NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Nature of Business —ADT Inc. (“ADT Inc.”), a company incorporated in the state of Delaware, and its wholly owned subsidiaries (collectively, the “Company”), are principally engaged in the sale, installation, servicing, and monitoring of electronic home and business security and automation systems in the United States (or “U.S.”) and Canada. Prior to September 2017, ADT Inc. was named Prime Security Services Parent Inc. ADT Inc. is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is owned by Apollo Investment Fund VIII, L.P. and related funds that are directly or indirectly managed by Apollo Global Management, LLC, its subsidiaries and its affiliates (“Apollo” or the “Sponsor”), and management investors.

Basis of Presentation —The condensed consolidated financial statements include the accounts of ADT Inc. and its wholly owned subsidiaries, and have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported in these condensed consolidated financial statements should not be taken as indicative of results that may be expected for future interim periods or the full year. For a more comprehensive understanding of the Company and its condensed consolidated financial statements, these interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2017 , which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 15, 2018.

The Condensed Consolidated Balance Sheet as of December 31, 2017 included herein was derived from the audited consolidated financial statements as of that date, but does not include all the footnote disclosures from the annual financial statements. The Company conducts business through its operating entities and reports financial and operating information in one segment.

All intercompany transactions have been eliminated. The results of companies acquired are included in the condensed consolidated financial statements from the effective dates of the acquisitions.

Reclassifications— Certain prior period amounts have been reclassified to conform with the current period presentation.

Use of Estimates —The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Significant estimates and judgments inherent in the preparation of the condensed consolidated financial statements include, but are not limited to, estimates of future cash flows and valuation related assumptions associated with asset impairment testing, useful lives and methods for depreciation and amortization, loss contingencies, income taxes and tax valuation allowances, and purchase price allocations. Actual results could differ materially from these estimates.

Stock Split —On January 4, 2018 , the board of directors of the Company declared a 1.681 -for-1 stock split (the “Stock Split”) of the Company’s common stock issued and outstanding as of January 4, 2018 . The number of shares subject to, and the exercise price of, the Company’s outstanding options were adjusted to reflect the Stock Split. Unless otherwise noted, all share and per-share data included in these condensed consolidated financial statements have been adjusted to give effect to the Stock Split.

Initial Public Offering —In January 2018, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 105,000,000 shares of common stock at an initial public offering price of $14.00 per share. The Company’s common stock began trading on the New York Stock Exchange under the symbol “ADT.”

The Company received net proceeds of $1,415 million , after deducting underwriting discounts and commissions from the sale of its shares in the IPO. In addition, the Company incurred $10 million of offering expenses in connection with the IPO, of which $5 million had not been paid as of March 31, 2018 . In connection with the IPO, the Company deposited $750 million of the net proceeds into a segregated account (“Segregated Account”) for the purpose of redeeming the 750,000 shares of Series A $0.01 par value preferred securities (“Koch Preferred Securities”) at a future date. Funds held in the Segregated Account are reported as noncurrent restricted cash and cash equivalents in the Company’s Condensed Consolidated Balance Sheet as of March 31, 2018 . Refer to Note 13 “ Subsequent Events ” for further discussion.

On February 21, 2018, the Company used approximately $649 million of the net proceeds from the IPO to voluntarily redeem $594 million aggregate principal amount of 9.250% Second-Priority Senior Secured Notes due 2023 (“Prime Notes”) and pay the related call premium. The aggregate principal amount of Prime Notes outstanding after the repayment was $2,546 million . Refer to Note 5 “ Debt ” for further discussion.

Merger, Restructuring, Integration, and Other Costs —Included in merger, restructuring, integration, and other costs in the Condensed Consolidated Statements of Operations are certain direct and incremental costs resulting from acquisitions made by the Company, certain related integration efforts as a result of those acquisitions, costs related to the Company’s restructuring efforts, as well as impairment charges related to the Company’s strategic investments.

Other (Expense) Income —Included in other (expense) income for the three months ended March 31, 2017, are foreign currency losses/(gains) related to the translation of monetary assets and liabilities that are denominated in Canadian dollars, primarily due to intercompany loans. In the first quarter of 2018, the Company designated certain of these loans to be of a long-term-investment nature, and are reflecting foreign currency losses/gains on these loans in accumulated other comprehensive loss in the condensed consolidated balance sheet.

Income Taxes —In providing guidance on accounting for the impacts of tax on ‘global intangible low taxed income’ (“GILTI”), the Financial Accounting Standards Board (“FASB”) concluded that an accounting policy should be elected to either treat GILTI inclusions as a period cost in each year incurred, or to recognize deferred taxes for basis differences that are expected to reverse as GILTI in the future. The Company’s accounting policy election is to treat the impact of GILTI as a period cost in each year incurred.

Subscriber System Assets, Net —Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system. The following table sets forth the gross carrying amount and accumulated depreciation of the Company’s subscriber system assets as of March 31, 2018 and December 31, 2017 .

Depreciation expense relating to subscriber system assets was $136 million and $133 million for the three months ended March 31, 2018 and 2017 , respectively, and is included in depreciation and intangible asset amortization in the Condensed Consolidated Statements of Operations.

Accrued Expenses and Other Current Liabilities —Accrued expenses and other current liabilities as of March 31, 2018 and December 31, 2017 consisted of the following:

Financial Instruments —The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, debt, preferred securities, and derivative financial instruments. Due to their short-term and/or liquid nature, the fair values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable approximated their respective carrying values as of March 31, 2018 and December 31, 2017 .

Cash Equivalents —Included in cash and cash equivalents are investments in money market mutual funds, which were $145 million and $51 million as of March 31, 2018 and December 31, 2017 , respectively. These investments are classified as Level 1 for purposes of fair value measurement.

Restricted Cash and Cash Equivalents —Restricted cash and cash equivalents are restricted for a specific purpose and cannot be included in the general cash account. The Company’s current portion of restricted cash and cash equivalents is held by a third-party trustee and primarily relates to amounts placed in escrow to cover potential adjustments to the purchase price associated with certain acquisitions. The Company’s noncurrent portion of restricted cash and cash equivalents represents funds held in the Segregated Account for the purpose of redeeming the Koch Preferred Securities at a future date, as described above. Restricted cash and cash equivalents consist of highly liquid investments with remaining maturities when purchased of three months or less. The fair value of restricted cash and cash equivalents is determined using quoted prices available in active markets for identical investments, which is a Level 1 input.

Long-Term Debt Instruments and Preferred Securities —The fair values of the Company’s debt instruments were determined using broker-quoted market prices, which are considered Level 2 inputs. The carrying amount of debt outstanding, if any, under the Company’s revolving credit facilities approximates fair value as interest rates on these borrowings approximate current market rates, and are considered Level 2 inputs. The fair value of the Koch Preferred Securities was estimated using a discounted cash-flow approach in conjunction with a binomial lattice interest rate model to incorporate the contractual dividends and the Company’s ability to redeem the Koch Preferred Securities. Key input assumptions to the valuation analysis are the credit spread, yield volatility, and expected time to redemption, which are considered Level 3 inputs. The credit spread was estimated using the credit spread at issuance of the Koch Preferred Securities and adjusted for the change in observed publicly traded debt of the Company between the issuance date and the measurement date. The yield volatility estimate was based on the historical yield volatility observed from comparable public high yield debt, and the expected time to redemption was based on the Company’s expectations.

The carrying values and fair values of the Company’s debt and Koch Preferred Securities that are subject to fair value disclosures as of March 31, 2018 and December 31, 2017 were as follows:

Derivative Financial Instruments —All derivative financial instruments are reported on the Condensed Consolidated Balance Sheets at fair value. The Company has not designated any of its derivative financial instruments as hedges, and therefore, all changes in fair value are recognized in the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2018 and 2017, the changes in fair value were not material to the condensed consolidated financial statements.

Guarantees —In the normal course of business, the Company is liable for contract completion and product performance. The Company does not believe such obligations will significantly affect its financial position, results of operations, or cash flows. As of  March 31, 2018 and December 31, 2017 , the Company had no material guarantees other than $55 million and $54 million , respectively, primarily in standby letters of credit related to its insurance programs.

Hurricanes —In the second half of 2017, there were three hurricanes impacting certain areas in which the Company operates that resulted in power outages and service disruptions to certain customers of the Company. The financial impact from these hurricanes to the three months ended March 31, 2018 was not material. The Company will continue to evaluate any potential financial and business impacts these hurricanes may have on future periods.

Settlements —In January 2018, the Company received $10 million in connection with a litigation settlement which is reflected as a benefit to selling, general and administrative expenses in the Condensed Consolidated Statement of Operations.

In February 2018, the Company entered into a settlement agreement, the terms of which entitled the Company to receive $7.5 million of non-cash compensation which was received in the first quarter of 2018 and reflected as a benefit to selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. Additionally, the Company is entitled to receive $24 million in licensing fees over a forty-eight -month period. As of March 31, 2018, collection of amounts due under the license arrangement was not deemed probable. In April 2018, the counterparty to the license agreement was acquired by a third-party. As a result of this acquisition, the Company will determine the effect on its probability assessment and the corresponding impact to the second quarter of 2018 consolidated financial results.

Recently Adopted Accounting Pronouncements —In May 2014, the FASB issued authoritative guidance, which sets forth a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted this new authoritative guidance and its related amendments effective on January 1, 2018 using the modified retrospective transition method, whereby the cumulative effect of initially applying the new standard is recognized as an adjustment to the opening balance of stockholders’ equity. Results for reporting periods beginning on or after January 1, 2018 are presented under this new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

The largest impact from the new standard relates to the timing of recognition of certain incremental selling costs associated with acquiring new customers. Under the new standard, these costs will primarily be amortized using an accelerated method over the expected life of the customer relationship, which is 15 years, rather than the initial contract term (generally 3 - 5 years). To a lesser extent, the adoption of the new standard impacted the identification of performance obligations and the allocation of transaction price to those performance obligations for certain sales of security systems sold outright to customers.

As of January 1, 2018, due to the cumulative impact of adopting this new standard, the Company recorded a net increase to opening balance of stockholders’ equity of $34 million , which is net of tax of $12 million . The impact to the lines items in the Condensed Consolidated Balance Sheet were as follows:

Refer to Note 2 “ Revenue ” for further discussion related to the impact of adopting this standard.

In January 2016, the FASB issued authoritative guidance related to the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, this update clarifies the guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from the unrealized losses on available-for-sale debt securities. The Company adopted this new authoritative guidance effective on January 1, 2018. There was no material impact to the condensed consolidated financial statements as a result of the adoption.

In May 2017, the FASB issued authoritative guidance that addresses changes to the terms or conditions of a share-based payment award, specifically regarding which changes to the terms or conditions of a share-based payment award would require modification accounting. This guidance does not change the accounting for modifications, but clarifies that an entity should apply modification accounting except when the fair value, vesting conditions, and classification of the modified award are the same as the original award immediately before the original award is modified. The Company adopted this new authoritative guidance effective on January 1, 2018, and applied the guidance prospectively for the shared-based payment award modifications subsequent to the date of adoption. Refer to Note 9 “ Share-based Compensation ” for further discussion.

In November 2016, the FASB issued authoritative guidance amending the presentation of restricted cash within the statement of cash flows. The new guidance requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance in the first quarter of 2018 using the retrospective transition approach for all periods presented in the Condensed Consolidated Statement of Cash Flows. The following table provides a reconciliation of the amount of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows:

Recently Issued Accounting Pronouncements —In February 2016, the FASB issued authoritative guidance on accounting for leases. This new guidance requires lessees to recognize a right-to-use asset and a lease liability for substantially all leases and to disclose key information about leasing arrangements. The recognition, measurement, and presentation of expenses and cash flows for lessees will remain significantly unchanged from current guidance. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This guidance will be effective for the Company in the first quarter of 2019. Early adoption is permitted. The guidance is to be adopted using a modified retrospective approach as of the earliest period presented. The Company is currently evaluating the impact of this guidance.

In January 2017, the FASB issued authoritative guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This guidance will be effective for the Company for annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests.

2. Revenue

The Company generates revenue primarily through contractual monthly recurring fees received for monitoring and related services provided to customers. In arrangements where the Company provides monitoring and related services but maintains ownership of the security systems, the Company’s performance obligations primarily include monitoring and related services (such as maintenance agreements) and a material right associated with the non-refundable fees (referred to as deferred subscriber acquisition revenue) received in connection with the initiation of a monitoring contract which the customer will not need to pay upon a renewal of the contract. The portion of the transaction price associated with monitoring and related service revenue is reflected in monitoring and related services revenue in the consolidated statement of operations when the services are provided to the customer.

Deferred subscriber acquisition revenue is deferred and recorded as deferred subscriber acquisition revenue on the consolidated balance sheet. Deferred subscriber acquisition revenue is amortized over the estimated life of the customer relationship using an accelerated method into installation and other revenue in the condensed consolidated statement of operations. Amortization of deferred subscriber acquisition revenue was $17 million for the three months ended March 31, 2018 .

In transactions in which the security system is sold outright to the customer, the Company’s performance obligations include monitoring and related services as well as the sale and installation of the security systems. For such arrangements, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. Revenue associated with the sale and installation of security systems is recognized once installation is complete, and is reflected in installation and other revenue in the condensed consolidated statement of operations Revenue associated with monitoring and related services is recognized as those services are provided and reflected in monitoring and related services revenue in the condensed consolidated statement of operations.

Early termination of the contract by the customer results in a termination charge in accordance with the contract terms. Contract termination charges are recognized in revenue when collectability is probable, and are reflected in monitoring and related services revenue in the condensed consolidated statement of operations. Amounts collected from customers for sales and other taxes are reported net of the related amounts remitted.

The Company incurs certain incremental contract costs (referred to as deferred subscriber acquisition costs, net) including selling expenses (primarily commissions) related to acquiring customers. Deferred subscriber acquisition costs, net are presented on the consolidated balance sheet. Commissions paid in connection with acquiring new customers are determined based on the value of the contractual fees. Amortization expense relating to deferred subscriber acquisition costs was $16 million for the three months ended March 31, 2018 . Contract assets associated with outright sales are immaterial.

Customer billings for services not yet rendered are deferred and recognized as revenue as services are provided. These fees are recorded as current deferred revenue on the condensed consolidated balance sheet as the Company expects to satisfy any remaining performance obligations as well as recognize the related revenue within the next twelve months. Accordingly, the Company has applied the practical expedient regarding deferred revenue to exclude the value of remaining performance obligations if (i) the contract has an original expected term of one year or less or (ii) the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.

The impact from the adoption of the new revenue standard on the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2018 was as follows:

Disaggregated Revenue

The following table sets forth the Company’s revenues disaggregated by source:

3. Acquisitions

From time to time, the Company may pursue acquisitions of companies that either strategically fit with the Company’s existing core business or expand the Company’s security and monitoring solutions in new and attractive adjacent markets. The Company acquired two businesses during the three months ended March 31, 2018 , and paid $36 million , net of cash acquired. In

addition, the Company recorded preliminary amounts of approximately $12 million of goodwill and approximately $13 million of customer relationships in the Condensed Consolidated Balance Sheet as of March 31, 2018 related to these acquisitions.

Dealer Generated Customer Accounts and Bulk Account Purchases

The Company paid $160 million and $144 million for customer contracts for electronic security services generated under the ADT Authorized Dealer Program and bulk account purchases during the three months ended March 31, 2018 and 2017 , respectively. These contracts are reflected in the Condensed Consolidated Balance Sheet as definite-lived intangible assets, and are recorded at their contractually determined purchase price.

4. Goodwill and Other Intangible Assets

Goodwill

There were no material changes in the carrying amount of goodwill during the three months ended March 31, 2018 .

Other Intangible Assets

The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s other intangible assets as of March 31, 2018 and December 31, 2017 :

For the three months ended March 31, 2018 , the changes in the net carrying amount of customer contracts acquired and customer relationships were as follows:

The weighted-average amortization period for customer contract additions primarily purchased through the ADT Authorized Dealer Network during the three months ended March 31, 2018  was  15 years . Amortization expense for definite-lived intangible assets for the periods presented was as follows:

The estimated aggregate amortization expense for definite-lived intangible assets is expected to be as follows:

5. Debt

First Lien Credit Agreement Amendment

On March 16, 2018 , the Company entered into an Incremental Assumption and Amendment Agreement No.6 (the “2018 First Lien Credit Agreement Amendment”), which further amended and restated the First Lien Credit Agreement (the First Lien Credit Agreement, as amended, restated, supplemented or otherwise waived prior to the effective date of the 2018 First Lien Credit Agreement Amendment (the “Existing Credit Agreement”) and, as amended by the 2018 First Lien Credit Agreement Amendment (the “Amended and Restated Credit Agreement”)).

Prior to the effectiveness of the 2018 First Lien Credit Agreement Amendment, the Existing Credit Agreement included a revolving credit facility of $255 million maturing on May 2, 2021, and a revolving credit facility of $95 million maturing on July 1, 2020. In connection with the 2018 First Lien Credit Agreement Amendment, the existing revolving credit facilities were replaced with a first lien revolving credit facility with an aggregate commitment of up to $350 million maturing on March 16, 2023 , subject to the repayment, extension, or refinancing with longer maturity debt of certain of the Company’s other indebtedness (the “2023 Revolving Credit Facility”). Borrowings under the 2023 Revolving Credit Facility will bear interest at a rate equal to, at the Company’s option, either (a) a London Interbank Offered Rate (“LIBOR”) rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the prime rate of Barclays Bank PLC, and (iii) one-month adjusted LIBOR plus 1.00% per annum, in each case, plus the applicable margin of 2.75% for LIBOR loans and 1.75% for base rate loans. The applicable margin for borrowings under the 2023 Revolving Credit Facility is subject to one step-down based on a certain specified net first lien leverage ratio.

In addition, the Amended and Restated Credit Agreement requires the Company to pay a commitment fee between 0.375% and 0.50% (determined based on a net first lien leverage ratio) in respect of the unused commitments under the 2023 Revolving Credit Facility.

The term loan facilities under the Amended and Restated Credit Agreement continue to have the same terms as provided under the Existing Credit Agreement. Additionally, the parties to the Amended and Restated Credit Agreement continue to have the same obligations set forth in the Existing Credit Agreement.

In connection with the Amended and Restated Credit Agreement, the Company recorded an immaterial loss on extinguishment of debt for the three months ended March 31, 2018 associated with the write off of a portion of the unamortized debt issuance costs relating to the Existing Credit Agreement.

As of March 31, 2018 , the Company had $350 million in available borrowing capacity under its 2023 Revolving Credit Facility.

Prime Notes

On February 21, 2018 , the Company redeemed $594 million aggregate principal amount of the Prime Notes using a portion of the net proceeds received from the IPO, and incurred a loss on extinguishment of debt of $62 million related to the payment of the call premium and the write-off of a portion of the unamortized debt issuance costs.

See Note 1 “ Basis of Presentation and Summary of Significant Accounting Policies ” for further discussion on the fair value of the Company’s debt.

6. Mandatorily Redeemable Preferred Securities

In connection with the ADT Acquisition, the Company issued 750,000 shares of the Koch Preferred Securities. On January 23, 2018, in connection with the IPO, the Company deposited $750 million of the net proceeds into a Segregated Account for the purpose of redeeming the Koch Preferred Securities at a future date. Funds held in the Segregated Account are reported as noncurrent restricted cash and cash equivalents in the Condensed Consolidated Balance Sheet as of March 31, 2018 .

The Koch Preferred Securities accrue and accumulate preferential cumulative dividends in arrears on the then current stated value of the Koch Preferred Securities. Dividends are payable quarterly, in cash, at a rate equal to the daily five-year treasury rate plus 9.00% per annum. In the event that dividends for any quarter are not paid in cash, dividends for such quarter will accrue and accumulate at a rate equal to the daily five-year treasury rate, plus 9.75% per annum, and will be added to the then current stated value of the Koch Preferred Securities at the end of such quarter.

The dividend obligation associated with the Koch Preferred Securities is reflected in interest expense, net in the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2018 , in lieu of declaring and paying a dividend on the Koch Preferred Securities, the Company elected to increase the accumulated stated value of such securities, which increased mandatorily redeemable preferred securities on the Condensed Consolidated Balance Sheet as of  March 31, 2018  by approximately $25 million . During the three months ended March 31, 2017 , the Company paid $21 million to meet the dividend obligation of the Koch Preferred Securities.

Refer to Note 1 “ Basis of Presentation and Summary of Significant Accounting Policies ” for information on the fair value of the Koch Preferred Securities.

Investor Rights Agreement

Prior to the consummation of the IPO, the Company, Prime Security Services TopCo Parent GP, LLC as the general partner of Ultimate Parent (“Parent GP”), Ultimate Parent, and affiliate of Koch Industries, Inc. (the “Koch Investor”), entered into an Amended and Restated Series A Investor Rights Agreement and a Second Amended and Restated Series A Investor Rights Agreement, which contain certain other designations, rights, preferences, powers, restrictions, and limitations that could require the Company to redeem all or a portion of the Koch Preferred Securities or require that the Company obtains the consent of the holders of a majority of the Koch Preferred Securities before taking certain actions or entering into certain transactions. Prior to the redemption of the Koch Preferred Securities in full, the Company and its subsidiaries are subject to certain affirmative and negative covenants, such as engaging in transactions with affiliates and paying dividends on its common stock, among other things, under the certificate of designation and other definitive agreements governing the Koch Preferred Securities. Additionally, the Company is required to offer to redeem all the Koch Preferred Securities in cash upon the occurrence of (i) any liquidation, dissolution, winding up or voluntary or involuntary bankruptcy of AP VIII Prime Security Services Holdings, L.P. (“AP VIII Prime Security LP”) which is the sole member of Parent GP and a limited partner of TopCo Parent, Parent GP, Ultimate Parent, the Company, Prime Security Services Borrower, LLC (a subsidiary), or any material subsidiary of the foregoing; (ii) an acceleration of any long term indebtedness of the Company; or (iii) a change in control, which, as defined in the certificate of designations governing the Koch Preferred Securities, includes (a) a change in control in Parent GP, Ultimate Parent, or the Company, (b) the Company’s Sponsor ceasing to have the power to appoint a majority of the directors or manager of Parent GP, Ultimate Parent, or the Company, and (c) the beneficial ownership of the Company’s Sponsor in Ultimate Parent or the Company falling below approximately 30% , in each case subject to certain exceptions.

7. Income Taxes

Unrecognized Tax Benefits

The Company did not have a significant change to its unrecognized tax benefits for the three months ended March 31, 2018 . The Company’s uncertain tax positions relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. Based on the current status of its income tax audits, the Company does not believe that a significant portion of its unrecognized tax benefits will be resolved in the next twelve months.

Effective Tax Rate

The Company’s income tax benefit for the three months ended March 31, 2018 and 2017 was $8 million and $32 million , respectively, resulting in an effective tax rate of 4.6% and 18.3% , respectively. The effective tax rate for the three months ended March 31, 2018 primarily reflects the reduced federal income tax rate of 21.0% as a result of Tax Reform, the 23.4% unfavorable impact of future non-deductible share-based compensation, 11.0% unfavorable impact of permanent non-deductible expenses

primarily associated with the Koch Preferred Securities, offset by the 16.1% favorable impact of tax adjustments related to prior year state returns filed in the current period.

The effective tax rates for both periods reflect the tax impact of permanent items, state tax expense, changes in tax laws, and non-U.S. net earnings. The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall effective state tax rate.

Tax Reform

In connection with Tax Reform, the SEC issued SAB 118 that allows companies to record provisional estimates of the effects of the legislative change, and a one-year measurement period to finalize the accounting of those effects. During the three months ended March 31, 2018 , the Company did not record any significant measurement period adjustments to the provisional amounts recorded in the 2017 consolidated financial statements. The Company expects to complete the accounting for the impact of Tax Reform during 2018.

8. Commitments and Contingencies

Purchase Obligations

As of March 31, 2018 , there have been no material changes to the Company’s purchase obligations outside the ordinary course of business as compared to December 31, 2017 .

Legal Proceedings

The Company is subject to various claims and lawsuits in the ordinary course of business, including from time to time, contractual disputes, employment matters, product and general liability claims, claims that the Company has infringed on the intellectual property rights of others, claims related to alleged security system failures, and consumer and employment class actions. In the ordinary course of business, the Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities. The Company has recorded accruals for losses that it believes are probable to occur and are reasonably estimable. While the ultimate outcome of these matters cannot be predicted with certainty, the Company believes that the resolution of any such proceedings (other than matters specifically identified below), will not have a material adverse effect on its financial position, results of operations, or cash flows.

Environmental Matters

On October 25, 2013, ADT was notified by subpoena that the Office of the Attorney General of California, in conjunction with the Alameda County District Attorney, is investigating whether certain of ADT’s electronic waste disposal policies, procedures, and practices are in violation of the California Business and Professions Code and the California Health and Safety Code.  During 2016, Protection One was also notified by the same parties that it was subject to a similar investigation. Both the Protection One and ADT investigations are ongoing and the Company is attempting to coordinate joint handling of both investigations and is cooperating fully with the respective authorities.

Wireless Encryption Litigation

The Company is subject to five class action claims regarding wireless encryption in certain ADT security systems. Jurisdictionally, three of the five cases are in Federal Court (in districts within Illinois, Arizona, and California), and both of the remaining two cases are in Florida State Court (both in Palm Beach County Circuit Court). Each of the five plaintiffs brought a claim under the respective state’s consumer fraud statute alleging that The ADT Corporation (“The ADT Corporation” refers to The ADT Security Corporation (formerly named The ADT Corporation) and each of its consolidated subsidiaries prior to the consummation of the ADT Acquisition) made misrepresentations and material omissions in its advertising regarding the unencrypted wireless signal pathways in certain security systems monitored by The ADT Corporation. The complaints in all five cases further allege that certain security systems monitored by The ADT Corporation are not secure because the wireless signal pathways are unencrypted, and can be easily hacked. On January 10, 2017, the parties agreed to settle all five class action lawsuits. On October 16, 2017, the U.S. District Court for the Northern District of California entered an order granting preliminary approval of the settlement. Notice to class members was issued November 16, 2017, and the settlement is currently in the administration process. A fairness hearing regarding the settlement was conducted on February 1, 2018. The Court took the matter under

advisement and subsequently stayed the settlement proceedings pending an appellate ruling on a related legal issue. The deadline for filing claims expired on February 26, 2018. The settlement administrator will not pay any claims until the Court enters an order granting final approval of the settlement.

TCPA Class Action relating to 2G-3G Radio Conversion Project

In August 2016, the Company was served with a class action complaint pending in the United States District Court for the Northern District of Georgia filed by a customer alleging that The ADT Corporation violated the Telephone Consumer Protection Act of 1991 (“TCPA”) by calling his cell phone, which was the only telephone number he provided to The ADT Corporation for his customer account, as part of The ADT Corporation’s efforts to communicate with customers affected by the Federal Communications Commission order allowing wireless carriers to sunset 2G wireless networks. Plaintiff seeks to represent a nationwide class of all The ADT Corporation customers who received such calls to their cell phones from 2013 to present. The premise of the plaintiff’s claim is that The ADT Corporation’s calls were telemarketing calls, which require a higher level of consent, and not transactional/business relationship calls because The ADT Corporation used the 2G transactional calls in an attempt to sell additional products and services. Plaintiff filed a motion for class certification. The ADT Corporation filed its opposition to class certification and further filed a motion for summary judgment in September 2017. The motions are fully briefed and are pending before the Court.

Shareholder Litigation

Five substantially similar shareholder class action lawsuits related to the January 19, 2018 IPO of ADT Inc. common stock were filed in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida in March, April, and early May 2018. The actions are entitled Goldstrand Investments Inc. v. ADT Inc ., Krebsbach v. ADT Inc ., Katz v. ADT Inc ., Sweet v. ADT, Inc., and Lowinger v. ADT Inc . Plaintiffs in each case allege the purchase of ADT common stock in or traceable to the IPO, assert claims for alleged violations of the Securities Act of 1933 (the “Securities Act”), and seek to represent a class of similarly situated shareholders. Plaintiffs in all five cases name ADT Inc. and various ADT officers, directors, and IPO underwriters, including Apollo Global Securities, LLC, as defendants. Plaintiffs allege that the defendants violated the Securities Act because the registration statement and prospectus used to effectuate the IPO were false and misleading in that they allegedly misled investors with respect to litigation involving ADT, ADT’s efforts to protect its intellectual property, competitive pressures ADT faced, and ADT’s customer acquisition costs. Additionally, two plaintiffs allege that the defendants misled investors with respect to false alarm pressures. The Company has not been served in these matters.

Income Tax Matters

On September 28, 2012, Johnson Controls International plc (as successor to Tyco International Ltd., “Tyco”) distributed to its public stockholders The ADT Corporation’s common stock (the “Separation from Tyco”), and The ADT Corporation became an independent public company. In connection with the Separation from Tyco in September 2012, The ADT Corporation entered into the 2012 Tax Sharing Agreement that governs the rights and obligations of The ADT Corporation, Tyco, and Pentair Ltd. for certain pre-Separation from Tyco tax liabilities, including Tyco’s obligations under the 2007 Tax Sharing Agreement among Tyco, Covidien, now operating as a subsidiary of Medtronic, and TE Connectivity. The ADT Corporation is responsible for all of its own taxes that are not shared pursuant to the 2012 Tax Sharing Agreement’s sharing formulae. Tyco and Pentair Ltd. are likewise responsible for their tax liabilities that are not subject to the 2012 Tax Sharing Agreement’s sharing formulae. Tyco has the right to administer, control, and settle all U.S. income tax audits for the periods prior to and including the Separation from Tyco.

All tax years through 2009 have been audited and resolved with the IRS. The IRS is currently auditing the 2010-2012 tax years, and should the IRS successfully challenge any tax positions taken in those years the Company’s share of the collective liability, if any, would be determined pursuant to the 2012 Tax Sharing Agreement. In accordance with the 2012 Tax Sharing Agreement, Tyco is responsible for the first $500 million of tax, interest, and penalties assessed against pre-2013 tax years including its 27% share of the tax, interest, and penalties assessed for periods prior to Tyco’s 2007 spin-off transaction. In addition to the Company’s share of cash taxes pursuant to the 2012 Tax Sharing Agreement, the Company’s net operating loss (“NOL”) and credit carryforwards may be significantly reduced or eliminated by audit adjustments to pre-2013 tax periods. NOL and credit carryforwards may be reduced prior to incurring any cash tax liability, and will not be compensated for under the tax sharing agreement. The Company believes that its income tax reserves and the liabilities recorded in the Consolidated Balance Sheet for the 2012 Tax Sharing Agreement continue to be appropriate. However, the ultimate resolution of these matters is uncertain, and if the IRS were to prevail, it could have a material adverse impact on the Company’s financial position, results of operations, and cash flows, potentially including a significant reduction in or the elimination of the Company’s available NOL and credit carryforwards generated in pre-Separation from Tyco periods. Further, to the extent The ADT Corporation is responsible for any liability under the 2012 Tax Sharing Agreement, there could be a material impact on its financial position, results of operations, cash flows, or its effective tax rate in future reporting periods.

During the third quarter of 2017, the Company was notified by the IRS of its intent to disallow amortization deductions claimed on the Company’s $987 million trademark and the Notice of Proposed Adjustment was received from the IRS in April 2018. There was no change in the Company’s previous assessment of this item. The Company intends to challenge this decision before the Appeals Division of the IRS. If the Company were to lose the dispute, it would result in minimal cash tax liabilities to ADT, no impact to the Company’s Statement of Operations, but material loss to the Company’s NOL deferred tax assets. The Company strongly disagrees with the IRS’s position and maintains that the deductions claimed are appropriate. The Company intends to vigorously defend its originally filed tax return position.

Other liabilities in the Company’s Condensed Consolidated Balance Sheets include $2 million as of March 31, 2018 and December 31, 2017 related to The ADT Corporation’s obligations under certain tax related agreements entered into in conjunction with the Separation from Tyco. The maximum amount of potential future payments is not determinable as such payments relate to unknown conditions and future events that cannot be predicted.

9. Share-based Compensation

2016 Equity Incentive Plan Awards

In 2016, the Company approved the 2016 Equity Incentive Plan, which provides for the issuance of non-qualified stock options to various employees of the Company. The Company records share-based compensation expense on options subject to time-based vesting, and subsequent to the consummation of the IPO, on options subject to vesting based on the achievement of certain investment return thresholds by Apollo. The Company does not expect to issue additional share-based compensation awards under the 2016 Equity Incentive Plan. For the three months ended March 31, 2018 and 2017 , share-based compensation expense for awards under the 2016 Equity Incentive Plan were not material.

Class B Unit Redemption

The Company records share-based compensation expense on certain Class B Unit awards granted to employees by Ultimate Parent (“Class B Units”). The Class B Units have two separate tranches, one of which is subject to time-based vesting (“Class B Unit Service Tranche”) over a five -year period, and the other of which is subject to vesting based upon the achievement of certain investment return thresholds by Apollo (“Class B Unit Performance Tranche”). Prior to the IPO, the Company recorded share-based compensation expense on the Class B Unit Service Tranche, whereas no share-based compensation expense was recorded for the Class B Unit Performance Tranche as the vesting of these awards was not deemed probable.

During the first quarter of 2018 and in connection with the IPO, each holder of Class B Units in Ultimate Parent had his or her entire Class B interest in Ultimate Parent redeemed for the number of shares of the Company’s common stock (“Distributed Shares”) that would have been distributed to such holder under the terms of Ultimate Parent’s operating agreement in a hypothetical liquidation on the date of the IPO at the IPO offering price (“Class B Unit Redemption”). All vesting conditions for the Distributed Shares remain the same as the vesting conditions that existed under the terms of the Class B Units. The Distributed Shares also have certain other restrictions pursuant to the terms and conditions of the Company’s Amended and Restated Management Investor Rights Agreement (the “MIRA”). Furthermore, as part of the Class B Unit Redemption, each holder received both vested and unvested Distributed Shares in the same proportion as the vested and unvested Class B Units held immediately prior to the IPO. As a result of the Class B Unit Redemption, holders of Class B Units received a total of 20.6 million shares of the Company’s common stock ( 17.8 million of which were unvested at the time of redemption). Of the Distributed Shares issued upon the Class B Unit Redemption, 50% were subject to the vesting conditions that existed for the Class B Unit Service Tranche (“Distributed Shares Service Tranche”) and 50% were subject to the vesting conditions that existed for the Class B Unit Performance Tranche (“Distributed Shares Performance Tranche”). As of March 31, 2018 , there were 7.4 million and 10.3 million unvested and outstanding shares in the Distributed Shares Service Tranche and Performance Tranche, respectively.

The Class B Unit Redemption resulted in a modification of the Class B Units. In connection with the modification, the Company utilized a Monte Carlo simulation to estimate the fair value of the Distributed Shares, as well as the derived service period for the Distributed Shares Performance Tranche. Significant assumptions included in the simulation were the risk-free interest rate and the expected volatility of the Company’s stock price. The Company selected a risk-free interest rate of 2.43% , which was based on a five-year U.S. Treasury with a zero-coupon rate. The Company also selected a stock price volatility of 30% , which was implied based upon an average of historical volatilities of publicly traded companies in industries similar to the Company, as the Company does not have sufficient history to use as a basis for actual stock price volatility. Additionally, because holders of Distributed Shares are entitled to receive previously declared accrued dividends once the shares vest, a dividend yield assumption was not included in the simulation.

The Class B Unit Redemption resulted in weighted-average fair values of $14.00 and $12.97 for the Distributed Shares Service Tranche and Performance Tranche, respectively. The fair values also incorporate the estimated impact of post-vesting selling restrictions pursuant to the MIRA. During the first quarter of 2018, the Company began recording share-based compensation

expense on the Distributed Shares Performance Tranche on a straight-line basis over the derived service period of approximately three years from the IPO date, as the vesting conditions are deemed probable following the consummation of the IPO. For the Distributed Shares Service Tranche, incremental compensation expense to be recorded as a result of the modification was not material. Additionally, the IPO triggered an acceleration of vesting of the unvested shares in the Distributed Shares Service Tranche, which will cause such Distributed Shares to become fully vested six months from the date of the IPO. During the three months ended March 31, 2018 , the Company recorded $12 million and $10 million of share-based compensation expense on the Distributed Shares Service Tranche and Performance Tranche, respectively.

Top-up Options

In January 2018, the Company approved its 2018 Omnibus Incentive Plan (the “2018 Omnibus Incentive Plan”), which became effective upon consummation of the IPO. Under the 2018 Omnibus Incentive Plan, and in connection with the Class B Unit Redemption, the Company granted 12.7 million options to holders of Class B Units (“Top-up Options”). The Top-up Options have an exercise price equal to the initial public offering price per share of the Company’s common stock and a contractual term of ten years from the grant date. Similar to the vesting conditions outlined above for the Distributed Shares, the Top-up Options contain a tranche subject to time-based vesting (“Top-up Options Service Tranche”) and a tranche subject to vesting based upon the achievement of certain investment return thresholds by Apollo (“Top-up Options Performance Tranche”). These vesting conditions are the same vesting conditions as those attributable to the Distributed Shares, including the condition that accelerates vesting of the Top-up Options Service Tranche over a period of six months following the IPO. Additionally, recipients of the Top-Up Options received both vested and unvested Top-up Options in the same proportion as the vested and unvested Class B Units held immediately prior to the IPO and Class B Unit Redemption. Any shares of the Company’s common stock acquired upon exercise of the Top-Up Options will be subject to the terms of the MIRA.

The Company used a Monte Carlo simulation to estimate the fair value of the Top-up Options, as well as the derived service period for the Top-up Options Performance Tranche. Significant assumptions included in the simulation were the risk-free interest rate, the expected volatility, and the expected dividend yield. The Company selected a risk-free interest rate of 2.43% , which was based on a five-year U.S. Treasury with a zero-coupon rate. The Company selected a stock price volatility of 30% , which was implied based upon an average of historical volatilities of publicly traded companies in industries similar to the Company, as the Company does not have sufficient history to use as a basis for actual stock price volatility. The Company also assumed a 1% dividend yield. The expected average exercise term was derived based on an average of the outcomes of various scenarios performed under the Monte Carlo simulation.

The weighted-average grant date fair values were $5.02 and $5.04 for the Top-up Options Service Tranche and Performance Tranche, respectively, for the three months ended March 31, 2018 . The fair values also incorporate the estimated impact of post-vesting selling restrictions pursuant to the MIRA. As of March 31, 2018 , there were 4.7 million and 6.4 million unvested and outstanding options in the Top-up Options Service Tranche and Performance Tranche, respectively.

For the three months ended March 31, 2018 , share-based compensation expense was $18 million and $2 million for the Top-up Options Service Tranche and Performance Tranche, respectively. The Company records share-based compensation expense associated with the Top-up Options Service Tranche on a straight-line basis over the requisite service period of six months from the IPO date. The Company records share-based compensation expense associated with the Top-up Options Performance Tranche on a straight-line basis over the derived service period of approximately three years from the IPO date.

Other 2018 Share-Based Compensation Awards

During the three months ended March 31, 2018 , the Company granted 4.0 million options (“2018 Options”) and 1.1 million restricted stock units (“2018 RSUs”) under the 2018 Omnibus Incentive Plan, both of which will cliff vest over a three -year period. For the 2018 Options, the contractual term is ten years.

The Company used a Black-Scholes pricing model to estimate the fair value of the 2018 Options granted in the first quarter of 2018. Significant assumptions included in the model were the risk-free interest rate, the expected volatility, the expected dividend yield, and the expected exercise term. The Company selected a risk-free interest rate of 2.52% , which was based on a six-year US Treasury with a zero-coupon rate. The Company selected a stock price volatility rate of 30% , which was implied based upon an average of historical volatilities of publicly traded companies in industries similar to the Company, as the Company does not have sufficient history to use as a basis for actual stock price volatility. The Company also assumed a 1% dividend yield. The expected average exercise term of 6.5 years was calculated using the simplified method, as the Company does not have sufficient historical exercise data to provide a reasonable basis to estimate future exercise patterns.

The grant date fair value of the 2018 Options for the three months ended March 31, 2018 was $4.35 . The grant date fair value of the 2018 RSUs was equal to $14.00 .

The Company records share-based compensation expense associated with the 2018 RSUs and 2018 Options on a straight-line basis over the requisite service period. For the three months ended March 31, 2018 and 2017 , share-based compensation expense for the options and RSUs granted under the 2018 Omnibus plan were not material. As of March 31, 2018 , there were 1.1 million unvested 2018 RSUs outstanding and 4.0 million 2018 Options unvested and outstanding.

For all share-based compensation awards, the Company recognizes forfeitures as they occur. Share-based compensation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations, and was $49 million and $2 million for the three months ended March 31, 2018 and 2017 , respectively.

10. Equity

Stock Split and Initial Public Offering

Refer to Note 1 “ Basis of Presentation and Summary of Significant Accounting Policies ” for a discussion regarding the Stock Split and the Company’s completion of an IPO in January 2018.

Common Stock Dividends

On March 15, 2018 , the Company’s board of directors declared a cash dividend of $0.035 per share to common stockholders of record on March 26, 2018 . The dividend was paid on April 5, 2018 .

During the three months ended March 31, 2017 , the Company paid dividends of $550 million to the Company’s equity holders and Ultimate Parent, which primarily includes distributions to the Company’s Sponsors (“Special Dividend”).

Accumulated Other Comprehensive Loss

During the three months ended March 31, 2018 , the Company did not record any material reclassifications out of accumulated other comprehensive loss.

Other

As discussed in Note 1 “ Basis of Presentation and Summary of Significant Accounting Policies ”, the opening balance of stockholders’ equity for the three months ended March 31, 2018 includes $34 million , net of tax, attributable to the cumulative effect of the adoption of the new revenue recognition standard.

11. Net Loss per Share

Basic net loss per share is computed by dividing net loss attributable to common shares by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing net loss available to common stockholders by the diluted weighted average number of common shares outstanding for the period. Diluted net loss per share would reflect the potential dilutive effect of common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of the diluted net loss per share calculation, all awards that could be potentially dilutive were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive. Basic and dilutive net loss per share were the same amounts for each period presented.

The computations of basic and diluted net loss per share for the periods presented are as follows:

12. Related Party Transactions

Management Consulting Agreement

In May 2016, in connection with the acquisition of The ADT Corporation, Apollo Management Holdings, L.P., an affiliate of the Company’s Sponsor (the “Management Service Provider”) entered into a management consulting agreement with the Company (the “Management Consulting Agreement”) relating to the provision of certain management consulting and advisory services to the Company following this acquisition.

Fees under the Management Consulting Agreement for the three months ended March 31, 2018 and 2017 were $1 million and $5 million , respectively. These costs are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. In January 2018, upon consummation of the IPO, this agreement was terminated in accordance with its terms.

Koch

During the three months ended March 31, 2018 , in lieu of declaring and paying a dividend obligation associated with Koch Preferred Securities, the Company elected to increase the accumulated stated value of the Koch Preferred Securities by approximately $25 million . During the three months ended March 31, 2017 , the Company paid cash dividends of $21 million to meet the dividend obligation associated with the Koch Preferred Securities to the Koch Investor. These amounts are reflected in interest expense in the Condensed Consolidated Statements of Operations.

Additionally, during the three months ended March 31, 2017, the Company paid $45 million of structuring fees to the Koch Investor in connection with the payment of the Special Dividend.

Refer to Note 6 “Mandatorily Redeemable Preferred Securities” for further discussion.

AGS

Apollo Global Securities, LLC, an affiliate of Apollo (“AGS”) served as an underwriter in the Company’s IPO. AGS agreed to purchase, and the Company agreed to sell 4,200,000 shares of common stock, and the Company paid $2 million in commissions to AGS in connection with its role as an underwriter in the IPO. The net amount of this transaction is reflected in the Condensed Consolidated Statement of Stockholders’ Equity as of March 31, 2018.

Other Transactions

During the three months ended March 31, 2017 , the Company paid dividends of $550 million to the Company’s equity holders and Ultimate Parent, which primarily includes distributions to its Sponsors. Such dividends are presented on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2017 . Refer to Note 10 “ Equity ” for further discussion.

13. Subsequent Events

Koch Agreement and Consent

On May 8, 2018, the Company entered into a written consent with the Koch Investor, whereby the Company agreed to redeem all of the outstanding Koch Preferred Securities on July 2, 2018. The Company intends to redeem the original stated value of $750 million of the Koch Preferred Securities using the funds deposited in the Segregated Account in connection with the IPO. The Company expects that additional distributions necessary to redeem the Koch Preferred Securities in full, including the payment of the related redemption premium, accumulated dividends, and pro forma tax reimbursements, will be funded with cash on hand immediately prior to the redemption.

Additionally, while the certificate of designation of the Koch Preferred Securities restricts the Company from paying dividends on its common stock, the Koch Investor has consented to a one-time distribution in an aggregate amount not to exceed $27 million , which the Company used to declare a common stock dividend on its common stock on May 9, 2018.

Common Stock Dividend

On May 9, 2018, the Company’s board of directors declared a cash dividend of $0.035 per share to common stockholders of record as of June 25, 2018. This dividend will be paid on July 10, 2018.