company’s conclusion that the Product sales and Services are one combined unit of accounting. As a result, all forms of transactions under
Vivint Flex Pay create deferred revenue for the gross amount of Products sold. Gross deferred revenues are reduced by imputed interest on the RICs and the present
value of expected payments due to the third-party financing provider under the Consumer Financing Program. These deferred revenues are recognized in a pattern
that reflects the estimated life of the subscriber relationships. The Company amortizes these deferred revenues 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.
Under the Consumer Financing Program, qualified customers are eligible for installment loans provided by a third-party financing provider of up to $4,000
for either 42 or 60 months. The Company pays a monthly fee to the third-party financing provider based on the average daily outstanding balance of the installment
loans. Additionally, the Company shares liability for credit losses depending on the credit quality of the customer. Because of the nature of these provisions under
the Consumer Financing Program, the Company records a derivative liability at its fair value when the third-party financing provider originates installment loans to
customers, which reduces the amount of revenue recognized on the provision of the services. The derivative liability is reduced as payments are made from the
Company to the third-party financing provider. Subsequent changes to the fair value of the derivative liability are realized through other loss/(income), net in the
Consolidated Statement of Operations. (See Note 8 ).
Retail Installment Contract Receivables —For customers that enter into a RIC under the Vivint Flex Pay plan, the Company records a receivable for the
amount financed. The RIC receivables are recorded at their present value, net of the imputed interest discount. At the time of installation, the Company records a
long-term note receivable within long-term
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investments and other assets, net on the consolidated balance sheets for the present value of the receivables that are expected to be collected beyond 12 months of
the reporting date. The unbilled receivable amounts that are expected to be collected within 12 months of the reporting date are included as a short-term notes
receivable within accounts and notes receivable, net on the consolidated balance sheets. The billed amounts of notes receivables are included in accounts receivable
within accounts and notes receivable, net on the consolidated balance sheets.
The Company imputes the interest on the RIC receivable using a risk adjusted market interest rate and records it as an adjustment to deferred revenue and as
an adjustment to the face amount of the related receivable. The imputed interest discount considers a number of factors, including collection experience, aging of
the remaining RIC receivable portfolios, credit quality of the subscriber base and other qualitative considerations, including macro-economic factors. The imputed
interest income is recognized over the term of the RIC contract as recurring and other revenue on the consolidated statement of operations.
When the Company determines that there are RIC receivables that have become uncollectible, it records an adjustment to the imputed interest discount and
reduces the related note receivable balance. Account balances are written-off if collection efforts are unsuccessful and future collection is unlikely based on the
length of time from the day accounts become past due. (See Note 3 ).
Revenue Recognition —The Company recognizes revenue principally on three types of transactions: (1) recurring and other revenue, which includes
revenues for monitoring and other smart home services, recognition of deferred revenue associated with the sales of Products at the time of installation, imputed
interest associated with the RIC receivables and recurring monthly revenue associated with Vivint Wireless Inc. (“Wireless Internet” or “Wireless”), (2) 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 (i.e., those products sold subsequent to the date of the initial installation) which are generally recognized upon delivery
of products, and (3) activation fees on subscriber contracts, which are amortized over the expected life of the customer.
Recurring and other revenue includes (1) the Company’s subscriber contracts associated with Services, which are billed directly to the subscriber in advance,
generally monthly, pursuant to the terms of subscriber contracts and recognized ratably over the service period, (2) monthly recognition of deferred Product
revenue related to the sale of the Company’s products, control panel, security peripheral equipment, smart home equipment, and related installation), at the time the
Customer enters into the contractual agreement and (3) imputed interest associated with the RIC receivables, which is recognized over the initial term of the RIC.
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 service offering (i.e., those products sold subsequent to the date of the initial installation) 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. The Company amortizes deferred
activation fees 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. Activation fees are no longer charged under Vivint Flex Pay, as these fees will no longer be billed separately to subscribers at the
time of installation. The Company does not charge activation fees for customer moves, reactivation, or renewal of monitoring services.
Revenue recognition begins after the customer’s right of rescission period has passed, which is typically three days from the installation date.
Deferred Revenue —The Company’s deferred revenues primarily consist of amounts for sales (including cash sales) of Products and Services. Deferred
Product revenues are recorded at the time equipment is installed and subsequently recognized as revenue in a pattern that reflects the estimated life of the
subscriber relationships. The Company amortizes these deferred revenues 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. Deferred Service revenues represent the
amounts billed, generally monthly, in advance and collected from customers for services yet to be performed.
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Accounts Receivable —Accounts receivable consists primarily of amounts due from customers for recurring monthly monitoring services and the billed
portion of RIC receivables. The accounts receivable are recorded at invoiced amounts and are non-interest bearing and are included within accounts and notes
receivable, net on the consolidated balance sheets. Accounts receivable totaled $24.3 million and $12.9 million and December 31, 2017 and 2016 , respectively net
of the allowance for doubtful accounts of $5.4 million and $4.1 million at December 31, 2017 and 2016 , 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, 2017 and 2016 , no accounts receivable were classified as held for sale. The
provision for doubtful accounts is included in general and administrative expenses in the accompanying consolidated statements of operations and totaled $22.5
million and $19.6 million for the years ended December 31, 2017 and 2016 , respectively.
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,
2017
2016
2015
$
$
4,138 $
22,465
(21,247)
5,356 $
3,541 $
19,624
(19,027)
4,138 $
3,373
14,924
(14,756)
3,541
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 9 ).
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.
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.
Subscriber Acquisition Costs —Subscriber acquisition costs represent the costs directly related and incremental to the origination of new subscribers. These
include commissions, other compensation and related costs paid directly for the generation and installation of new customer contracts, as well as the cost of
equipment installed in the customer home at the commencement of the contract. These costs are deferred and amortized in a pattern that reflects the estimated life
of the subscriber relationships. Amortization of subscriber acquisition costs, which includes the amortization of deferred commissions, is included in “Depreciation
and Amortization” on the consolidated statements of operations. The remaining subscriber acquisition costs are expensed as incurred. These costs include those
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 Company amortizes the deferred subscriber acquisition costs in the same manner
as deferred revenue. 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 consolidated statements of cash flows as these assets represent deferred costs associated with customer contracts.
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Cash and Cash Equivalents — Cash and cash equivalents consists of highly liquid investments with remaining maturities when purchased of three months
or less.
Inventories —Inventories, which are comprised of smart home and security system equipment and parts are stated at the lower of cost or market with cost
determined under the first-in, first-out (FIFO) method. The Company adjusts the inventory balance based on anticipated obsolescence, usage and historical write-
offs.
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 5 to 10 years. Definite-lived intangible assets are amortized on the straight-line
method over the estimated useful life of the asset or in a pattern in which the economic benefits of the intangible asset are consumed. Amortization expense
associated with leased assets is included with depreciation expense. Routine repairs and maintenance are charged to expense as incurred.
The Company reviews long-lived assets, including property, plant and equipment, subscriber acquisition costs, and definite-lived intangibles for impairment
when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers whether or not indicators of
impairment exist on a regular basis and as part of each quarterly and annual financial statement close process. Factors the Company considers in determining
whether or not indicators of impairment exist include market factors and patterns of customer attrition. If indicators of impairment are identified, the Company
estimates the fair value of the assets. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company conducts an indefinite-lived intangible impairment analysis annually as of October 1, and as necessary if changes in facts and circumstances
indicate that the fair value of the Company’s indefinite-lived intangibles may be less than the carrying amount. When indicators of impairment do not exist and
certain accounting criteria are met, the Company is able to evaluate indefinite-lived intangible impairment using a qualitative approach. When necessary, the
Company’s quantitative impairment test consists of two steps. The first step requires that the Company compare the estimated fair value of its indefinite-lived
intangibles to the carrying value. If the fair value is greater than the carrying value, the intangibles are not considered to be impaired and no further testing is
required. If the fair value is less than the carrying value, an impairment loss in an amount equal to the difference is recorded.
During the year ended December 31, 2015, the Company recorded impairments to long-lived assets and intangibles associated with the wireless internet
business restructuring (see Note 9 ). During the years ended December 31, 2017 and 2016 , no impairments to long-lived assets or intangibles were recorded.
The Company’s depreciation and amortization included in the consolidated statements of operations consisted of the following (in thousands):
Amortization of subscriber acquisition costs
Amortization of definite-lived intangibles
Depreciation of property, plant and equipment
Total depreciation and amortization
Year ended December 31,
2017
2016
2015
$
$
206,153 $
154,877 $
101,827
21,275
116,865
16,800
329,255 $
288,542 $
92,994
134,803
16,927
244,724
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. Subsequent to the year ended December 31, 2017 , the Company terminated the lease agreement for cash considerations. See Note 17 for further
discussion.
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Long-term Investments — The Company’s long-term investments are comprised of available-for-sale securities and cost based investments in other
privately held companies. As of December 31, 2017 and 2016 , cost-based investments totaled $0.7 million and $0.4 million , respectively. Available-for-sale
securities as of December 31, 2017 and 2016 totaled $2.7 million and $4.0 million , respectively.
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.
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, 2017 , 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 4 . 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, 2017 and 2016 were $3.1 million and $4.4 million , net of accumulated
amortization of $8.6 million and $6.9 million , respectively. Deferred financing costs included in the accompanying consolidated balance sheets within notes
payable, net at December 31, 2017 and 2016 were $35.7 million and $39.4 million , net of accumulated amortization of $45.2 million and $35.6 million ,
respectively. Amortization expense on deferred financing costs recognized and included in interest expense in the accompanying consolidated statements of
operations totaled $11.4 million , $11.6 million and $10.9 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.
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 $3.3 million and $1.2 million as of December 31, 2017 and 2016 , respectively, and the amount included in other long-term
obligations was $18.5 million and $6.6 million at December 31, 2017 and 2016 , 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 11 ).
During the first quarter of 2017, the Company adopted Accounting Standard Update (“ASU”) 2016-09. Under the provisions of ASU 2016-09, the Company
has elected to recognize the impact of forfeitures when they occur with no adjustment for estimated forfeitures and recognizes excess tax benefits as a reduction of
income tax expense regardless of whether the benefit reduces income taxes payable. Additionally, the Company recognizes the cash flow impact of such excess tax
benefits in operating activities in the consolidated statements of cash flows. The Company adopted ASU 2016-09 on a modified retrospective basis for the income
statement impact of forfeitures and income taxes and have retrospectively applied ASU 2016-09 to its consolidated statements of cash flows for the impact of
excess tax benefits. Accordingly, the Company recognized an immaterial cumulative adjustment charge for the adoption of the impact of forfeitures to beginning
retained earnings as of January 1, 2017. The Company recognized no cumulative adjustment benefit for the excess tax benefit for the exercise of equity grants from
prior fiscal years due to a full valuation allowance recorded against the excess tax benefits.
Advertising Expense —Advertising costs are expensed as incurred. Advertising costs were approximately $42.5 million , $33.0 million and $25.1 million
for the years ended December 31, 2017 , 2016 and 2015 , respectively.
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Income Taxes —The Company accounts for income taxes based on the asset and liability method. Under the asset and liability method, deferred tax assets
and deferred tax liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce
deferred tax assets when it is determined that it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
The Company recognizes the effect of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. The Company’s policy for recording interest and penalties is to record such items as a component of the provision for income taxes.
Contracts Sold —During the year ended December 31, 2016, the Company sold all of its New Zealand and Puerto Rico subscriber contracts and ceased
operations in these geographical regions ("2016 Contract Sales"). As a result, during the year ended December 31, 2016 the Company recorded the impact of these
transactions in restructuring and asset impairment (See Note 9 ).
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, 2017 , approximately 70% of the Company’s installed panels were SkyControl panels and 28% 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, 2017 and
2016 .
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’s reporting units are determined based on its current reporting structure, which as of December 31, 2017
consisted of two reporting units. The Company found that no indicators of goodwill impairment existed during the year ended December 31, 2017 , thus a
qualitative approach was used and it was determined that no impairment existed for goodwill.
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During the years ended December 31, 2017 and 2016 , no impairments to goodwill were recorded. During the year ended December 31, 2015, the Company
recorded $2.3 million of goodwill impairment associated with the wireless internet business restructuring (see Note 9 ).
Foreign Currency Translation and Other Comprehensive Income —The functional currencies of Vivint Canada, Inc. and Vivint New Zealand, Ltd. are
the Canadian and New Zealand dollars, respectively. Accordingly, assets and liabilities are translated from their respective functional currencies into U.S. dollars at
period-end rates and revenue and expenses are translated at the weighted-average exchange rates for the period. Adjustments resulting from this translation process
are classified as other comprehensive (loss) income and shown as a separate component of equity. During the year ended December 31, 2016, the Company
completed the 2016 Contract Sales which included all contracts in the New Zealand, Ltd. entity. (See Note 9 )
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, the Company determined that settlement of
Vivint Canada, Inc. and Vivint New Zealand, Ltd. intercompany balances was anticipated and therefore such balances were deemed to be of a short-term nature.
Translation activity included in the statements of operations in other loss, net related to intercompany balances was a gain of $4.9 million for the year ended
December 31, 2017 , a gain of $2.1 million for the year ended December 31, 2016 , and a loss of $9.4 million for the year ended December 31, 2015 .
Letters of Credit —As of December 31, 2017 and 2016 , the Company had $9.5 million and $5.7 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 issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts with
Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” Under Topic 606, revenue is recognized
when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in
exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on
accounting for licenses of intellectual property and identifying performance obligations. Topic 606 will be effective for the Company beginning with the first
quarter of fiscal 2018.
The Company offers its customers a smart home service combining its proprietary control panel; equipment in the home that interfaces with the control
panel, including door and window sensors, door locks, security cameras and smoke alarms (“Interfacing Equipment”); installation; and its proprietary back-end
cloud platform software and services. These combined elements together create an integrated system that allows the Company’s customers to monitor, control and
protect their home (“Smart Home Service”).
Based on the guidance in Topic 606, the Company has concluded that it will continue to recognize most revenue over time for its Smart Home contracts
based on the life of the contract. The Company has also concluded that, while certain equipment provided to its customers may be capable of being distinct, its
customers are buying an integrated system that provides them Smart Home Services. The equipment and services contracted for by the customer are necessary to
provide the integrated system the customer has contracted for. Because the equipment and services included in the customer’s contract are integrated and highly
interdependent, and because they must work together to deliver the Smart Home Services, the Company has concluded that most of the Interfacing Equipment,
control panel, related installation and Smart Home Services contracted for by the customer are generally not distinct within the context of the contract and,
therefore, constitute a single, combined performance obligation. This single, combined performance obligation will be recognized over the customer’s contract
term, whereas under Topic 605 the revenue was recorded over the expected customer life.
Service and other sales revenue will continue to be recognized at the time the Company performs services for its customers.
More judgment and estimates will be required under Topic 606 than are required under Topic 605, including estimating the SSP for each performance
obligation identified within the Company’s contracts. The Company is currently performing analyses to determine the SSP for each of the performance obligations
that have been identified. The Company is currently calculating its SSPs based on its historical pricing practices. Due to the complexity of certain contracts, the
actual revenue recognition treatment required under the Topic 606 for these arrangements may depend on contract-specific terms and vary in
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some instances.
Topic 606 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or modified retrospectively
with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company
has selected the cumulative catch-up transition method.
Under the cumulative catch-up transition method, the Company will evaluate each contract that is effective on the adoption date as if that contract had been
accounted for under Topic 606 from contract inception. Some revenue related to customer Smart Home contracts that would have been recognized in future periods
under Topic 605 (based on expected customer life) will be recast under Topic 606 (based on contract term) as if the revenue had been recognized in prior periods.
As this transition method requires that the Company not adjust historical reported revenue amounts, the revenue that would have been recognized under this
method prior to the adoption date will be an adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned.
Topic 606 also requires the deferral of incremental costs of obtaining a contract with a customer.
The Company is deferring these same costs under Topic 605. It does not anticipate any material change in contract costs that are capitalized or the period
over which they are expensed. Refer to Subscriber Acquisition Costs in Note 2 for further detail.
In June 2016, the FASB issued ASU 2016-13 which modifies the measurement of expected credit losses of certain financial instruments. This update is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and must be applied using a modified- retrospective approach,
with early adoption permitted. The Company is still evaluating the impact the adoption of ASU 2016-13 will have on 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.
The Company is in the initial stages of evaluating the impact of ASU 2016-02 on its accounting policies, processes, and system requirements. The
Company’s current operating lease portfolio is primarily comprised of network, real estate, and equipment leases. Upon adoption of this standard, the Company
expects the balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. The Company has assigned internal
resources to perform the evaluation. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting
under the new standard.
While the Company continues to assess the potential impacts of ASU 2016-02, 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.
NOTE 3 – RETAIL INSTALLMENT CONTRACT RECEIVABLES
Certain subscribers have the option to purchase Products under a RIC, payable over either 42 or 60 months. Short-term RIC receivables are recorded in
accounts and notes receivable, net and long-term RIC receivables are recorded in long-term investments and other assets, net in the consolidated balance sheets.
The following table summarizes the installment receivables (in thousands):
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RIC receivables, gross
Deferred interest
RIC receivables, net of deferred interest
Classified on the consolidated balance sheets as:
Accounts and notes receivable, net
Long-term investments and other assets, net
RIC receivables, net
Activity in the deferred interest for the RIC receivables was as follows (in thousands):
Deferred interest, beginning of period
Write-offs, net of recoveries
Change in deferred interest on short-term and long-term RIC receivables
Deferred interest, end of period
December 31, 2017
131,024
(36,048)
94,976
16,469
78,507
94,976
December 31, 2017
—
(6,055)
42,103
36,048
$
$
$
$
$
Since the inception of RICs and during year ended December 31, 2017 the amount of RIC imputed interest income recognized in recurring and other revenue
was $7.3 million .
NOTE 4 —LONG-TERM DEBT
Notes
Payable
On November 16, 2012, APX issued $1.3 billion aggregate principal amount of notes, of which $719.5 million remaining 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 remaining 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
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repurchase approximately $235 million aggregate principal amount of the outstanding 2019 notes and 2022 private placement notes in privately negotiated
transactions and repaid borrowings under the existing revolving credit facility.
In August 2016, APX issued an additional $100.0 million aggregate principal amount of the 2022 notes at a price of 104.00% .
In February 2017, APX issued an additional $300.0 million aggregate principal amount of the 2022 notes at a price of 108.25% (“February 2017 issuance”.)
A portion of the net proceeds from the offering of these 2022 notes were used to redeem $300.0 million aggregate principal amount of the existing 2019 notes and
pay the related accrued interest and redemption premium, and to pay all fees and expenses related thereto and any remaining proceeds will be used for general
corporate purposes.
In August 2017, APX issued $400.0 million aggregate principal amount of the 7.625% senior notes due 2023 (the “2023 notes” and, together with the
2019 notes, the 2020 notes and the 2022 private placement notes, the “notes”) (“August 2017 issuance”.) The proceeds from the outstanding 2023 notes offering
were used to redeem $150.0 million aggregate principal amount of the outstanding 2019 notes and pay the related accrued interest and redemption premium, and to
pay all fees and expenses related thereto. Any remaining net proceeds have been or will be used for general corporate purposes, which may include the repayment
of outstanding borrowings under the revolving credit facility.
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 the Company's 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, 7.875% per annum for the 2022 notes, and 7.625% per annum for
the 2023 notes. Interest on the 2019 notes, the 2020 notes, 2022 private placement notes and 2022 notes is payable semiannually in arrears on each June 1 and
December 1. Interest on the 2023 notes is payable semiannually in arrears on each September 1 and March 1. APX may redeem the notes at the prices and on the
terms specified in the applicable indenture or note purchase agreement.
Debt Modifications and Extinguishments
In accordance with ASC 470-50 Debt – Modifications and Extinguishments, the Company performed analyses on a creditor-by-creditor basis for the May
2016 issuance, February 2017 issuance and August 2017 issuance to determine if the repurchased notes were substantially different than the notes issued to
determine the appropriate accounting treatment of associated issuance fees. As a result of these analyses the company recorded the following amounts of other
expense and loss on extinguishment and deferred financing costs during the years ended December 31, 2017 and 2016 (in thousands):
Issuance
For the year ended
December 31, 2017
August 2017 issuance
February 2017 issuance
Total
For the year ended
December 31, 2016
May 2016 issuance
$
$
$
Other expense and loss on extinguishment
Deferred financing costs
Original discount
extinguished
Original deferred
financing costs
extinguished
New financing costs
Total other expense
and loss on
extinguishment
Original deferred
financing rolled over
New deferred
financing costs
Total deferred
financing costs
— $
—
— $
1,408 $
3,259
4,667 $
8,881 $
9,491
18,372 $
10,289 $
12,750
23,039 $
473 $
1,476
4,569 $
6,076
1,949 $
10,645 $
5,042
7,552
12,594
355 $
695 $
9,036 $
10,086 $
3,423 $
6,628 $
10,051
The original unamortized portion of deferred financing costs associated with new creditors and creditors under the repurchased notes, whose debt
instruments were not deemed to be substantially different, will be amortized to interest expense over the life of the issued notes.
The following table presents deferred financing activity for the year ended December 31, 2017 and 2016 (in thousands):
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Revolving Credit Facility
2019 Notes
2020 Notes
2022 Private Placement Notes
2022 Notes
2023 Notes
Total Deferred Financing
Costs
Revolving Credit Facility
2019 Notes
2020 Notes
2022 Private Placement Notes
2022 Notes
Total Deferred Financing
Costs
Revolving
Credit
Facility
Balance 12/31/2016
$
4,420 $
11,693
15,053
903
11,714
—
Balance 12/31/2015
$
6,456 $
20,182
18,892
1,170
—
Unamortized Deferred Financing Costs
Additions
Refinances
Early Extinguishment
Amortized
399 $
—
—
—
6,076
4,569
— $
(1,949)
—
—
1,476
473
— $
(4,667)
—
—
—
—
Balance 12/31/2017
3,099
(1,720) $
(2,200)
(3,844)
(151)
(3,199)
(280)
2,877
11,209
752
16,067
4,762
$
43,783 $
11,044 $
— $
(4,667)
$
(11,394) $
38,766
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
On November 16, 2012, APX entered into a $200.0 million senior secured revolving credit facility, with a five year maturity. On March 6, 2015, APX
amended and restated the credit agreement governing the revolving credit facility to provide for, among other things, (1) an increase in the aggregate commitments
previously available to APX thereunder from $200.0 million to $289.4 million (“Revolving Commitments”) and (2) the extension of the maturity date with respect
to certain of the previously available commitments. On August 10, 2017, APX further amended and restated the credit agreement governing the revolving credit
facility to provide for, among other things, (1) an increase in the aggregate commitments previously available to the Company from $289.4 million to $324.3
million and (2) the extension of the maturity date with respect to certain of the previously available commitments.
Borrowings under the amended and restated revolving credit facility bear interest at a rate per annum equal to an applicable margin plus, at APX’s option,
either (1) the base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50% , (b) the prime rate of Bank of America, N.A. and (c) the
LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for an interest period of one month, plus 1.00% or (2) the LIBOR rate determined
by reference to the London interbank offered rate for dollars for the interest period relevant to such borrowing. The applicable margin for base rate-based
borrowings (1)(a) under the Series A Revolving Commitments of approximately $267.0 million and Series D Revolving Commitments of approximately $15.4
million is currently 2.0% per annum and (b) under the Series B Revolving Commitments of approximately $21.2 million is currently 3.0% and (2)(a) the
applicable margin for LIBOR rate-based borrowings (a) under the Series A Revolving Commitments and Series D Revolving Commitments is currently 3.0% per
annum and (b) under the Series B Revolving Commitments is currently 4.0% . The applicable margin for borrowings under the revolving credit facility is subject to
one step-down of 25 basis points based on APX meeting a consolidated first lien net leverage ratio test at the end of each fiscal quarter. In November 2017,
previous commitments of $20.8 million under the Series C Revolving Commitments had expired. Outstanding borrowings under the amended and restated
revolving credit facility are allocated on a pro-rata basis between each Series based on the total Revolving Commitments.
In addition to paying interest on outstanding principal under the revolving credit facility, APX is required to pay a quarterly commitment fee (which will be
subject to one interest rate step-down of 12.5 basis points, based on APX meeting a consolidated first lien net leverage ratio test) to the lenders under the revolving
credit facility in respect of the unutilized
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commitments thereunder. As of December 31, 2017 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 D, March 31, 2019 and (3) with respect to the
extended commitments under the Series A Revolving Credit Facility and Series B Revolving Credit Facility, March 31, 2021.
As of December 31, 2017 there was $60.0 million of outstanding borrowings under the credit facility. As of December 31, 2016 there were no outstanding
borrowings under the credit facility. As of December 31, 2017 , the Company had $234.1 million of availability under our revolving credit facility (after giving
effect to $9.5 million of outstanding letters of credit and $60.0 million borrowings).
The Company’s debt at December 31, 2017 and 2016 consisted of the following (in thousands):
Series D Revolving Credit Facility due 2019
Series A, B Revolving Credit Facilities due 2021
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
7.625% Senior Unsecured Notes Due 2023
Total Notes payable
6.375% Senior Secured Notes due 2019
8.75% Senior Notes due 2020
8.875% Senior Secured Notes due 2022 - Private Placement
7.875% Senior Secured Notes due 2022
Total Notes payable
December 31, 2017
Unamortized
Premium
(Discount)
Unamortized
Deferred
Financing Costs
(1)
— $
—
—
4,465
(2,559)
24,593
—
— $
—
(2,877)
(11,209)
(752)
(16,067)
(4,762)
Net Carrying
Amount
3,000
57,000
266,588
923,256
266,689
908,526
395,238
Outstanding
Principal
$
3,000 $
57,000
269,465
930,000
270,000
900,000
400,000
$
2,829,465 $
26,499 $
(35,667) $
2,820,297
December 31, 2016
Outstanding
Principal
Unamortized
Premium
719,465
930,000
270,000
600,000
—
5,848
(2,960)
3,710
Unamortized
Deferred
Financing Costs
(1)
(11,693)
(15,053)
(903)
(11,714)
Net Carrying
Amount
707,772
920,795
266,137
591,996
$
2,519,465 $
6,598
$
(39,363) $
2,486,700
(1) Unamortized deferred financing costs related to the revolving credit facilities included in deferred financing costs, net on the consolidated balance sheets at
December 31, 2017 and 2016 was $3.1 million and $4.4 million , respectively.
NOTE 5 —BALANCE SHEET COMPONENTS
The following table presents material balance sheet component balances as of December 31, 2017 and December 31, 2016 (in thousands):
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Prepaid expenses and other current assets
Prepaid expenses
Deposits
Other
Total prepaid expenses and other current assets
Subscriber acquisition costs
Subscriber acquisition costs
Accumulated amortization
Subscriber acquisition costs, net
Long-term investments and other assets
RIC receivables, gross
RIC deferred interest
Security deposits
Investments
Other
Total long-term investments and other assets, net
Accrued payroll and commissions
Accrued payroll
Accrued commissions
Total accrued payroll and commissions
Accrued expenses and other current liabilities
Accrued interest payable
Current portion of derivative liability
Accrued taxes
Spectrum license obligation
Accrued payroll taxes and withholdings
Loss contingencies
Other
Total accrued expenses and other current liabilities
Current deferred revenue
Subscriber deferred revenues
Deferred product revenues
Deferred activation fees
Total current deferred revenue
Deferred revenue, net of current portion
Deferred product revenues
Deferred activation fees
Total deferred revenue, net of current portion
NOTE 6 —PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
85
December 31,
2017
2016
8,000 $
1,596
6,554
16,150 $
7,983
1,046
1,129
10,158
1,837,388 $
1,373,080
(528,830)
(320,646)
1,308,558 $
1,052,434
114,556 $
(36,049)
6,427
3,429
360
88,723 $
30,267 $
27,485
57,752 $
28,737 $
25,473
4,585
3,861
3,185
2,156
6,324
—
—
6,612
4,442
482
11,536
24,101
22,187
46,288
16,944
—
3,376
2,983
4,793
2,571
3,598
74,321 $
34,265
38,170 $
40,397
9,770
88,337 $
213,542 $
51,013
264,555 $
34,682
—
11,040
45,722
975
57,759
58,734
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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Vehicles
Computer equipment and software
Leasehold improvements
Office furniture, fixtures and equipment
Buildings
Build-to-suit lease building
Construction in process
Property, plant and equipment, gross
Accumulated depreciation and amortization
Property, plant and equipment, net
December 31,
2017
2016
$
42,008 $
46,651
20,783
17,202
—
8,268
4,299
139,211
(61,130)
$
78,081 $
Estimated
Useful Lives
3-5 years
3-5 years
2-15 years
7 years
39 years
31,416
27,006
17,717
13,508
702
5,004
10.5 years
9,908
105,261
(41,635)
63,626
Property plant and equipment includes approximately $26.2 million and $21.2 million of assets under capital lease obligations, net of accumulated
amortization of $16.6 million and $10.9 million at December 31, 2017 and 2016 , respectively. Depreciation and amortization expense on all property plant and
equipment was $21.3 million , $16.8 million and $16.9 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. Amortization expense relates
to assets under capital leases as included in depreciation and amortization expense.
In June 2016, the Company entered into a non-cancellable lease to occupy a new building constructed in Logan, UT as a location to further sales recruitment
and training, as well as conduct research and development (the "Logan Facility"). Because of its involvement in certain aspects of the construction of the Logan
Facility, per the terms of the lease, the Company was deemed the owner of the building for accounting purposes during the construction period. Accordingly, the
Company recorded a build-to-suit lease asset and a corresponding build-to-suit lease liability during the construction period.
In April 2017, construction on the Logan Facility was completed and the Company commenced occupancy. In accordance with ASC 840-40 Sale-Leaseback
Transactions, the building did not qualify for sale-leaseback treatment. As such, the Company will retain the building asset and corresponding lease obligation on
the balance sheet. Accordingly, the Company has a build-to-suit building asset, which totaled $8.3 million and $5.0 million as of December 31, 2017 and 2016 .
See Note 12 -Commitments and Contingencies for more information on build-to-suit arrangements.
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NOTE 7 —GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 , were as follows (in thousands):
Balance as of January 1, 2016
Effect of Foreign Currency Translation
Balance as of December 31, 2016
Effect of Foreign Currency Translation
Balance as of December 31, 2017
Intangible assets, net
$
$
834,416
817
835,233
1,737
836,970
The following table presents intangible asset balances as of December 31, 2017 and 2016 (in thousands):
December 31, 2017
December 31, 2016
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
$
970,147 $
(637,780) $ 332,367 $
965,179 $
(539,910) $ 425,269
10 years
17,000
2,917
7,100
10,616
(13,274)
(1,250)
(4,066)
(5,835)
3,726
1,667
3,034
4,781
17,000
7,067
7,100
8,724
(10,479)
6,521
8 years
(4,984)
2,083 5 - 7 years
(2,268)
(3,913)
4,832
6 years
4,811
5 years
1,007,780
(662,205)
345,575
1,005,070
(561,554)
443,516
2GIG 2.0 technology
Other technology
Space Monkey
technology
Patents
Total definite-lived
intangible assets:
Indefinite-lived intangible
assets:
Spectrum licenses
31,253
IP addresses
Domain names
564
59
—
—
—
31,253
31,253
564
59
564
59
—
—
—
31,253
564
59
Total Indefinite-
lived intangible
assets
31,876
—
31,876
31,876
—
31,876
Total intangible assets, net $ 1,039,656 $
(662,205) $ 377,451 $ 1,036,946
$
(561,554) $ 475,392
During the year ended December 31, 2016, a subsidiary of the Company entered into leasing agreements with a third party for designated radio frequency
spectrum in 40 mid-sized metropolitan markets. The lease term is for seven years, with an option to become the licensor of record with the Federal
Communications Commission ("FCC") with respect to the applicable spectrum licenses at the end of this 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 FCC. Subsequent to the year ended
December 31, 2017 , the Company terminated the lease agreement for cash considerations. See Note 17 for further discussion.
In connection with the Wireless Restructuring (See Note 9 ), 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
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included in restructuring and asset impairment charges on the consolidated statement of operations during the year ended December 31, 2015.
During the year ended December 31, 2017 and 2016 , the Company added $2.0 million and $1.3 million of intangibles related to patents, respectively.
The Company recognized amortization expense related to capitalized software development costs of $1.1 million and $1.3 million during the years ended
December 31, 2016, and 2015, respectively. The Company did not recognize any amortization expense related to capitalized software for the year ended December
31, 2017. Amortization expense related to intangible assets was approximately $101.8 million , $116.9 million and $134.8 million for the years ended
December 31, 2017 , 2016 , and 2015 , respectively.
As of December 31, 2017 , the remaining weighted-average amortization period for definite-lived intangible assets was 4.8 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, 2017 (in
thousands):
2018
2019
2020
2021
2022
Thereafter
Total estimated amortization expense
88
$
89,513
79,267
68,349
59,023
49,038
118
$
345,308
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NOTE 8 —FINANCIAL INSTRUMENTS
Cash,
Cash
Equivalents
and
Marketable
Securities
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, 2017 , the Company held an immaterial amount of money market funds classified as level 1 investments. As of December 31, 2016 the Company
held $42.3 million of money market funds. As of December 31, 2017 and 2016 the Company held $2.7 million and $4.0 million , respectively, of corporate
securities classified as level 1 investments.
The following tables set forth 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, 2017 and 2016 (in thousands):
Adjusted Cost
Unrealized Gains
Unrealized
Losses
Fair Value
Cash and Cash
Equivalents
December 31, 2017
$
3,866 $
— $
— $
3,866 $
3,866 $
Long-Term
Investments and
Other Assets, net
—
6
4,018
4,024
—
—
—
—
(1,315)
(1,315)
6
2,703
2,709
6
—
6
—
2,703
2,703
$
7,890 $
— $
(1,315) $
6,575 $
3,872 $
2,703
December 31, 2016
Adjusted Cost Unrealized Gains Unrealized Losses
$
1,191 $
— $
— $
Fair Value
Cash and Cash
Equivalents
1,191 $
1,191 $
Long-Term
Investments and
Other Assets, net
—
Cash
Level 1:
Money market funds
Corporate securities
Subtotal
Total
Cash
Level 1:
Money market funds
Corporate securities
Subtotal
42,329
3,007
45,336
—
1,011
1,011
—
—
—
42,329
4,018
46,347
42,329
—
42,329
—
4,018
4,018
Total
$
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. During the years ended December 31, 2017 and 2016 the Company recorded an unrealized loss of $1.3 million and
an unrealized gain of $1.0 million , respectively associated with the change in fair value of the investee's stock. The balance of accumulated other comprehensive
income associated with unrealized gains and losses for the change in fair value totaled net losses of $0.3 million at December 31, 2017 and net income of $1.0
million at December 31, 2016 .
The carrying amounts of the Company’s accounts and notes receivable, accounts payable and accrued and other liabilities approximate their fair values.
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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
2023 Notes
Total
December 31, 2017
December 31, 2016
Face Value
Estimated Fair Value
Face Value
$
269,465 $
273,507 $
719,465 $
Estimated Fair Value
743,783
930,000
270,000
900,000
400,000
952,134
276,486
966,420
425,000
930,000
270,000
600,000
—
946,275
280,372
655,140
—
$
2,769,465 $
2,893,547 $
2,519,465 $
2,625,570
Stated Interest
Rate
6.375%
8.75%
8.875%
7.875%
7.625%
The fair value of the 2019 notes, 2020 notes, 2022 private placement notes, 2022 notes and the 2023 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.
Derivative Financial Instruments
Under the Consumer Financing Program, the Company pays a monthly fee to a third-party financing provider based on the average daily outstanding
balance of the installment loans and shares the liability for credit losses, depending on the credit quality of the customer. Because of the nature of certain provisions
under the Consumer Financing Program, the Company records a derivative liability that is not designated as a hedging instrument and is adjusted to fair value,
measured using the present value of the estimated future payments. Changes to the fair value are recorded through other loss (income), net in the Consolidated
Statement of Operations. The following represent the contractual obligations with the third-party financing provider under the Consumer Financing Program that
are components of the derivative:
• The Company pays a monthly fee based on the average daily outstanding balance of the installment loans
• The Company shares the liability for credit losses depending on the credit quality of the customer
• The Company pays transactional fees associated with customer payment processing
The derivative is classified as a Level 3 instrument. The derivative positions are valued using a discounted cash flow model, with inputs consisting of
available market data, such as market yield discount rates, as well as unobservable internally derived assumptions, such as collateral prepayment rates, collateral
default rates and loss severity rates. These derivatives are priced quarterly using a credit valuation adjustment methodology. In summary, the fair value represents
an estimate of the present value of the cash flows the Company will be obligated to pay to the third-party financing provider for each component of the derivative.
The following table summarizes the fair value and the notional amount of the Company’s outstanding derivative instrument as of December 31, 2017 (in
thousands):
Consumer Financing Program Contractual Obligations
Classified on the consolidated balance sheets as:
Accrued expenses and other current liabilities
Other long-term obligations
Total Consumer Financing Program Contractual Obligation
$
$
Changes
in
Level
3
Fair
Value
Measurements
90
Fair Value
Notional Amount
163,032
46,496 $
25,473
21,023
46,496
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The following table summarizes the change in the fair value of the Level 3 outstanding derivative instrument for the year ended December 31, 2017 (in
thousands):
Balance, January 1, 2017
Additions
Settlements
Losses included in earnings
Balance, December 31, 2017
$
$
—
44,913
(7,972)
9,555
46,496
NOTE 9 – RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Restructuring
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
The following table presents accrued restructuring activity for the years ended December 31, 2017 and 2016 .
91
Year ended December 31,
2017
2016
2015
$
— $
(710) $
53,228
—
—
—
—
(751)
(77)
(1,538)
2,551
4,767
1,202
59,197
—
$
— $
1,013 $
59,197
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Accrued restructuring balance as of December 31,
2015
$
Restructuring and impairment recoveries
Cash payments
Non-cash settlements
Accrued restructuring balance as of December 31,
2016
Cash payments
Accrued restructuring balance as of December 31,
2017
$
Asset impairments
Contract
termination costs
Employee severance and
termination benefits
Total
— $
3,954
$
(710)
—
710
—
—
(751)
(2,554)
—
649
(91)
— $
558
$
$
321
(77)
(244)
—
—
—
—
$
4,275
(1,538)
(2,798)
710
649
(91)
558
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, 2017 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 $0.5 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.
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. During 2015, the Company 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 investing activities in the consolidated statement of cash
flows for the year ended December 31, 2015. All insurance recoveries have been received as of December 31, 2017 .
NOTE 10 —INCOME TAXES
The Company files a consolidated federal income tax return with its wholly-owned subsidiaries.
The 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,
2017
2016
2015
$
— $
— $
151
(24)
127
(326)
(53)
1,330
951
545
95
640
—
—
(573)
(573)
Provision for income taxes
$
1,078 $
67 $
92
—
392
(1)
391
—
—
(40)
(40)
351
Table of Contents
The following reconciles the tax expense computed at the statutory federal rate and the Company’s tax expense (in thousands):
Computed expected tax expense
State income taxes, net of federal tax effect
Foreign income taxes
Other reconciling items
Permanent differences
Effect of Federal law change
Change in valuation allowance
Provision for income taxes
Year ended December 31,
2017
2016
2015
$
(139,100) $
(93,770) $
(94,737)
65
(299)
(344)
2,008
166,876
(28,128)
360
(949)
666
1,688
—
92,072
$
1,078 $
67 $
259
202
—
1,980
—
92,647
351
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 and deferred financing costs
Inventory reserves
Property and equipment
Research and development credits
Valuation allowance
Total
Gross deferred tax liabilities:
Deferred subscriber acquisition costs
Prepaid expenses
Total
Net deferred tax liabilities
The Company had net operating loss carryforwards as follows (in thousands):
Net operating loss carryforwards:
Federal
States
Canada
Total
December 31,
2017
2016
$
591,619 $
799,302
72,389
17,633
15,191
6,662
1,176
41
(304,509)
400,202
19,866
15,452
14,776
6,999
3,482
41
(328,991)
530,927
(408,610)
(537,387)
(633)
(409,243)
$
(9,041) $
(744)
(538,131)
(7,204)
December 31,
2017
2016
$
$
2,355,153 $
1,715,004
27,326
2,084,897
1,553,812
33,526
4,097,485 $
3,672,237
U.S. federal net operating loss carryforwards will begin to expire in 2026 , if not used. State net operating loss carryforwards expire over different periods
and some have already begun to expire. The Company had United States research and development credits of approximately $41,000 at December 31, 2017 , and
December 31, 2016 , which begin to expire in 2030 .
Canadian net operating loss carryforwards will begin to expire in 2029 .
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Realization of the Company’s federal and state net operating loss carryforwards and tax credits is dependent on generating sufficient taxable income prior to
their expiration. Although a portion of these net operating loss 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 any 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.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. Among other changes in the Tax Reform, the U.S.
statutory tax rate was lowered from 35% to 21% effective January 1, 2018. ACS Topic 740, Accounting for Income Taxes, requires companies to recognize the
effect of tax law changes in the period of enactment; therefore, the Company was required to revalue its deferred tax assets and liabilities as of December 31, 2017,
at the newly enacted tax rate. The recorded impact of the revaluation of deferred tax assets and liabilities was offset by a corresponding impact to the Company’s
valuation allowance.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”),
which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from
the enactment date for companies to complete the accounting relating to Tax Reform under ASC Topic 740. In accordance with SAB 118, to the extent that a
company’s accounting for certain income tax effects of Tax Reform is incomplete, but it is able to determine a reasonable estimate, the company should report a
provisional estimate in its financial statements. Where a reasonable estimate cannot be determined, a company should continue to apply ASC Topic 740 based on
the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform.
Based on its initial analysis of Tax Reform, the Company recorded a provisional tax expense of $166.9 million for the year ended December 31, 2017,
resulting from the remeasurement of its deferred tax balances due to the reduction in the U.S. corporate income tax rate from 35% to 21% . This expense was offset
by a corresponding change in the valuation allowance, resulting in no change in net tax expense or benefit. For the reasons discussed below, the Company has not
fully completed its accounting for the income tax effects of Tax Reform; however, as the Company was able to make reasonable estimates of the effects of Tax
Reform, it has recorded provisional amounts in its consolidated financial statements. As part of the Company’s initial analysis, it performed the following:
• Remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Company continues to
analyze certain aspects of the Tax Reform which could potentially affect the measurement of these balances or give rise to revised deferred tax amounts.
The consolidated financial statements include provisional amounts for the impacts of deferred tax remeasurement.
• Performed initial evaluations of the state conformity to Tax Reform. The Company continues to assess the conformity to Tax Reform of each state in
which it operates, along with the changes in deductibility of certain expenses at the federal level, in order to finalize the impacts on the realizability of its
state deferred tax assets and liabilities. The consolidated financial statements include provisional amounts for the impacts of state conformity.
• Tax Reform creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of
the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Reform and the
application of ASC 740. Under U.S. GAAP, a company is permitted to make an accounting policy election to either treat taxes due on future inclusions in
U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into its measurement of deferred taxes. The
Company has not yet completed the analysis of the GILTI tax rules primarily due to a lack of guidance from the U.S. Treasury Department and is not yet
able to reasonably estimate the effect of this provision of the Tax Reform or make an accounting policy election for ASC 740 treatment of the GILTI tax.
Therefore, the Company has not recorded any amounts related to potential GILTI tax, if any, in its financial statements and has not yet made a policy
decision regarding whether to record deferred taxes on GILTI, if any.
At December 31, 2017 and 2016, the Company had a full valuation allowance as it believes it is more likely than not that these benefits will not be realized.
Significant judgment is required in determining the Company’s provision for income taxes, recording valuation allowances against deferred tax assets and
evaluating the Company’s uncertain tax positions. 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, management does not
believe it is more likely than not that all of its deferred tax assets will be utilized. The Company recorded a valuation allowance for U.S. deferred tax assets of
approximately $304.5 million and $329.0 million at December 31, 2017 and
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2016 , respectively. In addition to the change in valuation allowance from operations, the valuation allowance changes include impact of disposition related items.
As of December 31, 2017 , the Company's income tax returns for the tax years 2013 through 2016, remain subject to examination by the Internal Revenue
Service and various state taxing authorities.
During the first quarter of 2017, the Company adopted ASU 2016-09. Under the provisions of ASU 2016-09, the Company recognizes the impact of stock-
based compensation award forfeitures when they occur with no adjustment for estimated forfeitures and recognizes excess tax benefits as a reduction of income tax
expense regardless of whether the benefit reduces income taxes payable. The Company recognized no cumulative adjustment benefit for the excess tax benefit for
the exercise of equity grants from prior fiscal years due to a full valuation allowance recorded against the excess tax benefits.
NOTE 11 —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, 2017 , a total of 85,812,836
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 0.61% and 1.18% .
A summary of the Incentive Unit activity for the years ended December 31, 2017 and 2016 is presented below:
Outstanding, December 31, 2015
Granted
Forfeited
Outstanding, December 31, 2016
Forfeited
Outstanding, December 31, 2017
Unvested shares expected to vest after December 31, 2017
Exercisable at December 31, 2017
Incentive Units
73,962,836 $
12,825,000
(905,000)
85,882,836
(70,000)
85,812,836
61,686,998
24,125,838 $
Weighted Average
Exercise Price
Per Share
Weighted Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
1.06
1.93
1.09
1.19
1.30
1.19
1.23
1.07
7.31 $
104,562,869
6.81
6.81
6.99
6.36 $
—
—
—
—
As of December 31, 2017 , there was $0.6 million of unrecognized compensation expense related to outstanding Incentive Units, which will be recognized
over a weighted-average period of 0.66 years . As of December 31, 2017 and 2016 , the weighted average grant date fair value of the outstanding incentive units
was $0.30 and $0.30 , 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
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acquire an equity interest of Vivint Group. The SARs 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 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, 32,754,290 SARs were outstanding as of December 31, 2017 . 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, 2017 and 2016 is presented below:
Outstanding, December 31, 2015
Granted
Forfeited
Outstanding, December 31, 2016
Granted
Forfeited
Exercised
Outstanding, December 31, 2017
Unvested shares expected to vest after December 31, 2017
Exercisable at December 31, 2017
Stock Appreciation
Rights
18,664,137 $
5,649,573
(2,320,552)
21,993,158
13,250,640
(2,374,864)
(114,644)
32,754,290
28,805,779
3,948,511 $
Weighted Average
Exercise Price
Per Share
Weighted Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
0.87
1.22
0.92
0.96
1.74
1.12
0.72
1.26
1.32
0.86
8.66 $
3,628,498
8.23
9.21
9.43
7.64 $
—
—
—
—
As of December 31, 2017 , there was $1.7 million of unrecognized compensation expense related to outstanding Vivint awards, which will be recognized
over a weighted-average period of 2.83 years . As of December 31, 2017 and 2016 , the weighted average grant date fair value of the outstanding SARs was $0.19
and $0.22 , 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, 10,000 SARs were outstanding as of December 31, 2017 . 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, 2017 and 2016 is presented below:
Outstanding, December 31, 2015
Forfeited
Outstanding, December 31, 2016
Forfeited
Outstanding, December 31, 2017
Unvested shares expected to vest after December 31, 2017
Exercisable, December 31, 2017
Stock Appreciation
Rights
81,000
$
(63,500)
17,500
(7,500)
10,000
2,000
8,000
$
Weighted Average
Exercise Price
Per Share
Weighted Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic Value
13.26
15.54
5.00
5.00
5.00
5.00
5.00
7.66
6.41
6.41
6.41
6.41
—
—
—
—
—
As of December 31, 2017 , there was an immaterial amount of unrecognized compensation expense related to all Vivint Wireless awards. As of
December 31, 2017 and 2016 , the weighted average grant date fair value of the outstanding SARs was $2.30 and $2.30 , respectively.
Stock-based compensation expense in connection with all stock-based awards for the years ended December 31, 2017 , 2016 and 2015 is allocated as follows
(in thousands):
Operating expenses
Selling expenses
General and administrative expenses
Total stock-based compensation
Year ended December 31,
2017
2016
2015
$
$
65 $
68 $
217
1,313
(127)
3,927
1,595 $
3,868 $
71
578
2,472
3,121
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 12 —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 these individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.
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, and 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
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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 $2.2 million and $2.6 million as of December 31, 2017 and 2016 , respectively.
During the year ended December 31, 2017 the Company recorded $10.0 million related to the settlement of litigation with ADT Inc.
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,
2017
2016
12,550 $
11,222
Lease Term
1 - 15 years
4,461
4,732
1 - 10 years
17,011 $
15,954
$
$
Capital Leases —The Company also enters into certain capital leases with expiration dates through November 2021 . 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, 2017 . As of December 31, 2017 and 2016 , the capital lease obligation balance was $21.7 million and
$17.7 million , respectively.
Spectrum Licenses —During the year ended December 31, 2016, Vivint Wireless, Inc. (“Vivint Wireless”), an indirect wholly owned subsidiary of the
Company, entered into leasing agreements with Nextlink Wireless, LLC (“Nextlink”) for designated radio frequency spectrum in 40 mid-sized metropolitan
markets. In December 2017, Vivint Wireless entered into a Termination Agreement with Verizon Communications Inc. (“Verizon”) pursuant to which the parties
agreed, among other things, to terminate certain spectrum leases, including the 40 aforementioned leasing agreements, between Vivint Wireless and Nextlink, a
subsidiary of Verizon, in exchange for cash consideration. Subsequent to the year ended December 31, 2017 , the Company consummated the transactions
contemplated by the Termination Agreement with Verizon. See Note 17 for further discussion.
As of December 31, 2017 , future minimum lease payments were as follows (in thousands):
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2018
2019
2020
2021
2022
Thereafter
Amounts representing interest
Total lease payments
Operating
Capital
Total
$
20,276 $
11,635 $
19,424
17,106
16,433
15,300
42,922
—
$
131,461 $
7,234
4,368
51
—
—
(1,583)
21,705 $
31,911
26,658
21,474
16,484
15,300
42,922
(1,583)
153,166
Build-to-Suit Lease Arrangements —In June 2016, the Company entered into a non-cancellable lease to occupy the Logan Facility. In 2016, because of
its involvement in certain aspects of the construction of the Logan Facility, per the terms of the lease, the Company was deemed the owner of the building for
accounting purposes during the construction period. Accordingly, the Company recorded a build-to-suit lease asset and a corresponding build-to-suit lease liability
during the construction period.
In April 2017, construction on the Logan Facility was completed and the Company commenced occupancy. In accordance with ASC 840-40 Sale-
Leaseback Transactions, the building did not qualify for sale-leaseback treatment. As such, the Company will retain the building asset and corresponding lease
obligation on the balance sheet. Accordingly, the Company has a build-to-suit lease asset, which totaled $8.3 million and $5.0 million , respectively, net of
accumulated depreciation of $0.3 million and $0 as of December 31, 2017 and 2016, respectively.
In addition to the commitments mentioned above, the Company had other off-balance sheet obligations of $69.8 million as of December 31, 2017 that
consisted of commitments related to software licenses, marketing activities, and other goods and services.
NOTE 13 —RELATED PARTY TRANSACTIONS
Transactions with Vivint Solar
The Company and Vivint Solar, Inc. (“Solar”) have entered into agreements under which the Company provided certain ongoing administrative services to
Solar through September 2017, and the Sales Dealer Agreement (as defined below). During the year ended December 31, 2017 , 2016 and 2015 the Company
charged $2.8 million , $4.6 million and $7.1 million , respectively of 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 at both December 31, 2017 and December 31, 2016 , and is included
in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
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 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
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•
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.
In August 2017, the Company entered into a Sales Dealer Agreement with Solar (the “Sales Dealer Agreement”), pursuant to which each party will act as a
non-exclusive dealer for the other party to market, promote and sell each other’s products. The agreement has an initial two -year term, which will be automatically
renewed for successive one -year terms unless written notice of termination is provided by one of the parties to the other no less than 90 days prior to the end of the
then current term. The products, territories and consideration that is payable by each party to the other will be determined in accordance with the agreement. The
Sales Dealer Agreement will govern and replace substantially all of the activities that were previously undertaken under the Marketing and Customer Relations
Agreement described above, including the pilot program. The Company and Solar also agreed to extend the term of the non-solicitation provisions under the
existing Non-Competition Agreement to match the term of the Sales Dealer Agreement.
Other Related-party Transactions
The Company incurred additional expenses during the years ended December 31, 2017 , 2016 and 2015 of approximately $3.5 million , $4.2 million , $2.5
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, 2017 and 2016 included payables of $1.4 million and $2.5 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 has 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. 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 $3.5 million , $3.7 million and $3.6 million during the years ended December 31, 2017 , 2016 and 2015 , 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, 2017 , 2016 and 2015 the Company incurred no costs associated with such services.
During the year ended December 31, 2017, Blackstone Advisory Partners L.P. (“BAP”), an affiliate of Blackstone, participated as one of the initial
purchasers of the 2022 notes in the February 2017 issuance and the 2023 notes in the August 2017 issuance and received fees at the time of closing of such
issuances aggregating approximately $0.6 million .
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During the year ended December 31, 2016, 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 .
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
succeeded 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, 2017 and 2016 , amounted to approximately $0.3 million . As of December 31, 2017 and 2016
, this amount was fully reserved.
Prepaid expenses and other current assets at December 31, 2017 and 2016 included a receivable for $0.5 million and $0.4 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.
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NOTE 14 —SEGMENT REPORTING AND BUSINESS CONCENTRATIONS
For the years ended December 31, 2017 , 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, 2017
Revenue from external customers
Property and equipment, net
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
United States
Canada
Total
$
$
$
816,026 $
65,957 $
77,345
736
700,471 $
57,436 $
62,781
845
602,418 $
51,303 $
55,103
171
881,983
78,081
757,907
63,626
653,721
55,274
NOTE 15 —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, 2017 and 2016 .
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NOTE 16 —GUARANTOR AND NON-GUARANTOR SUPPLEMENTAL FINANCIAL INFORMATION
The notes were issued by APX and 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, 2017 , 2016 and 2015 . 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.
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Assets
Condensed Consolidating Balance Sheet
December 31, 2017
(In thousands)
Parent
APX
Group, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Current assets
$
— $
4,150 $
284,293 $
49,935 $
(162,413) $
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
$
—
—
—
—
—
—
—
—
—
—
77,345
1,214,678
3,099
2,188,221
—
—
—
106
—
—
6,303
350,710
809,678
78,173
736
93,880
—
—
—
26,741
27,292
10,550
—
—
—
(2,188,221)
(6,303)
—
—
(106)
175,965
78,081
1,308,558
3,099
—
—
377,451
836,970
88,723
— $
2,195,576 $
2,821,180 $
209,134 $
(2,357,043) $
2,868,847
28,805 $
343,398 $
128,581 $
(162,413) $
338,371
— $
—
—
—
2,820,297
—
—
653,526
—
—
—
—
—
—
—
—
10,791
248,643
79,020
106
6,303
(6,303)
—
—
—
2,820,297
298
15,912
—
9,041
—
—
(653,526)
—
(106)
11,089
264,555
—
79,020
9,041
(653,526)
(653,526)
2,139,222
48,999
(1,534,695)
(653,526)
— $
2,195,576 $
2,821,180 $
209,134 $
(2,357,043) $
2,868,847
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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
105
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Condensed Consolidating Statements of Operations and Comprehensive Loss
For the Year ended December 31, 2017
(In thousands)
Revenues
Costs and expenses
(Loss) income from operations
Loss from subsidiaries
Other expense (income), net
(Loss) income before income tax expenses
Income tax (benefit) expense
Net (loss) income
Other comprehensive income (loss), net of tax
effects:
Parent
$
— $
—
—
(410,199)
—
(410,199)
—
APX
Group, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
— $
841,658 $
43,015 $
(2,690) $
881,983
—
—
(165,497)
244,702
(410,199)
—
997,247
(155,589)
—
13,545
(169,134)
(228)
42,919
(2,690)
1,037,476
96
—
(4,619)
4,715
1,306
—
(155,493)
575,696
—
575,696
—
—
253,628
(409,121)
1,078
$
(410,199) $
(410,199) $
(168,906) $
3,409 $
575,696 $
(410,199)
Foreign currency translation adjustment
3,155
3,155
—
3,155
(6,310)
3,155
Unrealized loss on marketable securities
Total other comprehensive income (loss), net
of tax effects
(1,693)
(1,693)
(1,693)
—
3,386
(1,693)
1,462
1,462
(1,693)
3,155
(2,924)
1,462
Comprehensive (loss) income
$
(408,737) $
(408,737)
$
(170,599) $
6,564 $
572,772 $
(408,737)
106
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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 income (loss), net of tax
effects:
Foreign currency translation adjustment
Unrealized gain on marketable securities
2,482
1,011
2,482
1,011
—
1,011
2,482
—
(4,964)
(2,022)
Total other comprehensive income (loss), net
of tax effects
3,493
3,493
1,011
2,482
(6,986)
2,482
1,011
3,493
Comprehensive (loss) income
$
(272,464) $
(272,464) $
(70,393) $
4,249 $
338,608 $
(272,464)
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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)
(13,293)
Total other comprehensive (loss) income, net
of tax effects
(13,293)
(13,293)
2
2
(13,294)
26,585
(13,293)
(13,294)
26,585
(13,293)
Comprehensive loss
$
(292,400) $
(292,400) $
(117,968) $
(14,209) $
424,577 $
(292,400)
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Table of Contents
Cash flows from operating activities:
Net cash (used in) provided by
operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of capital assets
Investment in subsidiary
Acquisition of intangible assets
Other assets
Net cash provided by (used in)
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
Proceeds from capital contribution
Payment of intercompany settlement
Intercompany receivable
Intercompany payable
Repayments of capital lease obligations
Financing costs
Deferred financing costs
Return of capital
Net cash (used in) provided by
financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash
Cash:
Beginning of period
End of period
$
Condensed Consolidating Statements of Cash Flows
For the Year ended December 31, 2017
(In thousands)
Parent
APX
Group, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
— $
(313,290) $
3,958 $
— $
(309,332)
—
—
—
—
1,151
(325,222)
—
—
—
—
(20,391)
776
—
(1,745)
(301)
1,151
(325,222)
(21,661)
—
—
—
—
—
—
—
—
—
—
—
(1,151)
724,750
(450,000)
196,895
(136,895)
—
—
—
—
—
(18,277)
(11,119)
(1,151)
—
—
—
—
326,373
(2,983)
3,621
—
(9,667)
—
—
(1,151)
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,621)
(340)
—
—
—
—
—
324,071
—
—
(20,391)
776
—
(1,745)
(301)
324,071
(21,661)
—
—
—
—
(326,373)
—
(3,621)
3,621
—
—
—
2,302
724,750
(450,000)
196,895
(136,895)
—
(2,983)
—
—
(10,007)
(18,277)
(11,119)
(1,151)
(1,151)
304,203
316,193
(3,961)
(324,071)
291,213
—
—
—
— $
—
—
(21,019)
(18,758)
24,680
18,186
3,661 $
(572) $
132
129
654
783 $
—
—
—
— $
132
(39,648)
43,520
3,872
109
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
Net cash used in 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
$
Condensed Consolidating Statements of Cash Flows
For the Year ended December 31, 2016
(In thousands)
Parent
APX
Group, Inc.
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
— $
— $
(380,508) $
14,802 $
— $
(365,706)
—
—
43
—
—
43
—
—
—
—
—
(3,000)
—
(12,906)
(20)
—
—
(15,926)
(466)
(1,547)
—
—
—
—
—
—
(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
—
—
—
—
—
—
3,000
12,906
—
408,214
—
(9,036)
(9,241)
(8,295)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
100,407
430,595
415,825
—
—
22,381
20,127
2,299
(1,941)
24,680 $
18,186 $
2,201
654 $
110
—
—
—
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
Condensed Consolidating Statements of Cash Flows
For the Year ended December 31, 2015
(In thousands)
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
Proceeds from insurance claims
Change in restricted cash
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 (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
$
— $
(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 $
111
—
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
NOTE 17 —SUBSEQUENT EVENTS
On January 10, 2018, Vivint Wireless, an indirect, wholly owned subsidiary of the Company and Verizon consummated the transactions contemplated by a
termination agreement dated December 23, 2017, between Vivint Wireless and Verizon, pursuant to which the parties agreed, among other things, to terminate
certain spectrum leases between Vivint Wireless and Nextlink, a subsidiary of Verizon, in exchange for a payment by Verizon to Vivint Wireless in the amount of
$55 million .
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Table of Contents
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, 2017 , 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, 2017 . 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, 2017 .
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, 2017 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. After our initial implementation, and as we continue to enhance our ERP, we will evaluate and enhance our Internal
Controls Over Financial Reporting to ensure appropriate coverage of process and technical risks.
114
Table of Contents
ITEM 9B.
OTHER INFORMATION
Iran Threat Reduction and Syria Human Rights Act of 2012
None.
PART III
115
Table of Contents
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth, as of March 6, 2018 , certain information regarding our directors and executive officers who are responsible for overseeing the
management of our business.
Name
Executive officers:
Todd R. Pedersen
Alex J. Dunn
Mark J. Davies
Matthew J. Eyring
Scott R. Hardy
Patrick E. Kelliher
Shawn J. Lindquist
Todd M. Santiago
Jeremy B. Warren
Non-employee directors:
David F. D’Alessandro
Paul S. Galant
Bruce McEvoy
Jay D. Pauley
Joseph S. Tibbetts, Jr.
Peter F. Wallace
Executive Officers
Age
49
46
57
48
40
54
48
45
43
67
50
40
40
65
42
Position
Chief Executive Officer and Director
President and Director
Chief Financial Officer
Chief Strategy and Innovation Officer
Chief Operating Officer
Chief Accounting Officer
Chief Legal Officer
Chief Revenue Officer
Chief Technology Officer
Director
Director
Director
Director
Director
Director
Todd R. Pedersen. Mr. Pederson founded our 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. Mr. 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. Mr. 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.
Matthew J. Eyring. Mr. Eyring has served as our Chief Strategy and Innovation Officer since November 2012, and oversees the Vivint Innovation Center,
which includes the company’s technology, product development, new business development, and strategy functions. Prior to Vivint, Mr. Eyring worked at
Innosight, a global strategy and innovation consulting firm, from 2001 to 2012. He held many senior positions at the firm, most recently serving as Managing
Partner with responsibility for all global strategy and operations. Prior to Innosight, Mr. Eyring was a Vice President and General Manager at LavaStorm
Technologies, an Internet professional services company, where he ran the company’s Boston office. Prior to that, Mr. Eyring was a Product Manager at
Medtronic, Inc. Mr. Eyring previously served on the board of directors of Virgin Pulse.
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Table of Contents
Mr. Eyring holds a B.A. in Economics from the University of Utah and an MBA from the Harvard Business School, and is the co-author of a number of articles
published in the Harvard Business Review.
Scott R. Hardy. Mr. 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.
Patrick E. Kelliher. Mr. 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. Mr. Lindquist has served as our Chief Legal Officer and Secretary since May 2016. From February 2014 to May 2016, Mr. Lindquist
served as Chief Legal Officer, Executive Vice President and Secretary of Vivint Solar. From February 2010 to February 2014, Mr. Lindquist served as Chief Legal
Officer, Executive Vice President and Secretary of Fusion-io, Inc., a leading provider of flash memory solutions for application acceleration, which was acquired
by Sandisk Corporation in 2014. From 2005 to 2010, Mr. Lindquist served as Chief Legal Officer, Senior Vice President and Secretary of Omniture, Inc., through
the completion and integration of its merger with Adobe Systems Incorporated. Prior to Omniture, Mr. Lindquist was a corporate and securities attorney at Wilson
Sonsini Goodrich & Rosati, P.C., the leading legal advisor to technology, life sciences and other growth enterprises worldwide. Mr. Lindquist has also served as in-
house corporate and mergers and acquisitions counsel for Novell, Inc., a software and services company 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.
Todd M. Santiago. Mr. 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. in English from Brigham Young University and an MBA from the Harvard Business School.
Jeremy B. Warren. Mr. 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.
Non-Employee Directors
David F. D’Alessandro. Mr. D’Alessandro has served as a Director of our company since July 2013. Mr. D’Alessandro serves on the boards of directors of
several private companies as well as our publicly traded sister company, Vivint Solar. From 2010 to September 2017, Mr. D’Alessandro also served as chairman of
the board of directors of SeaWorld Entertainment, Inc. 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 served as vice chairman and a trustee of Boston University.
Paul S. Galant. Mr. Galant has served as a Director of our company since October 2015. Mr. Galant has served as Chief Executive Officer of VeriFone
Systems, Inc., and a member of VeriFone’s Board of Directors since October 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 to 2010, 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
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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 also brings broad financial industry experience from his time as chairman of the NY
Federal Reserve Bank Payments Risk Committee and chairman of The Clearing House Secure Digital Payments LLC. Mr. Galant currently serves on the board of
directors of Conduent Incorporated, a leading provider of diversified business services with leading capabilities in transaction processing, automation and analytics.
Mr. Galant holds a B.S. in Economics from Cornell University where he graduated a Phillip Merrill Scholar.
Bruce McEvoy. Mr. McEvoy has served as a Director of our company since November 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 MB Aerospace, Performance Food Group Company, RGIS Inventory
Specialists, TeamHealth and our publicly traded sister company, Vivint Solar. Mr. McEvoy was formerly a director of Catalent, Inc., GCA Services Group, Inc.,
SeaWorld Entertainment, Inc. and Vistar Corporation. Mr. McEvoy holds an A.B. in History from Princeton University and an MBA from the Harvard Business
School.
Jay D. Pauley. Mr. Pauley has served as a Director of the company since October 2015. Mr. Pauley is a Managing Director 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.
Joseph S. Tibbetts, Jr. Mr. Tibbetts has served as a Director of our company since October 2015. Since March 2017, Mr. Tibbetts has been serving as the
interim chief financial officer of Acquia Corporation, a private company that is a leading provider of cloud-based, digital experience management solutions. Prior
to that Mr. Tibbetts served as the senior vice president and chief financial officer of Publicis.Sapient, part of Publicis Group SA, from February 2015, when
Publicis acquired Sapient Corporation, 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. 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 currently serves
on the board of directors of our publicly traded sister company, Vivint Solar. Mr. Tibbetts holds a B.S. in business administration from the University of New
Hampshire.
Peter F. Wallace. Mr. Wallace has served as a Director of our company since November 2012. Mr. Wallace is a Senior Managing Director at Blackstone in
the Private Equity Group, which he joined in 1997. Mr. Wallace has served on the board of directors of our publicly traded sister company, Vivint Solar, Inc., since
November 2012 and as Chairman of the Board since March 2014. Mr. Wallace also serves on the board of directors of Alight Solutions, Inc., Michaels Stores, Inc.,
Outerstuff, Service King, Tradesmen International and The Weather Channel Companies. Mr. Wallace was formerly a director of AlliedBarton Security Services,
GCA Services, New Skies Satellites Holdings Ltd. and SeaWorld Entertainment. Mr. Wallace holds 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 our board of directors to satisfy its
oversight responsibilities effectively in light of our business and structure, our board of directors 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 our board of directors considered, among other things, the
following important characteristics which make each director a valuable member of our board of directors:
• 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.
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• 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 significant financial and investment 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. 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 managing director 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
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, 2017 , 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
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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 2017 , 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, 2017 .
Submitted by the Compensation Committee:
David F. D’Alessandro, Chair
Bruce McEvoy
Peter F. Wallace
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Introduction
Compensation Discussion and Analysis
Our executive compensation program 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 2017 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”) assists the Board of Directors in overseeing our executive compensation
program; however, in 2017, all executive compensation determinations were made by the Board of Directors.
Messrs. Pedersen and Dunn generally participate in discussions and deliberations with our Committee and the Board of Directors regarding the
determinations of annual cash incentive awards for our executive officers. Specifically, they make recommendations to our Committee and/or the Board of
Directors 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.
Use of Competitive Data
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We do not target a specific market percentile when making executive compensation decisions; however, we believe that information regarding
compensation practices at similar companies is a useful tool to help maintain practices that accomplish our executive compensation objectives. While the
Committee did not engage any compensation consultant in 2017, in 2016, the Committee engaged FW Cook & Co., Inc. ("FW Cook") to assist and make
recommendations regarding the selection of companies to be included in a compensation peer group.
In 2016, the Committee used both information from the compensation peer group and proprietary technology company survey data, size adjusted to
our revenue, provided by FW Cook as one factor to determine whether our compensation levels were competitive, and to make any necessary adjustments to reflect
executive performance and our performance.
We did not review or consider any peer group or survey data in connection with compensation decisions in 2017.
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 2017 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 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, the Board of Directors determined to increase each named executive officer's base salary by 3%, effective as of April 1,
2017, as shown below:
Name
Todd R. Pedersen
Mark J. Davies
Alex J. Dunn
Matthew J. Eyring
Todd M. Santiago
Base Salary prior to April
1, 2017
($)
Base Salary Effective as of
April 1, 2017
($)
660,000
600,000
660,000
600,000
600,000
679,800
618,000
679,800
618,000
618,000
The “Summary Compensation Table” and corresponding footnotes to the table show the base salary earned by each named executive officer during
fiscal 2017 as well as the base salary adjustments for each of our named executive officers made during fiscal 2017 .
Bonuses
Cash bonus opportunities are available to various managers, directors and executives, including our named executive officers, to motivate their
achievement of short-term performance goals and tie a portion of their cash compensation to performance.
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Fiscal 2017 Management Bonus - Messrs. Pedersen and Dunn
In fiscal 2017 , 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 2017 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 2017 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 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 2017 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 $480,000,000 for the Company.
For fiscal 2017 , the Company's actual Adjusted EBITDA achieved was $490,328,000 , or 102.1% of target, which results in an achievement factor of
121% of their respective base salaries under the annual cash incentive plan. The following table illustrates the calculation of the annual cash incentive awards
earned by each of Messrs. Pedersen and Dunn in light of these performance results.
Name
Todd R. Pedersen
Alex J. Dunn
Salary (1)
($)
679,800
679,800
Target
Bonus
%
100%
100%
Target
Bonus
Amount
($)
679,800
679,800
Achievement
Factor
121%
121%
Bonus
Earned
($)
822,558
822,558
(1) The annual base salaries of Messrs. Pedersen and Dunn were increased from $660,000 to $679,800, effective as of April 1, 2017.
Fiscal 2017 Management Bonus – Messrs. Davies, Eyring and Santiago
For fiscal 2017 , Messrs. Davies, Eyring and Santiago are eligible to receive a discretionary bonus based on a percentage of such executive’s base
salary, which bonuses we expect will be paid in March 2018. Each of Messrs, Davies, Eyring and Santiago are eligible to receive a target bonus opportunity of 60%
of their respective base salaries. The following table sets forth the bonus awards earned by Messrs. Davies, Eyring and Santiago, respectively, which were based on
Mr. Davies’ contribution to financial management and operational improvement, Mr. Eyring’s contribution to our product innovation and strategy, and
Mr. Santiago’s contribution to the success of our 2017 selling efforts:
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Named Executive Officer
Mark J. Davies
Matthew J. Eyring
Todd M. Santiago
Salary (1)
($)
618,000
618,000
618,000
Target
Bonus
%
Target Bonus
Amount
($)
Bonus
Amount Payable
($)
60%
60%
60%
370,800
370,800
370,800
370,800
370,800
370,800
(1) Effective April 1, 2017, the base salaries of Messrs. Davies, Eyring and Santiago were increased from $600,000 to $618,000.
Sign-On Bonuses
From time to time, we 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, sign-on bonuses 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 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.
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
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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.
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.
In 2017, we did not match employee contributions to the 401(k) plan. However, beginning in January 2018, 2018 participants will be eligible for our
matching program. Under this new matching program, we match an employee’s contributions to the 401(k) savings plan dollar-for-dollar up to 1% of such
employee’s eligible earnings and $0.50 for every $1.00 for the next 5% of such employee’s eligible earnings. The maximum match available under the 401(k) plan
is 3.5% of the employee’s eligible earnings. For employees who have been employed by us for less than two years, matching contributions vest on the second
anniversary of their date of hire. Our matching contributions to our employees who have been employed by us for two years or more are always fully vested.
At no cost to the employee, we provide an amount of basic life insurance valued at $50,000.
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
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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.
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 Revenue Officer
Year
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
Salary
($) (1)
674,469
Bonus
($) (2)
—
—
—
370,800
360,000
755,625
—
—
511,784
370,800
360,000
257,500
370,800
360,000
263,294
582,115
525,000
613,154
550,962
511,250
674,469
582,115
518,750
613,154
550,962
534,808
613,154
559,875
526,588
Stock
Awards
($)
—
—
—
—
6,667
—
—
—
—
—
14,167
—
—
14,167
—
Non-Equity
Incentive Plan
Compensation
($) (3)
822,558
660,000
525,000
—
—
—
822,558
660,000
518,750
—
—
—
—
—
—
Declined
Non-Equity
Incentive Plan
Compensation
($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
All Other
Compensation
($) (4)
948,737
Total
($)
2,445,764
869,823
2,111,938
687,561
1,737,561
143,949
1,127,903
89,992
1,007,621
311,534
1,578,409
875,137
2,372,164
2,926,862
4,168,977
680,060
2,229,344
114,616
1,098,570
63,736
86,836
988,865
879,144
148,460
1,132,414
142,412
1,076,454
127,432
917,314
(1) Effective April 1, 2017, the base salaries of Messrs. Pedersen, Davies, Dunn, Eyring and Santiago were increased as follows: for Messrs. Pedersen and
Dunn, from $660,000 to $679,800; for Messrs. Davies, Eyring and Santiago, from $600,000 to $618,000.
(2) The amounts reported in this column for Messrs. Davies, Eyring and Santiago represent their annual discretionary bonuses earned for each respective fiscal
year.
(3) 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.”
(4) 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, 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, $162,836 in actual Company expenditures for financial
advisory services provided to Mr. Pedersen, other miscellaneous personal benefits and $267,595 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
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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 $73,980 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;
(b)
(c)
(d)
(e)
as to Mr. Davies, $44,340 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, excess liability insurance premiums, fuel expenses and $66,950 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 and Company paid personal travel, $162,836 in actual
Company expenditures for financial advisory services provided to Mr. Dunn, other miscellaneous personal benefits and $248,929 reimbursed for
taxes with respect to perquisites. 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 $39,043 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, $31,169 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, $29,823 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, Company paid personal travel, the value of meals in the Company cafeteria,
excess liability insurance premiums, fuel expenses, gift cards and other prizes and $61,536 reimbursed for taxes owed with respect to perquisites. In
addition, family members of Mr. Santiago have, in limited circumstances, accompanied him on business travel on the Company leased aircraft for
which we incurred de minimis incremental costs.
Grants of Plan-Based Awards in 2017
The following table provides supplemental information relating to grants of plan-based awards made to our named executive officers during 2017 .
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Name
Todd R. Pedersen
Mark J. Davies
Alex Dunn
Matthew J. Eyring
Todd M. Santiago
Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards(1)
Grant
Date
Threshold
($)
Target
($)
Maximum
($)
1,699,500
339,900
679,800
—
—
—
339,900
679,800
1,699,500
—
—
—
—
—
—
—
—
—
—
—
(1) Reflects the possible payouts of cash incentive compensation to Messrs. Pedersen and Dunn under the fiscal 2017 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 2017 Management Bonus – Messrs. Pedersen and Dunn” above.
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 and effective April 1, 2017, his base salary was increased from
$660,000 to $679,800. 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,
effective July 25, 2016, his base salary was increased from $525,000 to $660,000 and effective April 1, 2017, his base salary was increased from $660,000 to
$679,800. 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.”
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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 $618,000, 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
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
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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, 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. As to Messrs. Davies, Eyring
and Santiago, the 2.0x exit-vesting Class B Units will remain eligible to vest for six months following a termination 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 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.
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
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exit-vesting conditions are met. As to Messrs. Davies, Eyring and Santiago, the 3.0x exit-vesting Class B Units will remain eligible to vest for six months
following a termination 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 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.
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:
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
131
N/A
N/A
N/A
N/A
N/A
N/A
Table of Contents
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 2017 Fiscal Year-End
The following table provides information regarding outstanding equity awards for our named executive officers as of December 31, 2017 . 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 Stock
That
Have Not
Vested
(#) (1)
—
106,667
288,333
—
226,667
—
226,667
—
Grant Date
11/16/2012
9/20/2016
3/3/2014
11/16/2012
9/20/2016
7/12/2013
9/20/2016
7/12/2013
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, 2017 , 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 2017
The following table provides information regarding the equity held by our named executive officers that vested during 2017 .
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
315,000
1,549,470
345,000
345,000
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, 2017 , 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 29, 2017 , the last business
day of fiscal 2017 . 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 29, 2017 .
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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
($)(3)
Accrued
But
Unused
Vacation
($)
Value of
Accelerated
Equity
($)(4)
2,679,600
674,469
—
—
—
674,469
27,785
—
27,785
1,467,000
370,800
20,839
—
—
—
370,800
—
—
2,679,600
674,469
—
—
—
674,469
27,785
—
27,785
1,467,000
370,800
20,839
—
—
—
370,800
—
—
1,467,000
370,800
20,839
—
—
—
370,800
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
3,381,854
—
702,254
1,858,639
—
370,800
3,381,854
—
702,254
1,858,639
—
370,800
1,858,639
—
370,800
(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 $679,800 and
(y) 200% of the executive’s respective actual annual bonus paid 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 $618,000 and (y) 150% of the executive’s respective actual annual bonus paid 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 2017 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 2017 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 2017 rates.
(4) 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, 2017 , 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, Eyring and Santiago agreed to specified restrictive covenants for specified
periods upon a termination of employment,
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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 2017 .
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 $1.19 per share, which
become vested and exercisable on July 1, 2017. Upon exercise of a vested SAR, Vivint shall pay the holder an amount equal to the number of shares subject to
such vested SAR which are being exercised, multiplied by the excess of the fair market value of one share over the applicable strike price, and reduced by the
aggregate amount of all applicable income and employment taxes required to be withheld.
The following table provides information on the compensation of our non-management directors in fiscal 2017 .
Name
David F. D’Alessandro
Paul S. Galant
Bruce McEvoy (2)
Jay D. Pauley (2)
Joseph S. Tibbetts, Jr.
Peter F. Wallace (2)
Fees Earned
or Paid in
Cash
($)
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
($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
150,000
150,000
—
—
150,000
—
(1) As of December 31, 2017 , Mr. D’Alessandro held 33,333 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 84,034 stock appreciation rights covering shares of common stock of Vivint Group, Inc., which
became 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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CEO Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K (“Item
402(u)”), the Company is providing the following reasonable estimate of the ratio of the median of the annual total compensation of all of our employees except
Todd R. Pedersen, our CEO, to the annual total compensation of Mr. Pedersen, calculated in a manner consistent with Item 402(u). For 2017, our last completed
fiscal year:
•
•
The median of the annual total compensation of all of our employees, excluding our CEO, was $33,282 .
The annual total compensation of our CEO was $2,445,764 .
Based on this information, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all of our
employees except our CEO was 73 to 1.
We determined that, as of December 31, 2017, our employee population consisted of approximately 10,159 U.S. employees and approximately 511
non-U.S. employees all of whom were located in Canada. As permitted by Item 402(u), we excluded from our employee population for purposes of identifying our
“median employee” the approximately 511 non-U.S. employees located in Canada, who comprised in the aggregate less than 5% of our of our total employees as
of December 31, 2017. Our resulting employee population consisted of: approximately 1,941 direct sellers, whose compensation is entirely commission-based and
who work primarily during the period from April to August; approximately 7,074 regular full-time and part-time employees; approximately 1,120 seasonal
employees, whose compensation is primarily based on the number of installations they perform and who work primarily during the period from April to August;
and approximately 24 temporary employees.
To identify our “median employee” from this employee population, we obtained from our internal employee tax records total income paid in 2017 to
each employee in the employee population, as reported in the 2017 tax form applicable to such employee. We believe this consistently applied compensation
measure reasonably reflects annual compensation across our employee base. We annualized the total income amounts paid to any permanent employees in the
employee population who were employed by us for less than the full fiscal year. We then ranked the resulting income paid to all of the employees in the employee
population other than our CEO to determine our median employee. Once we identified our median employee, we combined all of the elements of such employee’s
compensation for 2017 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K for the Summary Compensation Table. With respect to the
annual total compensation of our CEO, we used the amount reported in the “Total” column of our Summary Compensation Table set forth above in this annual
report on From 10-K.
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Acquisition LLC owns 92.3% of the issued and outstanding shares of common stock of Vivint Smart Home, 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, 2017 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
5,282,259
—
—
—
—
—
—
—
—
1,500,000
103,836,908
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 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
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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 65,094,456 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
Support and Services Agreement
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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 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”).
The monitoring fee payable for monitoring services in any 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 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
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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, 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).
Other Transactions with Blackstone
Blackstone Advisory Partners L.P. (“BAP”), an affiliate of Blackstone, participated as one of the initial purchasers of the 2022 notes in the February 2017
offering and the 2023 notes in the August 2017 offering and received fees at the time of closing of such issuances aggregating approximately $0.6 million .
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 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.
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
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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 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
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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 ACCOUNTING 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, 2017 and 2016 represent fees billed by the Company’s principal independent
registered public accounting firm, Ernst & Young LLP.
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,
2017
1,793,930 $
$
—
2016
1,656,000
—
1,793,930
1,656,000
—
—
51,000
—
$
1,793,930 $
1,707,000
(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.
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PART IV
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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))
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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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4.16
4.17
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8†
Second Supplemental Indenture, dated as of February 1, 2017, 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 February 1, 2017 (File Number: 333-191132-01))
Indenture, dated as of August 10, 2017, among APX Group, Inc., the guarantors party thereto and Wilmington Trust, National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on From 8-K of APX Group Holdings,
Inc. filed on August 10, 2017 (File Number: 333-191132-02))
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))
Third Amended and Restated Credit Agreement, dated as of August 10, 2017, by and among APX Group, Inc., APX Group
Holdings, Inc., the other guarantors party thereto, each lender from time to time party thereto and Bank of America, N.A., as
administrative agent, L/C issuer and swing line lender (incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K of APX Group Holdings, Inc. filed on August 10, 2017 (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))
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10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
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))
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))
Employment Agreement, dated March 8, 2016, by and between APX Group, Inc. and Matthew Eyring (incorporated by
reference to Exhibit 10.19 to the Annual Report on Form 10-K of APX Group Holdings, Inc. for the fiscal year ended December
31, 2016 (File Number 333-191132-02))
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))
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10.22
10.23
10.24*
12.1*
21.1*
24.1*
31.1*
31.2*
32.1*
32.2*
99.2
99.3
101.1*
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))
Second Amended and Restated Consumer Financing Services Agreement, dated May 31, 2017, between Citizens Bank, N.A.
and APX Group, Inc. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment)
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of APX Group Holdings, Inc.
Power of Attorney (included on the signature page hereto)
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
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
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.
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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 6, 2018
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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 6, 2018 .
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
153
Note:
Information
has
been
omitted
from
this
agreement
pursuant
to
a
request
for
confidential
treatment,
and
such
information
has
been
separately
filed
with
the
Securities
and
Exchange
Commission.
The
omitted
information
has
been
marked
with
a
bracketed
asterisk
(“[*]”).
Exhibit 10.24
Second Amended and Restated Consumer Financing Services Agreement
This Second Amended and Restated Consumer Financing Services Agreement is made and entered as of May 31, 2017 by and between APX Group, Inc., a
Delaware corporation, having an address at 4931 N. 300, W. Provo, Utah 84604 (“ Company ”), and Citizens Bank, N.A., a national banking association having
an address at One Citizens Plaza, Providence, Rhode Island 02903 (“ Supplier ” or “ Citizens ”).
Background
WHEREAS, Company, through subsidiaries, including Vivint, Inc., is engaged in the business of selling the Company Products (as such term is defined below);
WHEREAS, Supplier is engaged in the business of granting credit to consumer borrowers;
WHEREAS, Company and Supplier (collectively, the “ Parties ”) entered into an Amended and Restated Consumer Financing Services Agreement dated as of
January 3, 2017 (the “ Original Agreement ”), pursuant to which the Parties agreed to terms concerning the provision by Supplier of an installment loan product
specifically for certain consumer customers located in the United States of America seeking to purchase certain Company Products;
WHEREAS, except as specifically set forth in Section 2.4 , it is intended by the Parties that Company shall not take any credit risk nor have any involvement in
the credit-granting process or loan servicing activities with respect to any loan derived from this Agreement;
WHEREAS, the Parties have agreed to further amend and restate the Original Agreement, which Original Agreement is hereby replaced by this Agreement; and
NOW, THEREFORE, in consideration of the terms and conditions set forth herein and for other good and valuable consideration, Company and Supplier agree as
follows:
1 Definitions
“ Account Manager ” has the meaning set forth in Article 8 below.
“ Affiliate ” means, with respect to any Person, each Person that controls, is controlled by, or is under common control with, such Person. For purposes of this
definition, “control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether
through the ownership of voting securities, by contract or otherwise.
“ Agreement ” means this Second Amended and Restated Consumer Financing Services Agreement, including the preamble and exhibits.
“ Applicant ” means a Person that has submitted a Credit Application under the Program.
“ APR ” means the “annual percentage rate”, as such term is defined in Regulation Z (12 CFR Part 226).
“ Approval Rate Percentage ” has the meaning set forth in Section 3.1.14 below.
“ Base LIBOR ” means [*]%.
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
“ Base Transaction Fee ” means (i) [*]% with respect to Program A Loans and (ii) [*]% with respect to Program B Loans.
“ Borrower ” means a qualifying Consumer, the determination of which qualification will be made by Supplier as set forth in this Agreement, including Article 2
hereof, who has been issued a Loan by Supplier and is contractually obligated under a Credit Agreement with Supplier. Each Borrower shall have a unique, valid
social security number (SSN).
“ Business Day ” means any day other than a Saturday, a Sunday or a day on which banks located in Providence, Rhode Island and Provo, Utah are required or
authorized by law, rule or regulation to remain closed.
“ Business Sales ” means in-home selling by Company or its Affiliates of Company Products.
“ Change(s) ” means changes to the Supplier System or Credit Services provided by Supplier that would materially alter the functionality of the Supplier System
or Credit Services, or the scope of Citizens’ or any of its Personnel’s resources, pricing, timing, performance and/or completion thereof.
“ Chargeback Costs ” means the fees incurred by Company in connection with the “Chargeback Fees” as listed in Exhibit 6 to this Agreement and any amount
charged back to Company by any payment network as set forth in such Exhibit 6 .
“ Company Channels ” means (i) all in-home selling by Company or its Affiliates, (ii) all call centers owned or operated by or on behalf of Company or its
Affiliates and (iii) to the extent utilized from time to time, whether now or in the future, to sell Company Products, all mail order, catalog, internet and other
direct access media (including all mobile media, whether or not accessible through a website) that are owned or operated by or on behalf of Company or its
Affiliates.
“ Company Parties ” has the meaning set forth in Section 21.10.1.1 below.
“Company Products” means hardware and software products and services sold by Company through Company Channels, including all sales and other
applicable taxes, and all shipping, handling and delivery charges.
“ Company Program Advertising ” means the marketing, statements and other collateral material for the Credit Services created by or on behalf of Company
that include reference to Company or any Company Product.
“Company System” means the back end systems, including related software, applications, tools and documentation, developed or employed by Company to
facilitate the processing of Credit Applications and settlement between Supplier and other Company systems, which as of the Program Commencement Date shall
include Street Genie and Tech Genie.
“ Company’s Confidential Information ” has the meaning set forth in Section 11.1 below.
“ Company’s Customer Information ” means all information collected, obtained, accessed or received by or on behalf of Company from or about its customers
and prospective customers, including but not limited to, personally identifiable information about individuals, including but not limited to “non-public personal
information” (as such term is defined in 15 U.S.C. § 6809(4)), product registration and other information obtained through Company’s point of sale (“ POS ”)
systems, use of Company’s websites and any Company Channels, whether or not collected, obtained, accessed or received in connection with the Program,
including [*].
[*].
“ Confidential Information ” has the meaning set forth in Section 11.3 below.
“ Consumers ” means non-corporate consumer customers of Company domiciled in the U.S.A. who desire to purchase Company Products, which Consumers
shall not include any business, institution, charitable or government customers.
“ Cost of Funds Adjustment ” means (i) the difference (positive or negative) between the average LIBOR during the month
2
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
(or portion thereof) for which the Transaction Fee is being calculated and the Base LIBOR, divided
by
(ii) 12. For the avoidance of doubt, the Cost of Funds
Adjustment may be a negative number.
“ Credit Agreement ” means each agreement between Supplier and a Borrower governing a Loan and the use thereof, together with any amendments,
modifications or supplements thereto (including through issuance of a change in terms notice) and any replacement of such agreement.
“ Credit Application ” means the credit application that must be completed and submitted by a Consumer in order to establish a Loan (including any such
application submitted at the POS, by phone or via the internet or a mobile phone or tablet).
[*].
“ Credit Services ” means consumer credit services, provided solely by Supplier to Borrowers pursuant to the Program and the terms and conditions of the Credit
Agreement, as such credit services are described in this Agreement, including Article 2 hereof, which credit services further include but are not limited to
processing Credit Applications, issuing Program Loans, servicing and collections.
“ FCPA ” means the United States Foreign Corrupt Practices Act of 1977, as amended (15 U.S.C. §§ 78dd-1, et seq.).
“ FICO Score ” means the credit score designated as such and derived from the credit model developed by the Fair Isaac Corporation.
“ GAAP ” means accounting principles generally accepted in the United States, consistently applied.
“Government Agency” means any United States federal, state or local government or any governmental, semi-governmental, administrative, judicial or
regulatory body, authority, agency, court, tribunal, commission or other entity exercising executive, legislative or judicial functions of or pertaining to
government in the United States.
“ Indemnified Party ” has the meaning set forth in Section 23.1 below.
“ Indemnifying Party ” has the meaning set forth in Section 23.1 below.
“ Initial Term ” has the meaning set forth in Section 18.1 below.
“ Insolvency Event ” means the happening of any of these events:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
an application is made to a court for an order that a body corporate be wound up;
an application is made to a court for an order appointing a liquidator or provisional liquidator in respect of a body corporate, or one of
them is appointed, whether or not under an order;
a receiver, manager or receiver and manager is appointed in respect of a body corporate for the whole or any part of its undertaking,
property or assets;
except to reconstruct or amalgamate while solvent, a body corporate enters into, or resolves to enter into, a scheme of arrangement, deed
of company arrangement or composition with, or assignment for the benefit of, all or any class of its creditors or it enters into or takes
steps to enter into a reorganization, moratorium or other administration involving any of them;
a body corporate resolves to wind itself up, or otherwise dissolve itself or gives notice of its intention to do so, except to reconstruct or
amalgamate while solvent or is otherwise wound up or dissolved;
a body corporate is, or states that it is insolvent;
a body corporate takes any step to obtain protection or is granted protection from its creditors, under any applicable legislation or an
administrator is appointed to a body corporate; or
anything analogous or having a substantially similar effect to any of the events specified above happens under the law of any applicable
jurisdiction.
3
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
“Interchange Expenses” has the meaning set forth in Section 2.4.1 below.
“Legal Requirements” means all applicable United States federal, state or local laws, statutes, rules or regulations, including, by way of example and not
limitation, “Federal consumer financial law” as that term is defined at 12 U.S.C. §5481(14). Where reference is made in this Agreement to specific laws, statutes,
rules or regulations, such reference is not intended to be exclusive, or in any way a limitation on the inclusion of a law, statute, rule or regulation that is not
specifically enumerated.
“ LIBOR ” means the monthly average of the 12 month US Dollar London Interbank Offered Rate interest rate for each Business Day of the month (or portion
thereof) for which a Transaction Fee is calculated, such average being calculated as the arithmetic mean of the close-of-trading one-year US Dollar LIBOR
interest rates for all trading days during such calendar month or portion thereof, as quoted by Bloomberg.com as at the close of trading on each such trading day.
“ Loan ” has the meaning set forth in Section 2.1 below.
“ Loan Amount ” means the aggregate sales price (including all sales and other applicable taxes, and all shipping, handling and delivery charges) for all
Company Products included in one (1) order (including any supplemental or follow-on orders made within thirty
(30) days of the date of the initial order) by a Borrower.
“ Loan Documentation ” means, with respect to the Loans, all Credit Applications, Credit Agreements, any program privacy policies, all billing statements and
all online material that displays Loan information (in each case whether the foregoing are in electronic or paper form); provided, however, that Loan
Documentation shall not include Company invoices, sales slips, delivery and other receipts or other indicia of the sale of Company Products by Company.
“ Mark(s) ” means trademarks, service marks, logos, taglines, slogans, product names, domain names, social or mobile media identifiers and any other source
indicators.
“ Merchant Services Agreement ” means that certain Amended and Restated Agreement for Merchant Services (inclusive of any addenda) among [*].
“ OCC ” means the Office of the Comptroller of the Currency.
“ Off-Peak Periods ” mean time periods to be determined by Supplier (in consultation with its subcontractors) prior to the Program Commencement Date and
subject to Company’s commercially reasonable consent.
“ Online Service Center ” means an online portal within the Supplier System where Consumers may perform certain self-service functions relating to their Loan.
“ Party ” has the meaning set forth in the Preamble above.
“ PCR ” has the meaning set forth in Section 4.1.9 .
“ PCR Response ” has the meaning set forth in Section 4.1.9 .
“ Peak Sales Period ” means, for any given year, [*] through [*] in such year.
“ Person ” means any individual, corporation, business trust, partnership, association, limited liability company, joint venture, unincorporated association or
similar organization, or any Governmental Agency.
“ Personnel ” means the Affiliates, employees, agents and/or independent contractor(s) of a Party. “Personal Data” means Company’s Customer Information
and/or Program Information, as applicable herein.
“ Product(s) ” means Company Products(s).
4
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
“ Program ” or “ Loan Program ” means the Credit Services, as prepared and administered by Supplier pursuant to its usual and customary business practices,
including the offering of Credit Applications to Consumers, the origination of new accounts by Supplier, the extension of credit pursuant to Loans by Supplier,
and the promotion thereof, to facilitate purchases by Consumers of Company Products through Company Channels, as such Program is more fully described in
this Agreement, including in Article 2 hereof and each exhibit hereto .
“ Program Commencement Date ” means the date on which the Program is launched and made available to Consumers.
“ Program A Loans ” means Program Loans approved and serviced by Supplier for Borrowers who satisfy the requirements of the Supplier Credit Policy.
“ Program B Loans ” means Program Loans approved and serviced by Supplier for Borrowers who do not satisfy the requirements of the Supplier Credit Policy
but who satisfy the requirements of Program B Loans Credit Policy.
“ Program B Loans Credit Policy ” means the Credit Application approval criteria for Program B Loans as set forth in the third column of the table in Exhibit 4
.
“ Program Information ” means personally identifiable information about individuals, including but not limited to “non-public personal information” (as such
term is defined in 15 U.S.C. § 6809(4)), and other information obtained as part of the application for or provision of Credit Services, or otherwise collected,
obtained, received, accessed by or on behalf of Supplier solely in connection with its performance under this Agreement or in connection with the Program.
“ Program Loans ” has the meaning set forth in Section 2.4.2 below.
“ Program Materials ” means any and all materials produced for or related to the marketing, advertisement, solicitation, operation of or servicing of the
Program, including, without limitation, Loan Documentation, Credit Agreements and Credit Applications, regardless of communication channel, media or format.
“ Quarterly Business Review ” has the meaning set forth in the Services Level Agreement.
“ Relationship Manager ” has the meaning set forth in Article 8 below.
“ Renewal Term ” has the meaning set forth in Section 18.1 below.
“ Secondary Program ” has the meaning set forth in Section 5.2 below.
“ Service Levels ” means each service and the level of such service provided to Company pursuant to the Services Level Agreement.
“ Services Level Agreement ” means each individual performance standard set forth on Exhibit 2 .
“ [*] Loan Program ” has the meaning set forth in Section 5.3 below.
“ Supplier Credit Policy ” means the Credit Application approval criteria for Program A Loans as set forth in the second column of the table in Exhibit 4 .
“ Supplier Program Specifications ” means (i) the specifications, designs and requirements, designated by Supplier for the Loan Program and (ii) any document
to the extent such document embodies any of the foregoing.
“Supplier System” means the back end systems, including related software, applications, tools and documentation, developed or employed by Supplier or any
Supplier Personnel to facilitate the Loan Program.
5
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
“ Term ” has the meaning set forth in Section 18.1 below.
“ Term Commencement Date ” means the earlier of the Program Commencement Date and March 1, 2017.
“ Termination Date ” means (i) date of expiration of the Term pursuant to Section 18.1 in the case of a termination at the end of the Term; or (ii) in the case of
an early termination of this Agreement pursuant to Section 18.2 or 18.3 , the later of (A) the date on which this Agreement would otherwise terminate in
accordance with Section 18.2 or 18.3 , as applicable, and (B) if, by the date under subsection (A), [*], then, upon the written request of Company, the Termination
Date shall occur on the date that is ninety (90) days following the later of [*].
“ Third Party Fraud ” means acts of fraud that are attributable to persons other than the employees, contractors or agents of Company or Supplier. Third Party
Fraud losses will include the aggregate amount paid for a Product, as well as all associated fees, including, without limitation, finance charges, and non-sufficient
funds fees.
“ Transaction Fee ” has the meaning set forth in Section 2.4.1 below.
“ Willful Breach ” means a material breach or failure to perform that is the consequence of an act or omission of a Party, or a representative or Affiliate of such
Party, with the knowledge that the taking of, or failure to take, such act would, or would be reasonably expected to, cause a material breach of this Agreement.
2
The Program
2.1
Product Offering; Program Elements
2.1.1
2.1.2
The product offering constitutes Credit Services, as prepared and administered by Supplier, to facilitate purchases by
Consumers of Company Products .
The Program elements shall include the following:
2.1.2.1
The Credit Services will be offered to Consumers in connection with Consumers’ purchase of Company
Products.
2.1.2.2
2.1.2.3
The Credit Services will be an installment loan (as further described herein, a “Loan”) with an APR of zero
percent (0%).
The maximum aggregate Loan Amount of [*] will be as set forth in the Supplier Credit Policy and the Program
B Loans Credit Policy and the Loan term lengths will be forty-two (42) or sixty (60) months.
2.1.2.4
The Credit Services will be available through the Company Channels.
2.1.2.5
2.1.2.6
The Credit Services will be available on orders for Company Products that result in a Loan Amount of not less
than [*].
The Borrower for a Program A Loan must have an existing, U.S.-based personal, commercial or small business
credit card (which, for the avoidance of doubt, will not include a debit or prepaid card) in good standing. Such
credit card may be the Borrower’s credit card on file with Company. The Borrower for a Program B Loan must
have an existing credit card as described above or an existing U.S.-based “signature-required” debit card (which,
for the avoidance of doubt, will not include “PIN” or “PIN-less” debit cards or prepaid cards). Such debit card
may be the Borrower’s debit card on file with Company.
2.1.2.7
Split tender will be allowed in connection with Credit Services for Borrower purchases of Company Products
through a Company Channel.
6
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
2.1.2.8
2.1.2.9
Except as approved in advance by Company in writing, at Company’s sole discretion, [*] to Borrower for
originating the Program Loan or otherwise in connection with a Program Loan.
Regarding situations where shipment of a Product will be delayed, the Parties agree to follow the normal billing
practices of Company in effect as of the Effective Date to ensure Borrowers are charged correctly; provided,
however, that Company shall not change its billing practices without the prior written consent of Supplier, which
consent shall not be unreasonably withheld or delayed.
2.2 Credit Application; Disclosures; Returns
2.2.1.
2.2.2.
The Credit Application shall include the following entry fields relating to Borrower and the credit (or debit) card, as
applicable: [*]. All other entry fields shall be mutually agreed by the Parties unless the inclusion of such fields are required
by Legal Requirements and included by Supplier consistently to the credit applications for all consumer credit programs to
which such Legal Requirements are applicable.
The description of the Credit Services in the Program Materials shall include all disclosures required under applicable Legal
Requirements. The drafting and adequacy of such disclosures shall be solely the responsibility of Citizens, provided that
Company will be provided with a reasonable opportunity to review such disclosures in advance, though Company’s review
shall in no way limit or offset Supplier’s sole responsibility for providing Credit Services disclosures that comply with
applicable Legal Requirements. Citizens will be provided with a reasonable opportunity to review Company’s disclosures for
Company Products that are financed by the Credit Services.
2.2.3.
As it relates to returns of Company Products that were purchased with a Loan under the Program, the Parties agree as
follows:
2.2.3.1
2.2.3.2
2.2.3.3
2.2.3.4
Company shall perform all usual and customary actions relating to processing such a return, provided, however,
Company shall only return funds to the Consumer to the extent the funds relate to forms of tender unrelated to
the Credit Services;
Company shall post to the applicable Loan account record for the Borrower the amount that Citizens delivered to
Company under Article 9 below. Such posting shall occur automatically and as soon as reasonably practicable in
connection with a return;
Citizens shall perform all actions relating to cancelling the Loan and providing a credit (if any) to the Borrower;
and
To allow Company to identify a return as relating to a Loan, the name of the Program, to be determined by
Company, will be included on the proof of purchase that Company provides to Borrower. Such proof of
purchase may also include disclosure language.
2.3 Reserved.
2.4
Transaction Fee; Credit Loss Sharing and Assignment of Program B Loans; Fraud Losses
2.4.1
Transaction Fee; Interchange Expenses . Company shall pay to Citizens a monthly fee (the “ Transaction Fee ”) calculated with respect to
each month of the Program in the applicable amount set forth in the table below.
7
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
The Transaction Fees shall be invoiced and paid in the manner provided in Article 9 below.
LOAN CATEGORY
Program A
Program B
Company shall be responsible for paying [*].
TRANSACTION FEE
[*]
[*]
2.4.2
Credit Losses; Assignment of Program B Loans . As it relates to the Loans originated during the Term (collectively, the “ Program Loans
”), the Parties shall be responsible for the Credit Losses associated with the Program Loans as set forth in the table immediately below.
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
With respect to the Program Loans, Citizens shall charge Company for Credit Losses on a monthly basis as described in Section 2.4.1
above and Article 9 below. Such invoicing and payment process with respect to Credit Losses shall occur on a monthly basis during the
Term, and, notwithstanding any termination of this Agreement and for so long as the applicable Loan remains outstanding and has not been
charged off (and should not have been charged off) in accordance with Supplier’s standard charge-off policies, shall continue (A) with
respect to Loans with a term of forty-two (42) months, for the term of the Loan and for [*] following the end of such term and (B) with
respect to Loans with a term of sixty (60) months, for the term of the Loan and for [*] following the end of such Loan term. If Company
does not agree with Citizens’ calculation of the Credit Losses for the Program Loans as set forth in a Credit Loss Invoice, then the Parties
shall use best efforts to arrive at a mutually agreeable resolution of any disputes relating to the amount of such Credit Losses.
In the event that Company has been charged for a Credit Loss and subsequently Citizens recovers on that Loan, Citizens shall immediately
pay such recovered amounts to Company.
The Parties hereby agree that, [*].
Assignment of Program B Loans. The Parties shall cooperate in good faith in an effort to arrive at a mutually agreeable arrangement
pursuant to which Supplier shall continue its collection efforts with respect to the Loans following the date on which such Loans have been
charged off by Supplier. Unless Company shall have agreed otherwise in connection with the agreement with respect to any such
arrangement, then with respect to any Program B Loans, Company shall have the option to, within ten (10) Business Days following
Citizens’ receipt of payment from Company for a Credit Loss relating to such Program B Loan as provided herein, require Citizens to sell,
assign, transfer and convey to Company, for no additional consideration, all of its rights, title and interests in such Program B Loan. Such
an assignment shall be made on a servicing released basis and pursuant to a form of assignment mutually agreeable to the Parties.
The transfer of Program B Loans by Citizens to Company shall be without recourse, warranty or representation
of any kind, express or implied, including (i) any warranties of a transferor under the Uniform Commercial
8
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
Code or pursuant to any other statute, law, rule or regulation, or (ii) the nature, condition or value of Program B
Loans or any Credit Agreement or related loan document, including any representation, warranty or covenant
regarding the collectability of any Program B Loan, the creditworthiness of any Borrower, or the balance of any
Program B Loan or account. Company agrees hereby to accept such transfer of the Program B Loans in their “as
is, where is” basis “with all faults” as of the date of transfer.
Company covenants that all Program B Loans transferred to Company shall be serviced by Company or
Company’s servicer in compliance with all Legal Requirements. Company covenants that it will not violate any
Legal Requirements relating to credit collection in connection with the Program B Loans.
2.4.3
Fraud Losses.
2.4.3.1.
Subject to the terms hereof, [*].
2.4.3.2.
Company and Supplier will collaborate on fraud prevention and management as follows:
(i) Company and Supplier fraud teams will work collaboratively in identifying fraud, and reducing
fraud exposure. This will include regular meetings to assist in developing and executing an ongoing
collective fraud management strategy.
(i) Company and Supplier will participate in: (A) a conference call at least two (2) times per month
for the two (2) months after the Program Commencement Date for the purposes of discussing fraud
management; and then monthly during the Term after the two (2) months (B) a fraud strategy session
not less than every three (3) months during the Term.
Each Party will provide notice to the other Party prior to making any changes in its fraud
(ii)
management strategy and fraud protection infrastructure that may impact such other Party. Each
Party shall cooperate with the other Party in connection with any fraud reported by a Party to the
other.
3
Supplier Obligations
3.1
For the duration of the Agreement, Supplier agrees as follows:
3.1.1
Supplier shall, in cooperation with Company and in a manner consistent with the terms hereof, supply and
operate financing systems, which enable the Supplier to offer Credit Services to Borrowers in the U.S.A. Subject
to Section 3.1.14, Section 3.1.15 and Section 3.1.17, all decisions concerning the Credit Services and
creditworthiness of any Consumer, including provision of the Credit Services in compliance with applicable
Legal Requirements, shall be made at the good faith discretion of Supplier;
3.1.2
3.1.3
Supplier shall administer the Credit Services in accordance with the Services Level Agreement in Exhibit 2 ;
Supplier shall, at its own expense, be responsible for all activities associated with the servicing of all Loans
under the Program, including billing account maintenance, transaction and payment posting, authorizations,
customer service, including maintaining toll-free numbers, collections, and handling billing disputes, Company
inquiries
9
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
3.1.4
3.1.5
3.1.6
3.1.7
3.1.8
3.1.9
3.1.10
and fraud. Supplier shall service the Loans in compliance with Legal Requirements and with no less care and
diligence than the degree of care and diligence applied by Supplier with respect to consumer financing programs
for its own account;
If Supplier receives a Borrower complaint regarding the quality or delivery of any Company Products, Supplier
shall refer such complaint to Company via a “warm transfer” to Company’s customer service unit pursuant to a
mutually agreed warm transfer process;
Supplier shall produce Credit Application and disclosure forms for Credit Services in an electronic web-based
and point-of-sale format accessible by Consumers and ensure that these forms evidence a bona fide installment
loan transaction that is a valid, legal, and binding obligation that complies with all applicable Legal
Requirements. Supplier will also produce online forms for Company telesales agents to access as well as check
the status of a Credit Application and provide disclosures as required by applicable Legal Requirements;
Supplier shall provide support and assistance to Company for the integration of the Credit Services into
Company operational processes;
Supplier will be provided with advance copies of Company Program Advertising and will have twenty-four (24)
hours to review such materials and respond to Company to ensure the materials are in accordance with any
Legal Requirements; provided, that if Supplier does not respond within such period, such Company Program
Advertising shall be deemed approved;
[*];
To the extent, and in the manner, requested by Company, Supplier shall use its best efforts to promote and
market the Credit Services in a manner that is not illegal, unfair, deceptive or abusive; Supplier shall provide
Company with advance copies of all Program Materials, provided that Company’s review, acceptance or
approval of same shall not relieve Supplier of its obligations or responsibilities with respect thereto. Any use of
Company’s Marks by Supplier must be in accordance with Section 13.1 ;
Supplier shall be responsible for managing any Supplier Personnel which assists in developing, managing,
processing, or marketing any aspect of the Program in any way. Supplier shall, upon written request, provide
Company with the identity of any and all such Personnel along with a description of the work being performed.
Further, Supplier shall: (i) develop metrics to monitor and maintain normal business operation, and be
responsible for managing issues and ensure resolution within the metrics set out as defined in Exhibit 2 ; and (ii)
ensure that Company’s Confidential Information and Program Information are handled in accordance with
Article 11 ;
3.1.11
Supplier shall not pay any fees or costs associated with a Consumer’s transactions with Company;
3.1.12
Supplier shall provide Company with monthly reporting based on the agreed to metrics as set out in Exhibit 2 ;
3.1.13
Supplier shall provide the Online Service Center for Consumers as set forth in Exhibit 2 ;
10
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
3.1.14
3.1.15
3.1.16
With respect to each Credit Application submitted for approval under the Program, such Credit Application shall
be approved for a Program A Loan unless the Applicant with respect to such Credit Application fails to satisfy
one or more criteria of the Supplier Credit Policy. [*];
With respect to each Credit Application submitted for approval under the Program that fails to satisfy one or
more criteria of the Supplier Credit Policy, such Credit Application shall be approved for a Program B Loan
unless the Applicant with respect to such Credit Application fails to satisfy one or more criteria of the Program
B Loans Credit Policy. Upon reasonable request of Company from time to time, Supplier shall make such
modifications to the Program B Loans Credit Policy as Company may request and as are permitted by applicable
Legal Requirements, such that the Program B Loans Credit Policy will at all times ensure that Program B Loans
shall be approved for all Consumers not eligible for Program A Loans, to the extent such approval is acceptable
to Company and permitted by applicable Legal Requirements;
Except as expressly provided otherwise pursuant to this Agreement, [*];
3.1.17
[*];
3.1.18
[*]; and
3.1.19
Supplier shall use commercially reasonable efforts to cooperate with and assist Company, at Company’s request,
to improve the administration of chargebacks in an effort to reduce Chargeback Costs incurred by Company,
including by transitioning its chargeback services provider from [*] to a different provider mutually agreeable to
Supplier and Company.
4
Company Obligations
4.1
For the duration of the Agreement, Company agrees as follows:
4.1.1
4.1.2
4.1.3
4.1.4
4.1.5
Company shall, in cooperation with Supplier and in a manner consistent with the terms hereof, create a process
to enable Borrowers to apply for Credit Services using Supplier’s Credit Application form via the Company
Channels;
Company shall include Credit Services in Company Program Advertising and consumer sales activities, where
Company deems such inclusion appropriate in Company’s sole discretion;
Company shall not be responsible for any inaccuracy or truthfulness of the content of any documents and
information required for Supplier’s analysis of credit requests by Borrowers, provided, however, that in the
event Company collects those documents and information, Company shall be responsible for the transfer of
those documents and information to Supplier without modification;
Company shall pay any Interchange Expenses relating to Borrower repayment of Loan Amounts with a credit (or
debit) card product;
Company shall abide by applicable requirements in Regulation E, 12 C.F.R. Part 1005, for accepting
preauthorized, recurring payments using a debit card, including but not limited to, requiring that preauthorized,
recurring debit transactions from a consumer account be authorized in writing (not over the phone), and
providing a copy of that written authorization to the customer in the required timeframe(s). [*].
11
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
4.1.6
4.1.7
4.1.8
4.1.9
To the extent permitted by Legal Requirements, and in Company’s sole discretion, Company may provide
reasonable cooperation to Supplier in connection with any collection or charge-off efforts of Supplier, including
responding to information requests from Supplier;
Company shall comply with its obligations as set forth in the Services Level Agreement attached hereto as
Exhibit 2 ; and
In connection with any changes and improvements relating to the selling of Company Products under the
Program to be made following the date hereof, each such change or improvement shall be made following
discussions and agreement between the Account Managers.
Changes to Supplier’s System or Credit Services . Subject to the last sentence of this Section 4.1.9 , if Company
desires to implement a Change, the Parties will adhere to the following Change procedures: Company will send
a project change request (a “ PCR ”) to Citizens in writing that it desires to implement a Change. Within five (5)
Business Days following Citizens’ receipt of a PCR, or such longer period of time as may be reasonably
necessary, Citizens shall prepare and provide Company with a written response to such PCR (a “ PCR Response
”), reasonably detailing whether the PCR is feasible and any material issues involved in the implementation of
such PCR (including, without limitation, the estimated time and expense of Citizens and its Personnel required
to implement the PCR). If the PCR Response is acceptable to Company and Company wishes to proceed with
such Change proposal, then Company shall indicate such by approving the PCR Response and promptly
providing written confirmation to Citizens. An approved PCR Response shall constitute an amendment to this
Agreement. Supplier acknowledges that it has and shall be responsible for providing sufficient Supplier Systems
and Personnel to launch the Program in accordance with the requirements of this Agreement, and Company shall
not be responsible for any of Supplier’s costs in connection with such launch; however, if Company insists on a
Change in connection with the Program launch that is a customization not required in order to achieve the
Program launch, then the provisions of this Section 4.1.9 shall apply.
5
Exclusivity
5.1
Supplier understands and acknowledges that: (i) it is not the sole provider of credit products to Company and (ii) Company has and may
enter into agreements with other suppliers for credit products. However, during the Term, Supplier shall be the sole provider of Loans
under the Loan Program, other than the Secondary Program. For the avoidance of doubt, nothing in this Agreement shall preclude
Company (itself or pursuant to agreements with third parties) from financing sales of Company Products made through third party sales
channels (whether physical locations or other channels, and whether such sales are effected by Company Personnel or by third party
sellers).
5.2
Notwithstanding the foregoing, Company has the right to establish, substantially concurrently with the Program, a program for extending
lines of credit, either directly by Company or through an Affiliate or pursuant to an agreement with a third party, to Applicants whose
Credit Applications have been declined by Supplier as either a Program A Loan or a Program B Loan (a “ Secondary Program ”). At
Company’s reasonable discretion, to the extent permitted by applicable Legal Requirements, a Secondary Program may be similar or
identical to the Program in its features, positioning and appearance, provided a Secondary Program shall not (i) have similar credit criteria
terms as a Program A Loan or a Program B Loan or (ii) use any Supplier’s Marks or other proprietary Supplier intellectual property. To
the extent permitted by applicable Legal Requirements, Supplier shall, at Company’s expense, take the following actions in relation to a
Secondary Program:
12
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
5.3
5.4
5.5
(w) with prior notice to and consent from the Applicant, [*]. Any Secondary Programs offered or promoted by Company may be branded
with Company’s Marks.
[*].
Company understands and acknowledges that Supplier provides consumer credit services to other sellers of products. [*].
Notwithstanding anything to the contrary in this Agreement, the exclusivity provisions of this Article 5 shall not apply to any credit
products issued (either directly or pursuant to an agreement or arrangement with a third party issuer) by any business that is acquired by
or becomes affiliated with Company or any of its Affiliates by virtue of any acquisition or business combination transaction to which
Company or any of its Affiliates becomes party, so long as Supplier remains the sole provider of Loans for the Company Products in
existence and sold by Company and issued by Supplier as of immediately prior to such acquisition or other business combination
transaction through the particular Company Channels and geographic regions in which Loans were issued by Supplier immediately prior
to such acquisition or other business combination transaction.
6
Branding; Marks
The name of the offerings of Company Products under the Program shall be determined by Company in its sole discretion. Neither party will (i) use (or permit its
Personnel to use) the other party’s Marks except as provided in this Agreement or (ii) make (or permit its Personnel to make) any public statement whatsoever
(including, without limitation, press releases, media statements, case studies or the like) regarding the existence of this Agreement or the parties’ relationship
without the prior written consent of the other party.
7
Marketing and Promotion
7.1
Except as provided in this Agreement, neither Party may use the other’s Marks without the other Party’s prior written consent in the sole
discretion of such other Party.
7.2
7.3
7.4
7.5
7.6
The Parties agree to contribute to marketing and promotional activities relating to the Program as agreed from time to time. All Company
Program Advertising and Program Materials are subject to the prior written approval of each of the Parties; provided that Supplier will be
solely responsible for the inclusion of any disclosures required under Legal Requirements and Company shall have final approval rights
as to the “look and feel” of the Program Materials and the conformity of the content of the Program Materials with Company’s branding;
provided further, that Supplier’s consent will not be required for any Company Program Advertising that do not include or reference
Supplier’s Marks.
Supplier and Company may jointly offer Borrower promotions. These may include, but not be limited to [*]. At the time of the
implementation of a promotion, Supplier and Company will agree to the definition and structure of the specific promotion for a Program,
costs (if any), metrics, and reporting
Supplier and Company will develop a communication strategy which will outline how and when Consumer and Borrower
communications will be effected. This will include communications about the Credit Application and Company Product order process
with respect to the Program. Company shall pre-approve in writing all communication materials relating to the Program.
The Parties agree to jointly conduct an annual review and/or refresh of Consumer-facing communications, including, but not limited to,
the Online Service Center maintained by Supplier.
Each Party shall pay its own costs associated with any and all marketing and promotional activities. For the avoidance of doubt, all costs
and expense of preparation, production and delivery of all Program Materials shall be borne solely by Supplier, and all costs and expenses
relating to Company Program Advertising shall be borne solely by Company.
13
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
8
Appointment of Account Managers
Company and Supplier shall each name a full-time employee to act as its primary point of contact for the day to day administration of the Program and
this Agreement (each, an “ Account Manager ”). Each Account Manager must have the ability and authority to resolve or coordinate resolution of
day-to-day issues related to the Program and this Agreement. Prior to appointing its Account Manager, a Party shall (i) provide the other Party an
opportunity to meet the proposed candidate, (ii) consult with such other Party and permit it an opportunity to provide input and express its views as to
the proposed candidate and (iii) give due consideration to such other Party’s input and views as to the appointment of such Account Manager. Each
Party shall also designate a “ Relationship Manager ,” who shall be a senior member of its management team, to act as an executive sponsor for the
Program and this Agreement. The Relationship Manager must have the ability and full authority to resolve any issues arising from the Program and
this Agreement that cannot be resolved by the Account Manager. The Account Managers shall meet at least quarterly to review any outstanding issues
and to discuss any other issues of mutual interest or concern.
Further responsibilities of managers and topics of such quarterly reviews are as set forth in Exhibit 2 .
9
Payments and Reconciliation
9.1
Supplier shall pay to Company the Loan Amount pursuant to the transmittal procedures set forth on Exhibit 2 .
9.2
9.3
On or by the tenth (10 th ) Business Day of each month (provided that late delivery shall not affect Company’s obligation to pay), Citizens
shall deliver to Company with respect to such month: (a) an invoice for the Transaction Fee, (b) the Interchange Invoice, and (c) the
Credit Loss Invoice (collectively, the “ Monthly Invoices ”). The Monthly Invoices delivered to Company shall be in the respective
forms set forth as Exhibit 7 to this Agreement, and shall be accompanied by reasonable supporting documentation.
In addition, Citizens shall make available to Company upon request all work papers, schedules and other supporting documentation used
by Citizens in preparing the Monthly Invoices. Company shall pay the undisputed portion of the amount set forth in any said Monthly
Invoice to Citizens on or by the forty-fifth (45th) day following Company’s receipt of said Monthly Invoice. If Company does not agree
with Citizens’ calculation of the Transaction Fees, Interchange Expenses or Credit Losses as set forth in a Monthly Invoice, then the
Parties shall use best efforts to arrive at a mutually agreeable resolution of any disputes relating to the amount of such charges. Citizens
may only send a demand notice for payment obligations under a Monthly Invoice following forty-five (45) days from the Company’s
receipt of such Monthly Invoice.
10
Reporting and Audit
10.1
10.2
Each Party will provide the other Party with information as set forth in Exhibit 2 .
Each Party will maintain accounts and records necessary to confirm the basis for any amounts paid to the other Party pursuant to this
Agreement and to verify the Party’s compliance with the terms of this Agreement. The records will be maintained according to
recognized accounting practices and in such a manner as may be readily audited by an independent accounting firm at the other Party’s
reasonable request and cost. A non-requesting Party shall permit independent auditors nominated by a requesting Party (and as it relates
to either Party, Government Agencies with jurisdiction over such Party) and/or representatives of such requesting Party to audit records of
such non-requesting Party no more than twice per calendar year with at least six (6) months separation between requests, on reasonable
notice by such requesting Party and without unreasonable disruption to
non-requesting Party’s business, for the purposes of verifying such non-requesting Party’s compliance with the terms of this Agreement
and for verifying the accuracy of the information
14
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
provided by the non-requesting Party. Since neither Party has control over the requirements of Government Agencies with jurisdiction
over such Party, the limitations on the number of audits and notice shall not apply to audits by Government Agencies nor shall an audit by
a Government Agency count toward the limit on the number of audits above. In addition, the limitation on audits shall not apply toward
any audits that a Party may conduct to confirm remediation of a deficiency identified in a prior audit.
If an audit conducted pursuant to the paragraph above reveals any non-compliance or other deficiencies, then the Account Managers shall
promptly meet to discuss the matter, and the non-compliant Party shall promptly take action to remedy such non-compliance so that the
non-compliant Party is in compliance with this Agreement.
10.3
10.4
Notwithstanding the foregoing, Company shall have the right, at any reasonable time during the Term [*].
Any reporting must comply with the confidentiality obligations under this Agreement and be subject to applicable data protection laws,
and as per Exhibit 2 .
11
Confidential Information
11.1
11.2
11.3
11.4
Each Party acknowledges that in the course of performing its obligations hereunder it may receive information that is confidential and
proprietary to the other Party.
Supplier expressly agrees that information disclosed by Company and/or any Company entity or member of the Company group of
companies, Company Personnel to Supplier or Personnel under Supplier’s direction and/or control as the case may be, regarding sales
and/or marketing operations, relationship(s) with business partner(s), relationship(s) with channel partner(s), transaction histories,
contests, promotions, trade shows and other like events, products, product announcements, product launches and any other information,
including but not limited to information learned by Supplier from Company Personnel or through inspection of Company’s property, that
relates to Company’s Products, designs, business plans, business opportunities, finance, research, development, know-how, Personnel,
third-party confidential information, Company’s Customer Information, the Company System, the terms and conditions of this
Agreement, and the existence of the discussions between Supplier and Company will be considered and will be referred to collectively as
“ Company’s Confidential Information ”.
Company expressly agrees that information disclosed by Supplier and/or any Supplier entity or member of the Supplier’s group of
companies, Supplier or Personnel to Company, or Personnel under Company’s direction and/or control as the case may be, regarding
sales and/or marketing operations, relationship(s) with business partner(s), relationship(s) with channel partner(s), products, product
announcements, product launches and any other information, including but not limited to information learned by Company from Supplier
Personnel or through inspection of Supplier’s property, that relates to the Credit Services, Supplier’s products, designs (including, for the
avoidance of doubt, Supplier Program Specifications), business plans, business opportunities, finance, research, development, know-how,
Personnel, Program Information, the Supplier System, the terms and conditions of this Agreement, and the existence of the discussions
between Company and Supplier will be considered and will be referred to collectively as “Supplier’s Confidential Information”
(Company’s Confidential Information and Supplier’s Confidential Information, collectively, shall mean the “Confidential Information”).
Confidential Information however shall not include information that: (i) is now or subsequently becomes generally available to the public
through no fault or breach on the part of either Party; (ii) is independently developed by either Party without the use of any Confidential
Information of the other Party; (iii) either Party rightfully obtains from a third party who has the right to transfer or disclose it; (iv) was in
a Party’s possession on
15
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
11.5
11.6
11.7
11.8
11.9
a non-confidential basis prior to the time of disclosure to such Party by or on behalf of the disclosing Party; or (v) is required to be
disclosed by applicable Legal Requirements, subpoena, legal process or document demand (or to enforce a Party’s rights herein),
provided that the receiving Party shall promptly inform the disclosing Party of any such requirement, disclose no more Confidential
Information than as required and cooperate with any efforts by the disclosing Party to obtain a protective order or similar treatment.
Neither Party shall disclose, publish or disseminate the other Party’s Confidential Information to anyone other than those of its Personnel
under its direction and/or control with a need to know, provided that such Party shall be liable for any breach of the terms of this Article
11 or Article 12 by any of the foregoing parties. Each Party agrees to take all reasonable precautions to prevent any unauthorized use,
disclosure, publication, or dissemination of the other Party’s Confidential Information and to use the same measures in doing so as it uses
with regard to its own Confidential Information, but in no event using less than a reasonable standard of care. Each Party agrees to use the
other Party’s Confidential Information for the sole purpose of carrying out its obligations and exercising its rights under this Agreement,
including pursuant to Article 12. Each Party agrees not to use the other Party’s Confidential Information for its own or any third party’s
benefit without the prior written approval of an authorized representative of the other Party in each instance.
Supplier represents and warrants to Company that it has used and will continue to use reasonable best efforts to implement all requisite
processes and systems for the protection and security of the privacy and confidentiality of Company’s Confidential Information in
compliance with applicable Legal Requirements.
Company represents and warrants to Supplier that it has used and will continue to use reasonable best efforts to implement all requisite
processes and systems for the protection and security of the confidentiality of Supplier’s Confidential Information.
Each Party explicitly acknowledges and agrees that, as between the Parties, all Confidential Information of a Party remains the exclusive
property of such Party and no license or other rights to Confidential Information is granted or implied hereby to the other Party unless
explicitly set forth herein.
Within thirty (30) days of termination or expiration of this Agreement for any reason, each Party will either return to the other Party all
tangible embodiments of the other Party’s Confidential Information, including but not limited to any and all electronic files, computer
programs, documentation, notes, plans, drawings, and copies thereof, or, at such other Party’s option, will provide the other Party with
written certification that all such tangible embodiments of Confidential Information have been destroyed in accordance with the other
Party’s instructions pertaining thereto. Each Party may retain the other Party’s Confidential Information if required by applicable Legal
Requirements, and shall continue protect such Confidential Information in accordance with Section 11.5.
12
Data Privacy and Security
12.1
Personal Data
As a result of this Agreement, each Party and their respective Personnel assigned to perform the services under this Agreement may
obtain or receive Personal Data in connection with their performance hereunder.
12.2
Protection of Personal Data
12.2.1
For purposes of this Section 12.2 , (i) Company’s obligations with respect to Personal Data shall be with respect to the
Program Information to the extent received from
16
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
12.2.2
12.2.3
12.2.4
12.2.5
12.2.6
Supplier, and (ii) Supplier’s obligations with respect to Personal Data shall be with respect to Company’s Customer
Information to the extent received from Company and Program Information. Accordingly, with respect to each Party’s
obligations under this Section 12.2 , all references to Personal Data in this Section 12.2 shall be deemed to refer to the
applicable Personal Data for which they have obligations pursuant to this Section 12.2.1 .
Each Party shall, and shall ensure that any Personnel, collect, access, maintain, use, process, transmit, store, destroy and
transfer Personal Data in accordance with the applicable Legal Requirements, all internal and posted policies related to
privacy, personal information and data or system security and requirements set forth in this in this Article 12.
In addition to its obligations in Article 11 , each Party shall take all appropriate legal, organizational, and technical measures
to protect Personal Data and Confidential Information against accidental or unlawful destruction or accidental loss, alteration,
unauthorized disclosure or access, and against all other unlawful forms of processing, keeping in mind the nature of such
data, including in compliance with applicable Legal Requirements.
Each Party shall take all reasonable steps to ensure that Personal Data is reliable for its intended use, and is accurate,
complete and current.
Each Party shall provide other reasonable assistance and support, and assist and support to the other Party in the event of an
investigation by a data protection regulator or similar authority, if and to the extent that such investigation relates to the
collection, access of, maintenance, use, processing, transmission, storage, destruction or transfer of Personal Data under this
Agreement.
Each Party shall immediately notify the other Party in the event that the notifying Party learns or has reason to believe that
any person or entity has breached or attempted to breach such Party’s systems that collect, access, process, store, transfer,
transmit, destroy or maintain Personal Data covered by this Agreement, or gained unauthorized access to Personal Data
covered by this Agreement (“Information Security Breach”). Upon any such discovery, the notifying Party will investigate,
remediate, and mitigate the effects of the Information Security Breach pursuant to a mutually agreed to remediation plan and
the Parties shall cooperate fully in all such remedial actions. The notifying Party shall provide the other Party with reasonable
assurances and evidence that such Information Security Breach will not recur. Unless otherwise required by applicable Legal
Requirements (in which case, the notifying Party will promptly notify the other Party as to the required notifications to be
made), the notifying Party shall not make any notifications to customers or the general public of any such Information
Security Breach without the other Party’s prior written consent.
13
Proprietary Rights
13.1
Company Marks
13.1.1
Any Supplier violation of this Section 13.1 shall constitute a material breach of this Agreement and shall be grounds for
termination of this Agreement by Company.
13.1.2
All Program Materials that include or refer to the Company’s Marks shall be pre-approved, in advance and in writing, by
Company. Company reserves the right to approve or reject any use of any of Company’s Marks in its sole discretion. Further,
Company may terminate the right to any previously approved reference to the Company’s Marks upon thirty (30) days’
written notice, provided, however, that Supplier shall be allowed to run down any existing inventory of such materials.
Supplier will not remove, obfuscate or add any legal notification or mark to any materials
17
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
bearing the Company’s Marks. All use of any of Company’s Marks shall inure solely to the benefit of Company. No
ownership rights, license, whether express or implied, are granted to Supplier. Any right or permission not expressly stated is
hereby reserved by Company.
13.1.3
General Usage Guidelines . In addition to any specific guidelines provided in writing by Company to Supplier, Supplier agrees:
13.1.3.1
Not to incorporate or integrate any Company Mark into any Supplier Mark or Mark of a third party in any manner that
creates a composite or combination mark;
13.1.3.2
13.1.3.3
Not to obfuscate or remove any Company Mark or third party Mark from any materials provided by Company or any
packaging for the Company Products, and not to add any Mark of Supplier or a third party to any materials provided by
Company or any packaging for the Company Products;
Not to use or register, in whole or in part, any Mark that is confusingly similar to or that dilutes any Company Mark, as or as
part of a company name, company logo, trade name, product name, service name, or domain name. If Supplier has filed or
obtained in any country any trademark application, trademark registration, or domain name registration that relates to any
name or Mark that, in the sole opinion of Company, is similar, deceptive, or misleading with respect to any Company Mark,
Supplier shall immediately abandon any such application, registration or domain name or, at Company’s sole discretion,
assign it to Company;
13.1.3.4
Not to imitate the trade dress, design, layout, or “look and feel” of Company Products or services, including, but not limited
to, Company sales programs, websites, logos, typefaces, or product packaging;
13.1.3.5
Not to use the Company’s Marks in any unauthorized manner that would imply Company’s affiliation with or endorsement,
sponsorship, or support of Supplier; and
13.1.3.6
Not to bid on or obtain the rights to (or authorize others to bid on or obtain the rights to) any key word utilized by any search
engine (including, but not limited to, Google, Yahoo and MSN) to return or prompt search results if such key word is,
includes, or is confusingly similar to any Company Mark without the prior written consent of the Company.
13.1.4
Compliance . Upon request of Company, Supplier shall send to Company representative samples of the Program Materials. If, upon
review of such materials or otherwise, Company determines in its sole discretion that such materials are in violation of the Agreement or
Company’s trademark guidelines, then Supplier shall promptly correct or abandon such non-conforming materials. Without limiting the
foregoing, at Company’s request, Supplier shall promptly cease using such materials and/or recall any copies of such materials and
destroy them.
13.1.5
Termination . Upon expiration or termination of the Agreement, Supplier will immediately cease all use of the Company’s Marks.
13.1.6
Reservation and Protection of Rights. This Agreement gives Supplier no rights to any of Company’s Marks or other intellectual property
of Company except as expressly stated herein. Supplier agrees that, as between the Parties, Company owns all rights in the Company’s
Marks and its intellectual property. Supplier shall not at any time, whether during or after the Term, take any action to challenge, contest,
impair, disparage, invalidate, or that would tend to impair or invalidate any of Company’s rights in the Company’s Marks or any
applications or registrations therefor or any other Company intellectual property.
18
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
13.1.7
Enforcement. Supplier agrees to notify Company if Supplier becomes aware of:
13.1.7.1
Any uses of, or any application or registration for a Mark that conflicts with, dilutes, or is confusingly similar to any
Company Mark;
13.1.7.2
Any acts of infringement, dilution, or unfair competition involving any Company Mark; or
13.1.7.3
Any allegations or claims whether or not made in a lawsuit, that the use of any Company Mark by Supplier infringes or
otherwise violates the trademark or service mark or other rights of any other entity.
13.1.8
Company may, but shall not be required to, take whatever action it, in its sole discretion, deems necessary or desirable to protect the
validity and strength of the Company’s Marks.
13.2
Supplier Marks
13.2.1
Any Company violation of this Section 13.2 shall constitute a material breach of this Agreement and shall be grounds for
termination of this Agreement by Supplier.
13.2.2
All Company Program Advertising that includes or refers to the Supplier’s Marks shall be
pre-approved, in advance and in writing, by Supplier. Supplier reserves the right to approve or reject any use of any of
Supplier’s Marks in its sole discretion. Further, Supplier may terminate the right to any previously approved reference to the
Supplier’s Marks upon thirty (30) days’ written notice, provided, however, that Company shall be allowed to run down any
existing inventory of such materials. Company will not remove, obfuscate or add any legal notification or mark to any
materials bearing the Supplier’s Marks. All use of any of Supplier’s Marks shall inure solely to the benefit of Supplier. No
ownership rights, license, whether express or implied, are granted to Company. Any right or permission not expressly stated
is hereby reserved by Supplier.
13.2.3
General Usage Guidelines . In addition to any specific guidelines provided in writing by Supplier to Company, Company
agrees:
13.2.3.1
Not to incorporate or integrate any Supplier Mark into any Company Mark or Mark of a third party in any
manner that creates a composite or combination mark;
13.2.3.2
Not to obfuscate or remove any Supplier Mark or third party Mark from any Program Materials, and not to add
any Company Mark or a third party to any Program Materials;
13.2.3.3
Not to use or register, in whole or in part, any Mark that is confusingly similar to or that dilutes any Supplier
Mark, as or as part of a company name, company logo, trade name, product name, service name, or domain
name. If Company has filed or obtained in any country any trademark application, trademark registration, or
domain name registration that relates to any name or Mark that, in the sole opinion of Supplier, is similar,
deceptive, or misleading with respect to any Supplier Mark, Company shall immediately abandon any such
application, registration or domain name or, at Supplier’s sole discretion, assign it to Supplier;
13.2.3.4
Not to imitate the trade dress, design, layout, or “look and feel” of Supplier’s products or services, including, but
not limited to, Supplier’s websites, logos, typefaces, or product packaging;
13.2.3.5
Not to use the Supplier’s Marks in any unauthorized manner that would imply Supplier’s affiliation with or
endorsement, sponsorship, or support of Company; and
19
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
13.2.4
13.2.5
13.2.6
13.2.3.6
Not to bid on or obtain the rights to (or authorize others to bid on or obtain the rights to) any key word utilized
by any search engine (including, but not limited to, Google, Yahoo and MSN) to return or prompt search results
if such key word is, includes, or is confusingly similar to any Supplier Mark without the prior written consent of
Supplier.
Compliance. Upon request of Supplier, Company shall send to Supplier representative samples of the Company Program
Advertising. If, upon review of such materials or otherwise, Supplier determines in its sole discretion that such materials are
in violation of the Agreement or Supplier’s trademark guidelines, then Company shall promptly correct or abandon such non-
conforming materials. Without limiting the foregoing, at Supplier’s request, Company shall promptly cease using such
materials and/or recall any copies of such materials and destroy them.
Termination . Upon expiration or termination of the Agreement, Company will immediately cease all use of the Supplier’s
Marks.
Reservation and Protection of Rights . This Agreement gives Company no rights to any of Supplier’s Marks or other
intellectual property of Supplier except as expressly stated herein. Company agrees that, as between the Parties, Supplier
owns all rights in the Supplier’s Marks and its intellectual property, provided that Supplier shall not use the same or
substantially similar forms of any Program Materials in connection with providing services similar to the Credit Services to
any third party (it being understood that Supplier’s use of standardized system templates, legal disclosures and other
standardized disclosures generally used by Supplier for both the Company and its other third party program partners shall not
be deemed a violation of this provision). Company shall not at any time, whether during or after the Term, take any action to
challenge, contest, impair, disparage, invalidate, or that would tend to impair or invalidate any of Supplier’s rights in the
Supplier’s Marks or any applications or registrations therefor or any other Supplier intellectual property.
13.2.7
Enforcement. Company agrees to notify Supplier if Company becomes aware of:
13.2.7.1
Any uses of, or any application or registration for a Mark that conflicts with, dilutes, or is confusingly similar to
any Supplier Mark;
13.2.7.2
Any acts of infringement, dilution, or unfair competition involving any Supplier Mark; or
13.2.7.3
Any allegations or claims whether or not made in a lawsuit, that the use of any Supplier Mark by Company
infringes or otherwise violates the trademark or service mark or other rights of any other entity.
13.2.8
Supplier may, but shall not be required to, take whatever action it, in its sole discretion, deems necessary or desirable to
protect the validity and strength of the Supplier’s Marks.
13.3
Systems and Processes
[*].
13.4
Company and Supplier Proprietary Customer Information
13.4.1
Supplier acknowledges that: (i) Company maintains Company’s Customer Information independently derived from numerous
sources other than Supplier; (ii) the same or similar information may be contained in Company’s Customer Information and
Program Information; and
(iii) Company has a proprietary interest in Company’s Customer Information and any
20
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
13.4.2
13.4.3
13.4.4
other information about actual or prospective Consumers gathered by or on behalf of Company, whether or not Supplier has
derived or maintains identical information or has or asserts any rights therein, and that each such pool of data will be
considered separate information subject to the specific provisions applicable to that data hereunder. For clarity, with respect
to any data that constitutes both Company’s Customer Data and Program Information, Company shall be free to exercise all
rights with respect thereto as Company’s Customer Data without regard to any restrictions on the use or disclosure of
Program Information. Supplier hereby disclaims any ownership right or interest whatsoever in Company’s Customer
Information and agrees not to contest Company’s rights therein.
Supplier shall cooperate with Company to provide Company the maximum ability permissible under applicable Legal
Requirements to use and disclose Program Information, including, as necessary or appropriate, through the program privacy
notices and/or the use of disclosures, consents, opt-in provisions or opt-out provisions.
Company acknowledges that: (i) Supplier maintains Program Information independently derived from numerous sources
other than Company; (ii) the same or similar information may be contained in Company’s Customer Information and
Program Information; and (iii) Supplier has a proprietary interest in Program Information and any other information about
Borrowers gathered by or on behalf of Supplier, whether or not Company has derived or maintains identical information or
has or asserts any rights therein, and that each such pool of data will be considered separate information subject to the
specific provisions applicable to that data hereunder. For clarity, with respect to any data that constitutes both Company’s
Customer Data and Information, Supplier shall be free to exercise all rights with respect thereto as Program Information
without regard to any restrictions on the use or disclosure of Company’s Customer Data. Company hereby disclaims any right
or interest whatsoever in the Program Information and agrees not to contest Supplier’s rights therein.
Supplier shall not use, or permit to be used, Program Information, except as specifically provided in this Agreement. Supplier
may use the Program Information and any other information derived from the Program Information in compliance with
applicable Legal Requirements and the program privacy notices, solely: (i) as necessary to exercise its rights or carry out its
obligations hereunder; (ii) for purposes of promoting the Program; (iii) for purposes of performing analysis and modeling,
provided, however, that Program Information used for analysis and modeling other than with respect to the Program shall be
non-personally identifiable information, shall be aggregated with data from other portfolios; (iv) as necessary or appropriate
for purposes of compliance with applicable Legal Requirements, regulatory examination or internal auditing functions, risk
assessment or management functions. Supplier shall not use Program Information to market any of its products or services (i)
in greater frequency than is usual and customary for Supplier, which shall be consistent with the marketing levels shared with
Company prior to the date hereof, (ii) through marketing which makes reference to Company or uses Company’s Marks or
(iii) through Program inserts or billing statement messages, unless Supplier shall have provided reasonable advance notice of
such proposed insert or billing statement, Company shall have approved of such inclusion and Company shall have been
given a reasonable opportunity to review and approve the content thereof (such approval not to be unreasonably withheld).
Notwithstanding the foregoing, Company acknowledges that Supplier may independently gather information from
individuals independent of the Program, including from Persons who may or may not also be Borrowers or Applicants and
that marketing by use of such information, without reference to or use of Program Information shall not be governed or
restricted by this Section 13.4.4 .
13.4.5
Supplier shall not, directly or indirectly, sell, or otherwise transfer any right in or to
21
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
the Program Information.
13.4.6
Subject to applicable Legal Requirements, Supplier shall provide the information below to Company on a daily basis for each
Borrower: [*].
13.5 [*].
14
Representations and Warranties
Each Party represents and warrants to the other Party that on the day hereof: (i) it is duly organized, validly existing and in good standing under the Legal
Requirements of the U.S.A., or the state of its organization; (ii) has the full power, authority and legal right under the Legal Requirements of the U.S.A., to
conduct its business and to enter into and perform its obligations under this Agreement; (iii) without limiting the generality of the foregoing, has obtained and
possesses all necessary permits, certificates, licenses, consents, approvals, and authorizations of or from all Governmental Agencies, or any other requirements as
the case may be, to operate as may be required by Legal Requirements; (iv) the execution, delivery and performance of this Agreement does not conflict with
such Party’s corporate powers and/or corporate charter, will not violate any Legal Requirement or any agreement or contract to which such Party or any of its
subsidiaries is a party or by which it is bound and will not require the consent or approval of any other party to any agreement or contract to which such Party or
any of its subsidiaries is a party or by which it is bound; and (v) this Agreement has been duly executed and delivered and constitutes a legal, valid and binding
obligation of such Party, fully enforceable against such Party in accordance with its terms, except, in the cases of clauses (ii) -(iv), for such conflicts, breaches,
defaults, violations or failures to obtain such consents or approvals or make or obtain such filings, notices, consents and approvals as would not reasonably be
expected to have, individually or in the aggregate, a material adverse effect on such Party or its ability to perform its obligations under this Agreement.
15
Force Majeure
Neither party will be liable for delay or failure to fulfill its obligations under this Agreement due to unforeseen circumstances or causes beyond the Parties’
reasonable control, including acts of God, war, riot, embargoes, pandemics, acts of civil or military authorities, acts of terrorism or sabotage, fire, flood, accident,
strikes, inability to secure transportation, failure of communications networks, or shortage of supply or failure to deliver by either Party’s vendors, but excluding
changes in Legal Requirements; provided, that such Party promptly notifies the other Party and uses reasonable efforts to correct such failure or delay in its
performance, provided further that, in the event that the delay continues for more than two (2) consecutive months, such other Party may elect to terminate this
Agreement.
16
Limitation of Liability
Except as provided in this Agreement, the total liability of either Party to the other on all claims of any kind under or related to this
Agreement, whether in contract, warranty, condition, tort, strict liability, statute, or otherwise, shall be limited to the total amount of:
[*].
16.1
IN NO EVENT, WHETHER AS A RESULT OF BREACH OF CONTRACT, WARRANTY, CONDITION, TORT, STRICT
LIABILITY, STATUTE OR OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY: [*].
16.2
The limitations in this Article 16 (including, for the avoidance of doubt, Section 16.2 ) shall not apply to: [*]. The remedies set forth
in this Agreement will be Supplier and Company’s sole and exclusive remedies for any claim against the Supplier and Company
respectively in connection with this Agreement.
16.3
THE PARTIES AGREE THAT THE TERMS OF THIS AGREEMENT, INCLUDING THOSE CONCERNING WARRANTIES,
INDEMNITY AND LIMITATIONS OF LIABILITY, REPRESENT A FAIR ALLOCATION OF RISK BETWEEN THE PARTIES
WITHOUT WHICH THEY WOULD NOT HAVE ENTERED INTO THIS AGREEMENT. LIABILITY FOR DAMAGES WILL BE
LIMITED AND EXCLUDED, EVEN IF ANY EXCLUSIVE REMEDY PROVIDED FOR IN THE AGREEMENT FAILS OF ITS
ESSENTIAL PURPOSE.
NOTHING IN THIS AGREEMENT SHALL IN ANY WAY EXCLUDE OR LIMIT EITHER PARTY’S LIABILITY FOR DEATH
OR PERSONAL INJURY CAUSED BY SUCH PARTY, OR OTHER DAMAGES RELATING TO SUCH PARTY’S GROSS
NEGLIGENCE OR LIABILITY FOR FRAUD HEREUNDER.
16.4
16.5
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
17
Performance of Company Products and Credit Services
Company makes no warranties or representations as to performance of Company Products or as to service to Supplier or to any other Person except as expressly
set out in Company’s limited warranty to end-users included with the hardware products and contained in the license agreement included with software products.
Company reserves the right to change the warranty and service policy set forth in such limited warranty, or otherwise, at any time without further notice and
without liability to the extent permitted by Legal Requirements, all implied and statutory warranties and conditions and other terms, including but not limited to
implied warranties or merchantability, fitness for a particular purpose and terms of satisfactory quality are to the extent permitted by Legal Requirements hereby
expressly excluded.
Supplier makes no warranties or representations with respect to the effectiveness of the Credit Services in promoting the sale of Company Products.
18
Term and termination
18.1 Term of Program
The term of this Agreement will begin on the date of this Agreement set forth above and, unless renewed or extended as provided herein, terminate
at 11:59 p.m. Eastern Time, on the five (5) year anniversary of the Term Commencement Date (the “ Initial Term ”).
The Initial Term shall thereafter be extended automatically for additional one (1) year terms (each, a “ Renewal Term ”, and together with the
Initial Term, the “ Term ”) unless either Party notifies the other in writing within 180 days prior to the expiration of the Initial Term or Renewal
Term, whichever is applicable.
18.2 Termination by the Parties
In addition to any other termination provision in this Agreement, this Agreement may be terminated during the Initial Term or any subsequent
Renewal Term as follows:
18.2.1 Company may terminate this Agreement by giving at least thirty (30) days’ written notice to the Supplier if at any time [*].
18.2.2 Company may terminate this Agreement by giving at least thirty (30) days’ written notice to Supplier if at any time [*].
18.2.3 Company may terminate this Agreement pursuant to its rights to terminate as provided in the Services Level Agreement attached hereto as
Exhibit 2 , which termination shall be effectuated by Company by giving at least thirty (30) days’ written notice to Supplier.
18.2.4 Supplier may terminate this Agreement by giving at least thirty (30) days’ written notice to Company if at any time Company varies the
terms of the sales of any Company Product included in the Program and such variation, in the reasonable opinion of Supplier, makes the
performance of such obligations contrary to Legal Requirements.
18.2.5 Company may terminate this Agreement in accordance with Section 3.1.14 .
18.2.6 [*].
18.2.7 Company may terminate this Agreement upon thirty (30) days’ prior written notice if [*].
18.2.8 Company may terminate this Agreement by giving at least thirty (30) days’ written notice to Supplier if at any time [*].
18.3 Termination by either Party
In addition to any other right any Party has under this Agreement or at common law to terminate this
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
Agreement, a Party may terminate this Agreement:
18.3.1 immediately by giving at least 30 days’ written notice to the other party if a representation or warranty given by the other Party under this
Agreement was untrue in a material respect when it was made;
18.3.2 [*];
18.3.3 if the other Party breaches any other obligation under this Agreement and such breach continues unremedied for thirty (30) days after the
date of a notice to remedy the breach, provided, if any such breach is caused by any Personnel of a party, such cure period shall be forty-
five (45) days after the date of a notice to remedy the breach; provided, further that if such failure cannot be cured in a commercially
reasonable manner within such thirty (30) or forty-five (45) day time period, no termination right exists if the defaulting Party shall have
initiated a cure within such time and such cure is completed within ninety (90) days from the date of written notice regarding such breach;
18.3.4 upon written notice to the other Party, if the performance by the other Party of its obligations under this Agreement is prevented or
materially impeded for a period of not less than sixty (60) consecutive days by a force majeure event as set forth in Article 15 ;
18.3.5 if an Insolvency Event occurs in respect of the other Party; or
18.3.6 if a Party is directed by a Government Agency having jurisdiction over it to terminate this Agreement, and the matter has not been resolved
within thirty (30) days after delivery by such Party of a notice to the other Party.
18.4 Effects of Termination
18.4.1 In the event of a notice of termination or non-renewal of this Agreement, all obligations of the Parties shall continue in accordance with
and subject to the terms of this Agreement until the Termination Date; provided, that the obligations of the Company and its Affiliates in
Article 5 shall cease to be of any further force and effect if at any time following notice of termination or non-renewal of this Agreement
by either Party, Supplier ceases to accept Credit Applications or extend credit under the Loans or comply with Section 2.1 in connection
with the Loans. Supplier shall (at its expense) cooperate with Company to effect an orderly and efficient wind-down or transition to
Company or to a successor supplier.
Upon termination of this Agreement for any reason, with respect to each Loan outstanding at the time of such termination, the obligations
of both Parties pursuant to the terms of this Agreement in respect thereof, including each Party’s obligations with respect to Credit Losses
arising in respect of such Loans, shall continue in effect for so long as such Loans remain outstanding, including for the additional time
period following the end of the Term set forth in Section 2.4.2 (Credit Losses). Supplier shall not, directly or indirectly, sell, or otherwise
transfer any right in or to the Program Loans and shall continue to service the Program Loans until full repayment thereof, with no less care
and diligence than the degree of care and diligence applied by Supplier with respect to consumer financing programs for its own account.
18.4.2 Supplier shall use commercially reasonable efforts to cooperate with and assist Company, at Company’s request, in Company’s efforts to
transition the Program to a new supplier, including, beginning the earlier of eighteen
(18) months prior to the expiration date of this Agreement or following the occurrence of any event that would give either Party the right to
terminate this Agreement prior to the end of the Term (whether or not such right has been exercised). Subject to compliance with Legal
Requirements, Supplier shall provide all information to Company (which information may be disclosed by Company to any prospective
supplier that has executed a customary confidentiality agreement with Company) regarding the Program that is reasonably requested by
Company.
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
18.4.3 Following the Termination Date, in no event shall Supplier or any of its Personnel solicit any Applicant or Borrower for any loan, product
or service on the basis of such Person’s status as an Applicant or Borrower by use of any Borrower list, Applicant list (or portion thereof)
or any other information that is distinguishable from Supplier’s other customer information based on its origination from or association
with the Program Information.
18.4.4 Without limiting Company’s unilateral rights with respect to communications regarding any successor financing program, the parties shall
jointly agree to any communications with Borrowers and prospective Borrowers about the termination of the Program.
19
Survivorship
The following articles of this Agreement shall survive Agreement expiration or termination for any reason: Section 2.4.2 ( Credit Losses ); Articles 5 ( Exclusivity
); Article 9 ( Payments and Reconciliation ); Article 10 ( Reporting and Audit ); Article 11 ( Confidential Information ); Sections 13.1.3 and 13.1.6 ( Company
Marks ); Sections 13.2.3 and 13.2.6 ( Supplier Marks ); Article 16 ( Limitation of Liability ); Article 17 ( Performance of Company Products and Credit Services
); this Article 19 ( Survivorship ); Article 20 ( Notices ); Article 21 ( General Terms ); Article 22 ( Indemnification ); Article 23 ( Additional Obligations ); Article
24 ( Sales Taxes ); and any other articles or sections that by their nature would reasonably be expected to survive expiration or termination.
20
Notices
Any notice under this Agreement must be in writing and will be deemed given: (i) upon the earlier of actual receipt or five (5) days after being sent by pre-paid
first class registered or certified mail, return receipt requested, to the address set forth below for such Party, or as may be provided by the Parties; (ii) upon receipt
if sent by email to the email address provided below, followed by delivery of an original; or (iii) upon receipt if sent by nationally recognized overnight courier to
the address set forth below for receipt of notices, or as may be provided by the Parties.
Company’s designated address for notices:
Vivint, Inc.
4931 N. 300,
W. Provo, UT 84604
[*]
With a copy (which copy shall not constitute notice) to:
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017 [*]
Supplier’s designated address for notices:
Citizens Bank, N.A.
770 Legacy Place
Dedham, MA 02026
[*]
With a copy (which copy shall not constitute notice) to:
Citizens Bank, N.A.
Legal Department - RDC200F
100 Sockanosset Cross Road
Cranston, RI 02920
[*]
Either Party may give notice of its change of address for receipt of notices by giving notice in accordance with this Article 20 .
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
21
General Terms
21.1 Entire Agreement
Company and Supplier acknowledge that this Agreement, together with the exhibits hereto, constitutes the full and complete understanding and
agreement of the parties and supersedes and extinguishes all previous agreements and representations of, between or on behalf of the Parties with
respect to its subject matter. This Agreement contains all of Company’s and Supplier’s agreements, warranties, understandings, conditions,
covenants, and representations with respect to its subject matter, and Company and Supplier acknowledge and agree that they have not relied on
any other agreements, warranties, understandings, conditions, covenants or representations in entering into this Agreement. Neither Company nor
Supplier will be liable for any agreements, warranties, understandings, conditions, covenants, or representations not expressly set forth or
referenced in this Agreement. Company is deemed to have refused any different or additional provisions in purchase orders, invoices or similar
documents, unless Company affirmatively accepts such provision in writing, and such refused provisions will be unenforceable.
21.2 Governing Law, Venue, Waiver of Jury Trial
New York law shall govern this Agreement, without giving effect to conflicts of laws principles. Any action or proceeding between the Parties
relating to this Agreement shall take place in Manhattan County, New York; both Parties hereby waive any objection to personal jurisdiction or
venue in any forum located in that county. To the fullest extent permitted by Legal Requirements, the Parties hereto each irrevocably waives any
and all right to a trial by jury in any claim, demand, proceeding and cause of action or counterclaim arising under or in any way related to this
Agreement, and under any theory of law or equity, whether now existing or hereafter arising.
21.3 Relationship of Parties
Nothing in this Agreement will be construed as creating any relationship such as employer-employee, partnership, principal-agent or franchisor-
franchisee, and neither Party shall have the right, power or authority to obligate or bind the other in any manner whatsoever, except as otherwise
agreed in writing. Nothing herein shall be construed to provide for a sharing of profits by either Party, or any co-ownership of a business or
property so as to create a separate partnership under the laws of any jurisdiction. In connection with the Program, each Party’s employees will not
be considered employees of the other Party within the meaning or the applications of any federal, state or local laws or regulations including, but
not limited to, laws or regulations covering unemployment insurance, workers’ compensation, industrial accident, labor or taxes of any kind.
Company’s Personnel who are to perform services hereunder shall be under the employment, and ultimate control, management and supervision of
Company. Supplier’s Personnel who are to perform services hereunder shall be under the employment, and ultimate control, management and
supervision of Supplier. Supplier is solely responsible for compliance with all Legal Requirements regarding the payment of wages and/or other
compensation to Supplier Personnel, including ensuring the provision of workers’ compensation insurance for all Supplier Personnel.
21.4 Severability
If a court of competent jurisdiction holds that any provision of this Agreement is invalid or unenforceable, the remaining portions of this Agreement
will remain in full force and effect, and the Parties will replace the invalid or unenforceable provision with a valid and enforceable provision that
achieves the original intent of the Parties and economic effect of the Agreement.
21.5 Waivers
A Party’s waiver of any breach by the other Party or failure to enforce a remedy will not be considered a waiver of subsequent breaches of the same
or of a different kind.
21.6 Assignment and Other Material Business Changes
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
No Party may assign, in whole or in part, this Agreement without the other Party’s prior written approval. Either Party may use third party
Personnel upon written notice to the other Party to perform its obligations under this Agreement, but any subcontracting shall not relieve such Party
of its obligations hereunder and such Party shall be responsible for the performance of its Personnel to the same extent such Party would be
responsible if it had performed in such manner itself; provided, however that each Party is prohibited from subcontracting or performing services
itself or through Affiliates outside of the United States, except for services disclosed not less than thirty (30) days in advance to the other Party and
that do not involve contact or interaction with Applicants or Borrowers.
21.7 Variation
Any waiver, modification or amendment of any provision of this Agreement shall be effective only if in writing and signed by authorized
representatives of both Parties. The provisions of this Agreement shall prevail over any conflicting provisions in any purchase order, acceptance
notice or other document generated by the Parties except as expressly provided in the preceding sentence.
21.8 Counterparts
This Agreement, including all exhibits hereto that form an integral part of the Agreement, can be executed in two counterparts, each of which
would be deemed an original, but both of which together would constitute one and the same instrument.
21.9 Due Execution
Each of the Parties represents and warrants that the Persons executing this Agreement on behalf of each Party have been duly authorized to execute
this Agreement on behalf of the relevant Party.
21.10 Insurance
21.10.1 Supplier shall obtain and maintain in full force and effect, at its own cost and expense, during the term of the Agreement, and after
termination of the Agreement as may be specified below, the following minimum types and limits of insurance and any other insurance
required by Legal Requirements in any state where Supplier performs Credit Services under this Agreement. Such insurance shall be
maintained with reputable and solvent insurance companies having, where available, an A.M. Best’s insurance rating of A-VII or better or
a comparable financial rating from a reputable rating bureau, and lawfully authorized to do business where the Credit Services are to be
performed, and will comply with all those requirements as stated herein. In no way do these minimum insurance requirements limit the
liability assumed elsewhere in this Agreement, including but not limited to Supplier’s defense and indemnity obligations.
21.10.1.1 Workers’ compensation insurance with statutory limits, as required by any state, territory, province or nation having jurisdiction
over Supplier’s employees, and Employer’s Liability insurance with limits not less than [*]. Such coverage must include a
waiver of subrogation in favor of Company, its subsidiaries and Affiliates, and their respective officers, directors, shareholders,
employees, and agents (“ Company Parties ”) and their insurers, but only to the extent of liabilities falling within Supplier’s
indemnity obligations pursuant to the terms of this Agreement.
21.10.1.2 Commercial general liability insurance, including coverage for bodily injury, property damage, personal and advertising injury,
and contractual liability and including severability of interests provisions with limits of not less than [*] per occurrence and in
the annual aggregate, provided, however, that such insurance may be provided in any combination of primary and follow-form
excess insurance. Such insurance must include Company, its subsidiaries and affiliates, and their respective officers, directors,
shareholders, and Personnel (“ Company Parties ”) as additional insureds for liabilities based on the Credit Services of the
Supplier and its Personnel. Such coverage shall be primary to and non-contributory with any and all other insurance maintained
by Company Parties and include a waiver of subrogation against Company Parties and their
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
insurers.
21.10.1.3 Automobile liability insurance covering any owned, non-owned or hired vehicles used by Supplier in the performance of the
Credit Services, in compliance with all statutory requirements and with limits of not less than [*] for bodily injury and property
damage. Such insurance must include coverage for passenger liability. Such coverage must include a waiver of subrogation
against Company Parties and their insurers.
21.10.1.4 Banker’s professional liability insurance, covering negligent acts, errors and omissions in the provision of Credit Services, and
including extensions of coverage for internet security risks applying to all services provided under this Agreement, including
coverage for (a) theft, dissemination and/or use of Confidential Information stored or transmitted in electronic form and (b)
introduction of a computer virus into a Borrower’s or third Person’s computer, data, software or programs, all with a minimum
limits of [*] per claim and in the annual aggregate. The retroactive date applicable to such coverage shall precede the date
Supplier first began any Credit Services in connection with this Agreement. Supplier shall continue to maintain such insurance
for a period of not less than three (3) years following termination of this Agreement.
21.10.1.5 Banker’s blanket bond, including coverage for on and off premises loss, computer loss, and loss resulting from the fraudulent or
dishonest acts committed by Supplier’s Personnel, acting alone or in collusion with others. Limits of coverage must be at least
[*] per coverage grant described herein.
21.10.1.6 Cyber and network security liability insurance including privacy liability, the limits of which shall not be less than [*] per
occurrence and in the annual aggregate.
21.10.2
21.10.3
Supplier shall use best efforts to cause each of its third party Personnel, at no cost to Company, to maintain the same types and
limits of insurance, and to extend rights and benefits to the Company Parties under such insurance, as set forth in this Section
21.10 .
At the time this Agreement is executed, or within a reasonable time thereafter, and within a reasonable time after coverage is
renewed or replaced, Supplier will deliver to Company evidence that the foregoing coverages required from Supplier are in
place, at the notice address provided in Article 20 . Supplier shall similarly provide proof of the maintenance of insurance by its
third party Personnel to Company upon request. Company’s receipt or acceptance of evidence of coverage that does not comply
with these requirements, or Supplier’s failure to provide evidence of coverage, shall not constitute a waiver or modification of
the insurance requirements as set forth herein. In the event of cancellation of coverage, Supplier shall promptly replace coverage
so that no lapse in insurance occurs. All deductibles and self-insured retentions are to be paid by Supplier.
22
Indemnification
22.1 General Indemnity .
22.1.1 From and after the Program Commencement Date, Supplier shall indemnify, hold harmless and defend Company and its subsidiaries and
Affiliates, and their respective directors, officers, employees and agents, from and against all claims, liabilities, actions, demands,
settlements, damages, costs, fees and losses of any type, including reasonable attorneys’ and professionals’ fees and costs, in connection
with, in whole or in part: [*].
22.1.2 Company shall indemnify, hold harmless and defend Citizens and its subsidiaries and Affiliates, and their respective directors, officers,
employees and agents, from and against all claims, liabilities, actions, demands, settlements, damages, costs, fees and losses of any type,
including reasonable attorneys’ and professionals’ fees and costs, in connection with, in whole or in part: [*].
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Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
22.2
IP Infringement Indemnification .
22.2.1
22.2.2
Supplier shall indemnify, hold harmless and, upon Company’s request, defend Company and its subsidiaries and affiliates, and
their respective directors, officers, employees and agents from and against all third party claims, liabilities, actions, demands,
settlements, damages, costs, fees and losses of any type, including reasonable attorneys’ and professionals’ fees and costs,
arising from [*].
Company shall indemnify, hold harmless and, upon Citizens’ request, defend Citizens and its subsidiaries and affiliates, and
their respective directors, officers, employees and agents from and against all third party claims, liabilities, actions, demands,
settlements, damages, costs, fees and losses of any type, including reasonable attorneys’ and professionals’ fees and costs,
arising from [*].
23
Additional Obligations .
23.1
In case any claim is made, or any suit or action is commenced, against a Party (the “ Indemnified Party ”) in respect of which indemnification may
be sought by it under Article 22 and this Article 23 , the Indemnified Party shall promptly give the other Party (the “ Indemnifying Party ”) notice
thereof and the Indemnifying Party shall be entitled to participate in the defense thereof and, with prior written notice to the Indemnified Party
given not later than twenty (20) days after the delivery of the applicable notice from the Indemnified Party, to assume, at the Indemnifying Party’s
expense, the defense thereof, with counsel reasonably satisfactory to such Indemnified Party. After notice from the Indemnifying Party to such
Indemnified Party of its election so to assume the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this
Article 23 for any attorneys’ fees or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof, other
than reasonable costs of investigation and other than as set forth in Section 23.2 .
23.2 The Indemnified Party shall have the right to employ its own counsel if the Indemnifying Party elects to assume such defense, but the fees and
expenses of such counsel shall be at the Indemnified Party’s expense, unless (i) the employment of such counsel at the Indemnifying Party’s
expense has been authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party has not employed counsel to take charge of the
defense within twenty (20) days after delivery of the applicable notice or, having elected to assume such defense, thereafter ceases its defense of
such action, or (iii) the Indemnified Party has reasonably concluded that there may be defenses available to it which are different from or additional
to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on
behalf of the Indemnified Party), in any of which events the attorneys’ fees and expenses of counsel to the Indemnified Party shall be borne by the
Indemnifying Party.
23.3 The Indemnified Party or Indemnifying Party may at any time notify the other of its intention to settle or compromise any claim, suit or action
against the Indemnified Party in respect of which payments may be sought by the Indemnified Party hereunder, and (i) the Indemnifying Party may
settle or compromise any such claim, suit or action solely for the payment of money damages for which the Indemnified Party will be released and
fully indemnified hereunder, but shall not agree to any other settlement or compromise without the prior written consent of the Indemnified Party,
which consent shall not be unreasonably withheld (it being agreed that any failure of an Indemnified Party to consent to any settlement or
compromise involving relief other than monetary damages shall not be deemed to be unreasonably withheld), and (ii) the Indemnified Party may
not settle or compromise any such claim, suit or action without the prior written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld.
23.4 The Indemnifying Party shall promptly notify the Indemnified Party if the Indemnifying Party desires not to assume, or participate in the defense
of, any third party claim, suit or action.
23.5
If an Indemnified Party fails to give prompt notice of any claim being made or any suit or action being commenced in respect of which
indemnification under Article 22 and this Article 23 may be sought, such failure shall not limit the liability of the Indemnifying
29
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
Party to the extent the Indemnifying Party’s ability to defend the matter was not actually prejudiced by such failure to give prompt notice.
23.6 Notwithstanding anything to the contrary in this Agreement, no Party shall be liable to the other for consequential, punitive or exemplary damages
relating to or arising out of Article 22 and this Article 23 , unless the Indemnified Party shall have become liable to a third party for such
consequential, punitive or exemplary damages, in which case the Indemnifying Party shall be liable, subject to and in accordance with the terms of
Article 22 and this Article 23 for reimbursement of the amounts so paid to such third party.
24
Sales Taxes. Citizens shall notify Company of any amounts charged-off on Loans by Citizens, identified by Loan, and shall sign such forms and provide
any such other information as reasonably requested by Company to enable Company to recover any sales tax paid in connection with any Loan that has
been charged off by Citizen.
25
Company Employee Procedures Guide.
25.1 Company shall comply with the processes, procedures, practices, scripts, content, and other written instructions set forth in the “Company
Employee Procedures Guide” attached hereto as Exhibit 3 (the “ Procedures Guide ”).
[*].
25.2
25.3 With respect to activities of Company that require or permit Company to interact with a potential or existing Borrower where the interaction relates
to the Credit Services, Citizens is solely responsible for (A) determining whether the Procedures Guide addresses such activities and satisfies Legal
Requirements, the terms and conditions of Citizens’ Program Loans and amending the Procedures Guide to cure any non-compliance in accordance
with Section 25.5, and (C) obtaining all consents or authorizations from its Borrowers sufficient to legally permit the contact or interaction.
25.4 Company will use commercially reasonable efforts to notify Supplier of any suspected or known breach of the Procedures Guide.
25.5 Supplier agrees that if Supplier desires to make any changes to the Procedures Guide during the Term, Supplier shall provide Company with written
notice of any such proposed changes. As soon as is commercially practicable after receipt of such notice from Supplier, Company shall notify
Supplier in writing if Company has any potential operational feasibility issues related to such Supplier’s proposed changes. In the event Company
provides the notice described above, as soon as is commercially practicable thereafter, the Parties shall mutually agree in writing on any changes to
the Procedures Guide to address the issues raised in the notice from Company prior to the changes to the Procedures Guide being implemented.
26
Publicity. All media releases, public announcements and public disclosures by any Party, their respective affiliates, or their employees or agents, relating
to this Agreement, the Program or the transactions contemplated hereby, but not including any announcement intended solely for internal distribution by
the releasing party or any disclosure required by a Legal Requirement, shall be coordinated with and approved by the other Party in writing prior to the
release thereof.
30
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
[signature page follows]
31
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
IN WITNESS WHEREOF , the Parties hereto have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the
date first written above.
COMPANY :
APX Group, Inc., a Delaware corporation
By: /s/ Dale R. Gerard
Dale R. Gerard
Senior Vice President of Finance and Treasurer
SUPPLIER :
CITIZENS BANK, N.A., a national banking association
By: /s/ Mary K. Fiorille
Name: Mary K. Fiorille
Title: Head of Unsecured Loan Division
[Signature Page to Second Amended and Restated Consumer Financing Agreement]
32
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
LIST OF EXHIBITS
Exhibit 1Fraud Detection Information
Exhibit 2Services Level Agreement
Exhibit 3Company Employee Procedures Guide
Exhibit 4Supplier Credit Policy and Program B Loans Credit Policy
Exhibit 5[*]
Exhibit 6Schedule of Interchange Expenses
33
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
Data Point
Transaction
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Credit Card/Debit Card Data
[*]
[*]
[*]
[*]
[*]
[*]
Customer Data
[*]
[*]
[*]
[*]
[*]
[*]
[*]
EXHIBIT 1
FRAUD DETECTION INFORMATION
Example
Available
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
34
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Shipping
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Order Item Data
[*]
[*]
[*]
[*]
Installment Auth Response
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
35
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
EXHIBIT 2
SERVICES LEVEL AGREEMENT
TABLE OF CONTENTS
1. TECHNOLOGY AND SERVICE STANDARDS 1
2. SYSTEMS AVAILABILITY 1
3. SECURITY PROCEDURES 1
4. UNDERWRITING AND CREDIT SLA; PROBLEM RESOLUTION; TERMINATION; FORECASTING 1
5. ACCOUNT MANAGER AND OTHER SUPPORT BY CITIZENS 1
6. QUARTERLY BUSINESS REVIEWS 1
7. SETTLEMENT AND PAYMENTS 1
8. TRAINING 1
9. CONSUMER EXPERIENCE AND SATISFACTION 1
10. ONLINE SERVICE CENTER 1
11. REPORTING 1
36
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
1. TECHNOLOGY AND SERVICE STANDARDS
The following Technology and Service Standards shall be adhered to by the Parties.
1.1 Systems Connectivity
Parties shall clearly define all production and test systems connections between the Parties required to facilitate Credit Application submissions, Credit
Applications status confirmations, order authorization, settlement and payment. This shall include defining the communication format and the timing of
responses. Upon reasonable notice from one Party requesting reasonable detail regarding any of the foregoing, the other Party shall provide such information.
2. [*]
[*].
3. SECURITY PROCEDURES
Company agrees that Citizens’ Personnel shall be responsible for determining and maintaining all levels of security relating to Citizens’ hardware or Supplier
Systems. Citizens agrees that Company Personnel shall be responsible for determining and maintaining all levels of security relating to Company’s hardware or
Company Systems.
4. UNDERWRITING AND CREDIT SLA; PROBLEM RESOLUTION; TERMINATION; FORECASTING
4.1 [*]
[*].
4.2 Problem Resolution (Service Levels)
Citizens shall comply with the following service schedule for problem resolution where the cause of the problem is, partly or completely, related to Citizens’
Supplier System or outsourced systems. The account managers shall be in direct communication to resolve issues. The severity of each problem shall be agreed
between Company and Citizens based upon the criteria set forth in Figure 1 below. Monthly reports shall be provided to track all Priority 1-Priority 3 issues set
forth in Figure 1 below.
FIGURE 1: Problem Classification Table
Classification Criteria Resolution Reporting Frequency
[*] [*] [*] [*]
[*] [*] [*] [*]
[*] [*] [*] [*]
4.3 Monitoring and Other Metrics
Citizens shall provide Company with performance reports on a quarterly basis relating to the Service Levels set forth in Section 4.1 and 4.2 above. In addition,
Citizens shall provide metrics on general call center servicing levels, including the following: (i) average handle time, (ii) first call resolution (to be available for
providing at a later date agreed upon by the parties), (iii) abandonment rates, (iv) contacts per loan (to be available for providing at a later date agreed upon by the
parties) and (v) response to emails. Citizens and Company shall reasonably agree on the definition for such metrics.
Metrics shall be delivered on the day following the day measured and shall be provided (i) daily for the first forty-five (45) days following the Program
Commencement Date, (ii) weekly during the period between 45-90 days following the Program Commencement Date and (iii) monthly thereafter. Citizens and
Company may reasonably agree to adjust the frequency as
37
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
necessary.
4.4 Escalations
All problems with a severity level of Priority 1 to Priority 3 shall be escalated to the Account Managers if a solution or plan of resolution cannot be achieved
within the designated amount of time as described above.
Escalations shall follow escalation procedures as mutually agreed upon by the Parties. The priority of escalations shall be classified per the above table. Phone
contact shall be utilized as primary form of communication between the Account Managers for all Priority 1 issues, with email correspondence as a secondary
form.
4.5
Incident Analysis
Upon the occurrence of any problem with a severity level of Priority 1 to Priority 2, Citizens shall promptly perform a Root Cause Analysis of the problem and
provide the results of such analysis to Company’s Account Manager within a commercially reasonable period of time following the identification and
communication of the problem. For purposes of this Services Level Agreement, a “ Root Cause Analysis ” shall mean an analysis of any Service Level failure
and shall include, at a minimum:
i.
ii.
iii.
iv.
v.
Description of what happened;
Explanation of how the event differed from what was supposed to happen;
Determination of root cause(s) that contributed to the event through an analysis of the sequence of events leading up to the occurrence;
Implications to Consumers, Program or Company; and
Steps being taken to prevent a recurrence.
4.6 [*]
[*].
4.7 Forecasting
Company shall provide Citizens a “Minimum TPS Target.” For purposes of this Services Level Agreement, a “ Minimum TPS Target ” shall mean the
minimum transactions per second Citizens must complete at all times during the Agreement to meet Company’s the load expectations described in Section 2.4
above, which Minimum TPS Target must be agreed upon in writing by the Parties cooperating in good faith. If the actual velocity of Citizens’ transaction
completion rate exceeds the Minimum TPS Target, then Citizens shall not be required to meet the Service Levels set forth in Section 2.1 and 4.1 , unless
Company has provided Citizens with at least ninety (90) days’ notice of the expected increase in velocity and Citizens has agreed to such increase, acting in good
faith.
Company shall provide Citizens with a report on the first Business Day of each calendar quarter forecasting the expected transactions per second (including
average and peak transactions per second for the calendar quarter) and order volume. If actual volumes exceed such reported forecasts, then Citizens shall not be
required to meet the Service Levels set forth in Section 2.1 and 4.1 , unless Company has provided Citizens with a revised rolling ninety (90) days forecast and
Citizens has agreed to such increase, acting in good faith.
The Minimum TPS Target and the peak forecasted volumes shall be reviewed on a quarterly basis, and updated as provided above, if required.
5. ACCOUNT MANAGER AND OTHER SUPPORT BY CITIZENS
The following outlines the account manager support that Citizens shall provide to Company during the term of the Agreement. The Relationship Manager,
Account Manager and IS&T Account Manager duties may be fulfilled by one or multiple individuals, depending on the workload and as agreed to by the Parties.
5.1 Relationship Manager
Citizens shall appoint a Relationship Manager to Company for the duration of the Agreement. The Relationship Manager
38
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
shall support the Company consumer finance Program at a management level and shall be responsible for the following:
i.
ii.
iii.
iv.
v.
Major strategy decisions on the portfolio;
Executive issue escalations (as documented in Section 4.5 above);
Delivery of the Quarterly Business Review;
Action plan to deliver against dashboard performance metrics or other set goals; and
Development of quarterly and yearly goals/priorities associated with the Program.
5.2 Account Manager
Citizens shall appoint a dedicated Account Manager to Company for the duration of the Agreement. Such Account Manager will support Company consumer
finance at an operational level and will be responsible for the following:
i.
ii.
iii.
iv.
v.
vi.
Day-to-day administration of the Program;
Preparation of Quarterly Business Review materials as directed by Company;
Reporting and administrative support;
Training;
Customer escalations from in-home sales and call center, including monitoring and developing action plans associated with metrics; and
General systems escalations resolution.
5.3
IS&T Account Manager
Citizens shall appoint a dedicated full-time employee to act as a primary point of contact with Company in connection with information systems and technology
issues and who will manage any and all such issues in connection with the Program (the “ IS&T Account Manager ”), including the following:
i.
ii.
iii.
iv.
Coordination of technical escalations among several parties servicing Citizens calls;
Direct contact for Company information systems and technology team;
Coordinating maintenance and schedule down times with Company; and
Coordinating required technical enhancements and timelines.
5.4 Account Manager Response Time
The Account Manager and IS&T Account Manager shall ensure that requests, issues and concerns raised by Company to Citizens are responded to no longer than
by the next Business Day (or as otherwise specifically agreed to in this Services Level Agreement).
Citizens agrees to notify Company immediately, if there is a change in the IS&T Account Manager.
5.5 Other Management Support
Citizens shall also provide a dedicated person focused on each of the below:
i.
ii.
Marketing and Merchandising: Focused on marketing the program via email or online. They will also develop promotions and offers;
Consumer Experience: Focused on ensuring best in class customer experience. Conducts surveys and research on how best to improve;
and
Credit Manager: Focused on developing credit strategy to best meet the needs of the customer base. Continuously monitors and provides
suggestions to best increase approval rates.
6. QUARTERLY BUSINESS REVIEWS
Citizens and Company agree to prepare a written report each calendar quarter outlining a plan for the future development of the Program (a “ Quarterly Business
Review ”). Quarterly Business Reviews should focus on the following:
i.
ii.
iii.
Review key program metrics (i.e. volume, applications, approvals, declines, cancelations, fraud cancelations, etc.);
Review marketing and merchandising plan;
Consumer experience review: Review survey results, improvements to Consumer experience, as well as Consumer escalations and
feedback;
39
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
Consumer communication and marketing;
Competitive analysis: Market analysis including trends;
Consumer credit review and demographics;
Legal Requirements and legislations changes which may impact the Program;
Project reviews: Results of previous launched projects and upcoming plans;
Reporting improvements;
Lender dashboard;
Organization chart review: Review support structure;
Areas for improvement with action plans and metrics for the above;
Yearly priorities review; and
Jointly review fraud rate and procedures to be revisited if needed.
7. SETTLEMENT AND PAYMENTS
Settlement reporting shall be provided by Company to Citizens daily. Settlement reporting shall include sales, returns, and refunds. Incidences of fraud and any
fees will not be a part of settlement reporting, with such metrics to be included in the Quarterly Business Reviews.
Citizens shall remit payment to Company daily via ACH CTX. Reporting will be provided to Company for each debit and credit in addition to a remittance
advice notice.
Citizens shall initiate ACH CTX transaction for payment to Company within one (1) Business Day from date of settlement report.
8. TRAINING
8.1
Company Training by Citizens
Citizens shall provide resources (including training materials) to train Company Personnel across all Company Channels in Citizen’s Credit Application process.
8.2
Citizens Training by Company
Company shall provide resources (including training materials) to train Citizens employees to ensure they are trained on the following:
i.
ii.
iii.
iv.
Company in-home sales and call center Consumer experience;
Current promotions or offers made available by Company to its Consumers;
Current Company Products; and
How to address Company escalations.
All training resources developed by each of the Parties shall be reviewed annually by the Parties and modified based upon prior mutual written agreement of the
Parties.
9. CONSUMER EXPERIENCE AND SATISFACTION
9.1
Surveys
Citizens shall undertake Consumer satisfaction surveys on a quarterly basis with the prior written consent of Company. The survey will be designed by Citizens
in consultation with Company and is subject to agreement by both Parties. Survey results (including raw data) will be provided by Citizens to Company once
collated.
9.2
Complaints Monitoring
All complaints shall be tracked and shared monthly by Citizens with Company, including complaints obtained by Citizens through executive escalations,
escalations arising from contact via Citizens or Company, as well as customer surveys. Company and Citizens shall agree to goals associated with resolving
complaints.
40
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
9.3
Complaint Remedies
Citizens shall investigate complaints to determine trends and provide recommendations to rectify identified issues to Company’s satisfaction.
9.4
Escalated Complaint Notification
Company must be immediately notified of any and all Company Marks brand implications arising from any customer complaint. This notification is to be
emailed by the Account Manager who is to manage the customer complaint until resolved.
10. ONLINE SERVICE CENTER
Citizens shall make available its Online Service Center to enable customers to manage their account securely online at all times.
Capability offered through the Online Service Center shall include:
i.
ii.
Monthly statements - Showing transaction history; and
Payment notifications - Indicating when payments are due/overdue.
11. REPORTING
Citizens shall provide to Company the monthly reports with the data points set forth below and any additional data points as the parties mutually agree. All
reporting shall be provided for each of Program A Loan and Program B Loan categories by each Company Channel.
[*].
41
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
When discussing any potential Loan with Consumers, Company employees may not do any of the following :
EXHIBIT 3
COMPANY EMPLOYEE PROCEDURES GUIDE
[*].
Fraud Prevention Procedures :
[*].
42
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
EXHIBIT 4
SUPPLIER CREDIT POLICY AND PROGRAM B LOANS CREDIT POLICY
SEE ATTACHED
Program A
[*]
[*]
Program B
[*]
[*]
Citizens Cannot Underwrite
[*]
[*]
and meet all requirements
and meet all requirements
or meet any of the details
Credit Underwriting Criteria
[*]
[*]
[*]
[*]
[*]
below
[*]
[*]
[*]
below
[*]
[*]
[*]
Maximum Loan *
up to $4,000
up to $4,000
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
*
below
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Loan range of [*] - $4,000 is at a program level regardless of the loan being Program A or Program B. A consumer may finance any amount within
that range.
43
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
[*]
EXHIBIT 5
[*]
44
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
Any capitalized terms used but not defined in this Exhibit 6 shall have the respective meanings set forth in the Merchant Services Agreement.
EXHIBIT 6
Interchange Expenses Schedule
1.
CARD TRANSACTION FEES (per transaction) :
a.
b.
c.
d.
The fee of $[*] per [*] Authorization transaction
The fee of $[*] per [*] settlement transaction
The fees charged by the Card Organizations, including [*].
Each [*] transaction submitted by CUSTOMER will be subject to a [*]. The fees set forth in this Section 1 (Card Transaction Fees) may be
adjusted without notice to reflect increases or decreases in applicable sales or telecommunication taxes as levied by federal, state or local
authorities.
2.
ADDITIONAL SERVICES FEES (per item):
[*] 1 [*]
[*] 2 [*]
[*] 3 [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
_____________
1 [*]
2 [*]
3 [*]
45
Confidential treatment has been requested with respect to information contained within the [*] marking. Such portions have been omitted from this filing and
have been separately filed with the Securities and Exchange Commission.
Exhibit 7
Form of Monthly Invoices
INVOICE #1 - Transaction Fee:
[*]
INVOICE #2 - Interchange Fees: [*]
INVOICE #3 - Credit Losses:
[*]
46
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Exhibit 12.1
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
2017
2016
2015
2014
2013
Year Ended December 31,
(in thousands)
$
225,772 $
197,965 $
161,339 $
147,511 $
114,476
—
5,614
—
5,318
—
5,047
—
3,624
—
2,028
231,386
203,283
166,386
151,135
116,504
(409,121)
(275,957)
(278,756)
(238,146)
(120,921)
Distributed equity income of affiliated companies
—
—
—
—
Add: Fixed Charges
231,386
203,283
166,386
151,135
Total earnings available for fixed charges
$
(177,735) $
(72,674) $
(112,370) $
(87,011) $
—
116,504
(4,417)
Earnings for the period were insufficient to cover fixed charges by
the following amounts:
(409,121)
(275,957)
(278,756)
(238,146)
(120,921)
Ratio of earnings to fixed charges (2)
NM
NM
NM
NM
NM
(1) Represents the portion of rental expense deemed to be attributable to interest
(2) NM - Not meaningful
Subsidiaries of APX Group Holdings, Inc.
Jurisdiction of Incorporation / Organization
Exhibit 21.1
Utah
Utah
Utah
Utah
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Louisiana
Australia
Canada
New Zealand
Ontario
Ontario
Puerto Rico
Name
313 Aviation, LLC
Smart Home Pros, Inc.
Vivint, Inc.
Vivint Purchasing, LLC
AP AL LLC
APX Group, Inc.
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 Limited
Vivint Canada Servicing, LP
Vivint Funding Canada LP
Vivint Puerto Rico, LLC
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, 2017 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 6, 2018
/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, 2017 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 6, 2018
/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, 2017 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 6, 2018
/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, 2017 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 6, 2018
/s/ Mark Davies
Mark Davies
Chief Financial Officer
(Principal Financial Officer)