UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
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 001-36713
LIBERTY BROADBAND CORPORATION
(Exact name of Registrant as specified in its charter)
| | |
State of Delaware | | 47-1211994 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
12300 Liberty Boulevard | | 80112 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (720) (720) 875-5700
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Series A common stock | LBRDA | The Nasdaq Stock Market LLC |
Series C common stock | LBRDK | The Nasdaq Stock Market LLC |
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 ☐◻
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | |
Large | | Accelerated | | Non-accelerated | | Smaller | | Emerging |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒
The number of outstanding shares of Liberty Broadband Corporation'sCorporation’s common stock as of October 16, 2017July 15, 2020 was:
| | | | | | |
| | Series A | | Series B | | Series C |
Liberty Broadband Corporation Common Stock | | 26,495,123 | | 2,451,119 | | 152,983,879 |
| | | | | | |
| ||
| ||
| ||
|
Part I - Financial Information
I-1
LIBERTY BROADBAND CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
(unaudited)
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| |
|
| 2017 |
| 2016 |
| |
|
| (amounts in thousands) |
| |||
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 135,425 |
| 205,728 |
|
Trade and other receivables, net |
|
| 2,233 |
| 878 |
|
Derivative instruments |
|
| — |
| 49,019 |
|
Other current assets |
|
| 4,319 |
| 2,794 |
|
Total current assets |
|
| 141,977 |
| 258,419 |
|
Investment in Charter, accounted for using the equity method (note 4) |
|
| 9,326,871 |
| 9,315,253 |
|
Property and equipment, net |
|
| 425 |
| 710 |
|
Goodwill (note 5) |
|
| 6,497 |
| 6,497 |
|
Intangible assets subject to amortization, net (note 5) |
|
| 6,063 |
| 8,596 |
|
Other assets, at cost, net of accumulated amortization |
|
| 61 |
| 1,485 |
|
Total assets |
| $ | 9,481,894 |
| 9,590,960 |
|
Liabilities and Equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 4,963 |
| 7,931 |
|
Deferred revenue |
|
| 6,684 |
| 2,171 |
|
Current portion of debt (note 6) |
|
| — |
| 400,000 |
|
Other current liabilities |
|
| 553 |
| 2,014 |
|
Total current liabilities |
|
| 12,200 |
| 412,116 |
|
Debt (note 6) |
|
| 496,975 |
| 198,512 |
|
Deferred income tax liabilities |
|
| 497,414 |
| 504,644 |
|
Deferred revenue |
|
| 3,765 |
| 2,596 |
|
Other liabilities |
|
| 1,305 |
| — |
|
Total liabilities |
|
| 1,011,659 |
| 1,117,868 |
|
Equity |
|
|
|
|
|
|
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued |
|
| — |
| — |
|
Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 26,301,387 shares at September 30, 2017 and 26,251,533 shares at December 31, 2016 |
|
| 262 |
| 262 |
|
Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,455,179 shares at September 30, 2017 and 2,467,509 shares at December 31, 2016 |
|
| 25 |
| 25 |
|
Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 153,089,705 shares at September 30, 2017 and 153,019,547 shares at December 31, 2016 |
|
| 1,531 |
| 1,530 |
|
Additional paid-in capital |
|
| 7,952,316 |
| 7,945,883 |
|
Accumulated other comprehensive earnings, net of taxes |
|
| 8,290 |
| 7,656 |
|
Retained earnings |
|
| 507,811 |
| 517,736 |
|
Total equity |
|
| 8,470,235 |
| 8,473,092 |
|
Commitments and contingencies (note 8) |
|
|
|
|
|
|
Total liabilities and equity |
| $ | 9,481,894 |
| 9,590,960 |
|
| | | | | | |
| | June 30, | | December 31, |
| |
| | 2020 | | 2019 |
| |
| | (amounts in thousands) |
| |||
Assets |
| |
|
|
| |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 17,162 |
| 49,724 | |
Other current assets | |
| 2,544 |
| 2,409 | |
Total current assets | |
| 19,706 |
| 52,133 | |
Investment in Charter, accounted for using the equity method (note 4) | |
| 12,306,593 |
| 12,194,674 | |
Other assets | |
| 9,100 |
| 9,535 | |
Total assets | | $ | 12,335,399 |
| 12,256,342 | |
Liabilities and Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued liabilities | | $ | 8,562 |
| 6,168 | |
Deferred revenue and other current liabilities | |
| 11,544 |
| 5,971 | |
Total current liabilities | |
| 20,106 |
| 12,139 | |
Debt (note 5) | | | 573,593 | | 572,944 | |
Deferred income tax liabilities | | | 1,017,921 | | 999,757 | |
Other liabilities | | | 3,045 | | 3,556 | |
Total liabilities | | | 1,614,665 |
| 1,588,396 | |
Equity | | | | | | |
Preferred stock, $.01 par value. Authorized 50,000,000 shares; 0 shares issued | | | — | | — | |
Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 26,495,123 shares at June 30, 2020 and 26,493,197 shares at December 31, 2019 | | | 265 | | 265 | |
Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,451,119 shares at June 30, 2020 and 2,451,920 shares at December 31, 2019 | | | 25 | | 25 | |
Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 152,983,879 shares at June 30, 2020 and 152,956,316 shares at December 31, 2019 | | | 1,530 | | 1,529 | |
Additional paid-in capital | | | 7,878,499 | | 7,890,084 | |
Accumulated other comprehensive earnings, net of taxes | |
| 8,158 |
| 8,158 | |
Retained earnings | |
| 2,832,257 |
| 2,767,885 | |
Total equity | |
| 10,720,734 |
| 10,667,946 | |
Commitments and contingencies (note 7) | | | | | | |
Total liabilities and equity | | $ | 12,335,399 |
| 12,256,342 | |
See accompanying notes to the condensed consolidated financial statements.
I-2
LIBERTY BROADBAND CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
| | | | | | | | | | |
| | Three months ended | | Six months ended |
| |||||
| | June 30, | | June 30, |
| |||||
| | 2020 |
| 2019 |
| 2020 | | 2019 |
| |
| | (amounts in thousands, except per share amounts) | | |||||||
Revenue: | | | | | | | | | | |
Software sales | | $ | 4,114 | | 3,747 | | 8,108 | | 7,205 | |
Service | | | — | | — | | 110 | | — | |
Total revenue | | | 4,114 | | 3,747 | | 8,218 | | 7,205 | |
Operating costs and expenses | | | | | | | | | | |
Operating, including stock-based compensation (note 6) | | | 2,524 | | 2,227 | | 4,992 |
| 4,480 | |
Selling, general and administrative, including stock-based compensation (note 6) | | | 10,930 | | 8,217 | | 19,348 |
| 15,155 | |
Depreciation and amortization | | | 492 | | 469 | | 985 |
| 937 | |
| | | 13,946 | | 10,913 | | 25,325 |
| 20,572 | |
Operating income (loss) | | | (9,832) | | (7,166) | | (17,107) |
| (13,367) | |
Other income (expense): | | | | | | | | | | |
Interest expense | | | (5,131) | | (6,342) | | (10,992) | | (12,885) | |
Share of earnings (losses) of affiliates (note 4) | | | 158,128 | | 45,400 | | 219,810 |
| 80,249 | |
Gain (loss) on dilution of investment in affiliate (note 4) | | | (46,001) | | (16,322) | | (105,326) |
| (57,725) | |
Other, net | | | 28 | | 406 | | 191 |
| 829 | |
Net earnings (loss) before income taxes | | | 97,192 | | 15,976 | | 86,576 |
| (2,899) | |
Income tax benefit (expense) | | | (24,978) | | (3,924) | | (22,204) |
| 650 | |
Net earnings (loss) attributable to Liberty Broadband shareholders | | $ | 72,214 | | 12,052 | | 64,372 |
| (2,249) | |
Basic net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2) | | $ | 0.40 | | 0.07 | | 0.35 | | (0.01) | |
Diluted net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2) | | $ | 0.39 | | 0.07 | | 0.35 | | (0.01) | |
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| |||||
|
| September 30, |
| September 30, |
| |||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |
|
| (amounts in thousands, except per share amounts) |
| |||||||
Revenue |
| $ | 3,430 |
| 20,616 |
| 9,643 |
| 27,413 |
|
Operating costs and expenses |
|
|
|
|
|
|
|
|
|
|
Operating, including stock-based compensation (note 7) |
|
| 646 |
| 782 |
| 1,968 |
| 2,099 |
|
Selling, general and administrative, including stock-based compensation (note 7) |
|
| 6,189 |
| 9,855 |
| 18,099 |
| 27,792 |
|
Research and development, including stock-based compensation (note 7) |
|
| 1,440 |
| 2,384 |
| 6,214 |
| 8,040 |
|
Depreciation and amortization |
|
| 942 |
| 971 |
| 2,844 |
| 2,935 |
|
|
|
| 9,217 |
| 13,992 |
| 29,125 |
| 40,866 |
|
Operating income (loss) |
|
| (5,787) |
| 6,624 |
| (19,482) |
| (13,453) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (5,518) |
| (4,090) |
| (14,899) |
| (10,547) |
|
Dividend and interest income |
|
| 422 |
| 190 |
| 1,219 |
| 4,697 |
|
Share of earnings (losses) of affiliates (note 4) |
|
| (5,280) |
| 19,046 |
| 25,109 |
| 570,178 |
|
Realized and unrealized gains (losses) on financial instruments, net (note 3) |
|
| 2,675 |
| — |
| 5,026 |
| 92,990 |
|
Gain (loss) on dilution of investment in affiliate (note 4) |
|
| (3,718) |
| (16,331) |
| (42,515) |
| 760,074 |
|
Other, net |
|
| 9 |
| 5 |
| 11 |
| 112 |
|
Net earnings (loss) before income taxes |
|
| (17,197) |
| 5,444 |
| (45,531) |
| 1,404,051 |
|
Income tax benefit (expense) |
|
| 7,333 |
| (1,655) |
| 18,245 |
| (532,349) |
|
Net earnings (loss) attributable to Liberty Broadband shareholders |
| $ | (9,864) |
| 3,789 |
| (27,286) |
| 871,702 |
|
Basic net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2) |
| $ | (0.05) |
| 0.02 |
| (0.15) |
| 6.13 |
|
Diluted net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2) |
| $ | (0.05) |
| 0.02 |
| (0.15) |
| 6.10 |
|
See accompanying notes to the condensed consolidated financial statements.
I-3
LIBERTY BROADBAND CORPORATION
Condensed Consolidated Statements of Comprehensive Earnings (Loss)Cash Flows
(unaudited)
| | | | | | |
| | Six months ended | | |||
| | June 30, |
| |||
| | 2020 | | 2019 |
| |
| | (amounts in thousands) |
| |||
Cash flows from operating activities: |
| |
|
|
| |
Net earnings (loss) | | $ | 64,372 |
| (2,249) | |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 985 |
| 937 | |
Stock-based compensation | |
| 3,734 |
| 5,139 | |
Share of (earnings) losses of affiliates, net | |
| (219,810) |
| (80,249) | |
(Gain) loss on dilution of investment in affiliate | |
| 105,326 |
| 57,725 | |
Deferred income tax expense (benefit) | |
| 22,204 |
| (650) | |
Other, net | |
| 625 |
| 576 | |
Changes in operating assets and liabilities: | | | | | | |
Current and other assets | |
| (72) |
| (5,764) | |
Payables and other liabilities | |
| 6,938 |
| 4,461 | |
Net cash provided (used) by operating activities | |
| (15,698) |
| (20,074) | |
Cash flows from investing activities: | | | | | | |
Capital expended for property and equipment | |
| (35) |
| (50) | |
Exercise of preemptive right to purchase Charter shares | | | (14,910) | | — | |
Net cash provided (used) by investing activities | |
| (14,945) |
| (50) | |
Cash flows from financing activities: | | | | | | |
Taxes paid in lieu of shares issued for stock-based compensation | | | (1,945) | | — | |
Other financing activities, net | | | 26 | | 4,155 | |
Net cash provided (used) by financing activities | |
| (1,919) |
| 4,155 | |
Net increase (decrease) in cash | |
| (32,562) |
| (15,969) | |
Cash, cash equivalents and restricted cash, beginning of period | |
| 49,724 |
| 83,103 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 17,162 |
| 67,134 | |
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| |||||
|
| September 30, |
| September 30, |
| |||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |
|
| (amounts in thousands) |
| |||||||
Net earnings (loss) |
| $ | (9,864) |
| 3,789 |
| (27,286) |
| 871,702 |
|
Other comprehensive earnings (loss), net of taxes: |
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period |
|
| — |
| — |
| — |
| (221) |
|
Share of other comprehensive earnings (loss) of equity method affiliates |
|
| 260 |
| 247 |
| 634 |
| 811 |
|
Other |
|
| — |
| — |
| — |
| (1,839) |
|
Other comprehensive earnings (loss), net of taxes |
|
| 260 |
| 247 |
| 634 |
| (1,249) |
|
Comprehensive earnings (loss) attributable to Liberty Broadband shareholders |
| $ | (9,604) |
| 4,036 |
| (26,652) |
| 870,453 |
|
See accompanying notes to the condensed consolidated financial statements.
I-4
LIBERTY BROADBAND CORPORATION
Condensed Consolidated Statements of Cash FlowsEquity
(unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | | | Additional | | other | | | | | |
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | | | |||||
| | Stock | | Series A |
| Series B |
| Series C |
| capital | | earnings | | earnings | | Total equity | | |
| | (amounts in thousands) | | |||||||||||||||
Balance at January 1, 2020 |
| $ | — | | 265 | | 25 | | 1,529 | | 7,890,084 |
| 8,158 |
| 2,767,885 |
| 10,667,946 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — |
| — |
| 64,372 |
| 64,372 | |
Stock-based compensation | | | — | | — | | — | | — | | 3,705 | | — | | — | | 3,705 | |
Issuance of common stock upon exercise of stock options | | | — | | — | | — | | 1 | | 25 | | — | | — | | 26 | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | — | | (2,121) | | — | | — | | (2,121) | |
Noncontrolling interest activity at Charter | | | — | | — | | — | | — | | (13,194) | | — | | — | | (13,194) | |
Balance at June 30, 2020 | | $ | — | | 265 | | 25 | | 1,530 | | 7,878,499 |
| 8,158 |
| 2,832,257 |
| 10,720,734 | |
(unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | |
|
| | | | | | | | | | | Additional | | other | | | | |
|
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | |
| |||||
| | Stock | | Series A |
| Series B |
| Series C |
| capital | | earnings | | earnings | | Total equity |
| |
| | (amounts in thousands) |
| |||||||||||||||
Balance at March 31, 2020 | | $ | — | | 265 | | 25 | | 1,530 | | 7,876,950 |
| 8,158 |
| 2,760,043 |
| 10,646,971 | |
Net earnings (loss) | | | — | | — | | — | | — | | — | | — | | 72,214 | | 72,214 | |
Stock-based compensation | | | — | | — | | — | | — | | 1,900 | | — | | — | | 1,900 | |
Issuance of common stock upon exercise of stock options | | | — | | — | | — | | — | | 23 | | — | | — | | 23 | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | — | | (177) | | — | | — | | (177) | |
Noncontrolling interest activity at Charter | | | — | | — | | — | | — | | (197) | | — | | — | | (197) | |
Balance at June 30, 2020 | | $ | — | | 265 | | 25 | | 1,530 | | 7,878,499 | | 8,158 | | 2,832,257 | | 10,720,734 | |
|
|
|
|
|
|
|
|
| Nine months ended |
| |||
|
| September 30, |
| |||
|
| 2017 |
| 2016 |
| |
|
| (amounts in thousands) |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
Net earnings (loss) |
| $ | (27,286) |
| 871,702 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,844 |
| 2,935 |
|
Stock-based compensation |
|
| 4,376 |
| 4,582 |
|
Share of (earnings) losses of affiliates |
|
| (25,109) |
| (570,178) |
|
(Gain) loss on dilution of investment in affiliate |
|
| 42,515 |
| (760,074) |
|
Realized and unrealized (gains) losses on financial instruments, net |
|
| (5,026) |
| (92,990) |
|
Deferred income tax expense (benefit) |
|
| (18,259) |
| 533,626 |
|
Other, net |
|
| 1,080 |
| 112 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Current and other assets |
|
| (1,455) |
| 7,954 |
|
Payables and other liabilities |
|
| 2,724 |
| (2,702) |
|
Net cash provided (used) by operating activities |
|
| (23,596) |
| (5,033) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
Capital expended for property and equipment |
|
| (27) |
| (154) |
|
Purchases of short term investments and other marketable securities |
|
| — |
| (155,444) |
|
Sales of short term investments and other marketable securities |
|
| — |
| 164,458 |
|
Investment in equity method affiliate |
|
| — |
| (5,000,000) |
|
Other investing activities, net |
|
| 14 |
| 453 |
|
Net cash provided (used) by investing activities |
|
| (13) |
| (4,990,687) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
Borrowings of debt |
|
| 500,000 |
| 200,000 |
|
Repayments of debt |
|
| (600,000) |
| — |
|
Cash received from issuance of Series C Liberty Broadband common stock |
|
| — |
| 4,400,000 |
|
Payments from issuances of financial instruments |
|
| (101,638) |
| — |
|
Proceeds from settlements of financial instruments |
|
| 155,683 |
| — |
|
Other financing activities, net |
|
| (739) |
| (318) |
|
Net cash provided (used) by financing activities |
|
| (46,694) |
| 4,599,682 |
|
Net decrease in cash |
|
| (70,303) |
| (396,038) |
|
Cash and cash equivalents, beginning of period |
|
| 205,728 |
| 655,079 |
|
Cash and cash equivalents, end of period |
| $ | 135,425 |
| 259,041 |
|
See accompanying notes to the condensed consolidated financial statements.
I-5
LIBERTY BROADBAND CORPORATION
Condensed Consolidated StatementStatements of Equity (continued)
(unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | | | Additional | | other | | | | | |
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | | | |||||
| | Stock | | Series A |
| Series B |
| Series C |
| capital | | earnings | | earnings | | Total equity | | |
| | (amounts in thousands) | | |||||||||||||||
Balance at January 1, 2019 | | $ | — | | 263 | | 25 | | 1,526 | | 7,938,357 | | 7,778 | | 2,650,669 | | 10,598,618 | |
Net earnings (loss) | | | — | | — | | — | | — | | — | | — | | (2,249) | | (2,249) | |
Stock-based compensation | | | — | | — | | — | | — | | 5,010 | | — | | — | | 5,010 | |
Issuance of common stock upon exercise of stock options | | | — | | 1 | | — | | 1 | | 4,153 | | — | | — | | 4,155 | |
Tax sharing arrangement with former parent | | | — | | — | | — | | — | | (16,090) | | — | | — | | (16,090) | |
Noncontrolling interest activity at Charter | | | — | | — | | — | | — | | (2,384) | | — | | — | | (2,384) | |
Balance at June 30, 2019 | | $ | — | | 264 | | 25 | | 1,527 | | 7,929,046 | | 7,778 | | 2,648,420 | | 10,587,060 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | |
|
| | | | | | | | | | | Additional | | other | | | | |
|
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | |
| |||||
| | Stock | | Series A |
| Series B |
| Series C |
| capital | | earnings | | earnings | | Total equity |
| |
| | (amounts in thousands) |
| |||||||||||||||
Balance at March 31, 2019 |
| $ | — | | 263 | | 25 | | 1,526 | | 7,943,795 |
| 7,778 |
| 2,636,368 |
| 10,589,755 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — |
| — |
| 12,052 |
| 12,052 | |
Stock-based compensation | | | — | | — | | — | | — | | 2,487 | | — | | — | | 2,487 | |
Issuance of common stock upon exercise of stock options | | | — | | 1 | | — | | 1 | | 2,500 | | — | | — | | 2,502 | |
Tax sharing arrangement with former parent | | | — | | — | | — | | — | | (16,090) | | — | | — | | (16,090) | |
Noncontrolling interest activity at Charter | | | — | | — | | — | | — | | (3,646) | | — | | — | | (3,646) | |
Balance at June 30, 2019 | | $ | — | | 264 | | 25 | | 1,527 | | 7,929,046 |
| 7,778 |
| 2,648,420 |
| 10,587,060 | |
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
| other |
|
|
|
|
|
|
| Preferred |
| Common stock |
| paid-in |
| comprehensive |
| Retained |
|
|
| |||||
|
| Stock |
| Series A |
| Series B |
| Series C |
| capital |
| earnings |
| earnings |
| Total equity |
| |
|
| (amounts in thousands) |
| |||||||||||||||
Balance at January 1, 2017 |
| $ | — |
| 262 |
| 25 |
| 1,530 |
| 7,945,883 |
| 7,656 |
| 517,736 |
| 8,473,092 |
|
Net earnings (loss) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| (27,286) |
| (27,286) |
|
Other comprehensive earnings |
|
| — |
| — |
| — |
| — |
| — |
| 634 |
| — |
| 634 |
|
Stock-based compensation |
|
| — |
| — |
| — |
| — |
| 4,017 |
| — |
| — |
| 4,017 |
|
Issuance of common stock upon exercise of stock options |
|
| — |
| — |
| — |
| 1 |
| 2,416 |
| — |
| — |
| 2,417 |
|
Cumulative effect of accounting change at Charter (note 4) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 17,361 |
| 17,361 |
|
Balance at September 30, 2017 |
| $ | — |
| 262 |
| 25 |
| 1,531 |
| 7,952,316 |
| 8,290 |
| 507,811 |
| 8,470,235 |
|
See accompanying notes to the condensed consolidated financial statements.
I-6
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
During May 2014, the board of directors of Liberty Media Corporation and its subsidiaries (“Liberty”) authorized management to pursue a plan to spin-off to its stockholders common stock of a wholly-owned subsidiary, Liberty Broadband Corporation (“Liberty Broadband” or the “Company”), and to distribute subscription rights to acquire shares of Liberty Broadband Series CBroadband’s common stock (the “Broadband Spin-Off”). At the time of the Broadband Spin-Off, Liberty Broadband was comprised of (i) Liberty’s former interest in Charter Communications, Inc. (“Legacy Charter”), (ii) Liberty’s former wholly-owned subsidiary TruePosition, Inc., (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“Time Warner Cable”), (iv) certain deferred tax liabilities, as well as liabilities related to Time Warner Cable written call options and (v) initial indebtedness, pursuant to margin loans entered into prior to the completion of the Broadband Spin-Off. These financial statements refer to the combination of the aforementioned subsidiary, investments, and financial instrumentsLiberty Broadband Corporation as “Liberty Broadband,” “the Company,” “us,” “we” and “our” in the notes to the condensed consolidated financial statements.
On May 18, 2016, Time Warner Cable mergedThrough a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter Communications, Inc. (“Charter”). Pursuant to proxy agreements with Legacy Charter (the “Time Warner Cable Merger”GCI Liberty, Inc. (“GCI Liberty”). In connection with the Time Warner Cable Merger, Legacy Charter underwent a corporate reorganization, resulting in CCH I, LLC (“Charter”), a former subsidiary of Legacy Charter, becoming the new publicly traded parent company. Also on May 18, 2016, the previously announced acquisition of Bright House Networks, LLC from and Advance/Newhouse Partnership (“A/N”) by Charter (the “Bright House Transaction”) was completed. In connection with the Time Warner Cable Merger and Bright House Transaction, Liberty Broadband entered into certain agreements with Legacy Charter, Charter (for accounting purposes a related party of the Company), Liberty Interactive Corporation (“Liberty Interactive,” for accounting purposes a related party of the Company) and Time Warner Cable. As a result of the Time Warner Cable Merger and Bright House Transaction (collectively, the “Transactions”), Liberty Broadband exchanged its shares of Time Warner Cable for shares of Charter and purchased additional shares of Charter. As a result, and pursuant to proxy agreements entered into with Liberty Interactive and A/N, Liberty Broadband controls 25.01% of the aggregate voting power of Charter. See note 4 for additional detail regarding these transactions and corresponding agreements.
The Company’s wholly owned subsidiary, Skyhook Holding, Inc. (formerly known as TruePosition, Inc.(“Skyhook”), was originally incorporated to provide technology for locating wireless phones and other mobile devices through a passive network overlay system using its patented U-TDOA technology (“U-TDOA service”). In February 2014, Skyhook Holding, Inc. acquired 100% of the outstanding common shares of Skyhook Wireless, Inc., which operates a global location network containing billions of geolocated Wi-Fi access points and cell towers that serve as the reference infrastructure for providing location services. In 2015, one of Skyhook Holding, Inc.’s customers, a wireless carrier utilizing the legacy U-TDOA service which accounted for approximately 80% - 90% of consolidated revenue at the time, gave notice that it planned to discontinue use of the U-TDOA service and did not intend to renew its contract, which expired on December 31, 2015. The loss of this customer had a material adverse effect on Skyhook Holding, Inc.’s business. As a result of the loss of this wireless carrier customer, further changes in the regulatory environment and a shift in the overall market for the legacy U-TDOA service, Skyhook Holding, Inc. ceased making further investment in its U-TDOA products. In 2016, Skyhook Holding, Inc. and Skyhook Wireless, Inc. combined operations in order to focusfocuses on the development and sale of Skyhook’s device-based location technology. Skyhook markets and sells 2 primary products: (1) a location determination service called the suite ofPrecision Location Solution; and (2) a location intelligence and context products, and are referred to collectively herein as “Skyhook.”data insights service called Geospatial Insights.
The accompanying (a) condensed consolidated balance sheet as of December 31, 2016,2019, which has been derived from audited financial statements, and (b) interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Liberty Broadband's Annual Report on
I-7
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Form 10-K for the year ended December 31, 2016.2019. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers (i) the application of the equity method of accounting for investments in affiliates (ii) the fair value of non-financial instruments, (iii) the fair value of financial instruments, (iv) revenue recognition and (v) accounting for income taxes to be its most significant estimates.
In February 2016,December 2019, Chinese officials reported a novel coronavirus outbreak (“COVID-19”). COVID-19 has since spread through China and internationally. On March 11, 2020, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on lease accounting. This guidance requiresWorld Health Organization assessed COVID-19 as a companyglobal pandemic, causing many countries throughout the world to recognize lease assetstake aggressive actions, including imposing travel restrictions and lease liabilitiesstay-at-home orders, closing public attractions and restaurants, and mandating social distancing practices.
We are not presently aware of any events or circumstances arising from operating leasesthe COVID-19 pandemic that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained, any such changes will be recognized in the statement of financial position. The new guidance also simplifies the accounting for sale and leaseback transactions. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We plan to adopt this guidance on January 1, 2019. Companies are required to use a modified retrospective approach to adopt this guidance. The Company is currently working with its consolidated subsidiary, Skyhook, to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases, evaluating technology solutionsstatements. Actual results could differ from estimates, and collecting lease data.
In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entityany such differences may be material to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company anticipates adopting this guidance under the modified retrospective transition method. Skyhook has substantially completed the review of its revenue arrangements and does not currently expect that the adoption of the new standard will have a material impact on itsour financial position or results of operations. Additionally, Charter, which is accounted for as an equity method investment, has substantially completed its review of its revenue arrangements and does not currently expect that the adoption of the new standard will have a material impact on its financial position or results of operations.statements.
Liberty Broadband holds an investment in Charter that is accounted for using the equity method. Liberty Broadband does not control the decision making process or business management practices of this affiliate. Accordingly, Liberty Broadband relies on the management of this affiliate to provide it with accurate financial information prepared in accordance with GAAP that the Company uses in the application of the equity method. In addition, Liberty Broadband relies on audit
I-7
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
reports that are provided by the affiliate's independent auditor on the financial statements of such affiliate. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliate that would have a material effect on Liberty Broadband's condensed consolidated financial statements.
On June 29, 2020, Liberty Broadband announced that a special committee of independent and disinterested directors formed by its board of directors, and a special committee of independent and disinterested directors formed by the board of directors of GCI Liberty, have informed Liberty Broadband and GCI Liberty that the special committees have reached a preliminary understanding regarding a possible exchange ratio (“Possible Exchange Ratio”) for a potential business combination transaction between Liberty Broadband and GCI Liberty (the “Potential Combination”), in which Liberty Broadband would acquire all of the outstanding shares of Series A common stock, Series B common stock, and Series A Cumulative Redeemable Preferred Stock of GCI Liberty in a stock-for-stock merger. The special committees of each of GCI Liberty and Liberty Broadband also reached a preliminary understanding with John C. Malone, Chairman of the Board of each of GCI Liberty and Liberty Broadband relating to the Potential Combination. Prior to any negotiations, including any discussions regarding a Possible Exchange Ratio or regarding any arrangements with Mr. Malone, the special committees of GCI Liberty and Liberty Broadband were formed and agreed with each other and with Mr. Malone that any Potential Combination would be subject to and conditioned upon (i) the negotiation by, and approval of, each special committee and (ii) approval by a non-waivable vote of the holders of a majority of the voting power of the outstanding shares of each company not held by Mr. Malone or any other interested parties.
The Company expects that there will be continued discussions between and among the special committees and Mr. Malone regarding a Potential Combination and related matters, including the negotiation of mutually acceptable transaction agreements. There can be no assurance, however, that any discussions that occur hereafter will result in the entry into definitive agreements concerning a Potential Combination or, if such definitive agreements are reached, that such definitive agreements will contain transaction terms consistent with those described above, nor can there be any assurance that a Potential Combination will ultimately be consummated. Discussions concerning a Potential Combination may be terminated at any time and without prior notice. Liberty Broadband does not intend to disclose developments with respect to the foregoing unless and until the special committees and the boards of directors of each of GCI Liberty and Liberty Broadband have approved a specific transaction, if any, except as may be required by law.
Spin-Off Arrangements
Following the Broadband Spin-Off, Liberty and Liberty Broadband operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Broadband Spin-Off, Liberty (for accounting purposes a related party of the Company) and Liberty Broadband entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Broadband Spin-Off and to provide for an orderly transition. These agreements include a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.
I-8
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Broadband Spin-Off, certain conditions to the Broadband Spin-Off and provisions governing the relationship between Liberty Broadband and Liberty with respect to and resulting from the Broadband Spin-Off. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and Liberty Broadband and other agreements related to tax matters. Among other things, pursuant to the tax sharing agreement, Liberty Broadband has agreed to indemnify Liberty, subject to certain limited exceptions, for losses and taxes resulting from the Broadband Spin-Off to the extent such losses or taxes result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by Liberty Broadband (applicable to actions or failures to act by Liberty Broadband and its subsidiaries following the completion of the Broadband Spin-Off). Pursuant to the services agreement, Liberty provides Liberty Broadband with general and administrative services including legal, tax, accounting, treasury and investor relations support. See below for a description of an amendment to the services agreement in December 2019. Under the facilities sharing agreement, Liberty Broadband shares office space with Liberty and related amenities at Liberty’s corporate headquarters. Liberty Broadband will reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services and for costs thatwhich will be negotiated semi-annually. Under these various agreements, approximately $814 thousand and $661 thousand wasamounts reimbursable to Liberty were approximately $1.0 million and $17.0 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and $2.4$2.2 million was reimbursableand $17.9 million for the six months ended June 30, 2020 and 2019, respectively.
I-8
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
In December 2019, the Company entered into an amendment to the services agreement with Liberty in connection with Liberty’s entry into a new employment arrangement with Gregory B. Maffei, the Company’s President and Chief Executive Officer. Under the amended services agreement, components of his compensation will either be paid directly to him by each of the Company, Liberty TripAdvisor Holdings, Inc., GCI Liberty, and Qurate Retail, Inc. (collectively, the “Service Companies”) or reimbursed to Liberty, in each case, based on allocations among Liberty and the Service Companies set forth in the amended services agreement, currently set at 18% for the nine months ended September 30, 2017 and 2016, respectively.Company.
(2) Earnings (Loss) per Share
Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) attributable to Liberty Broadband shareholders by the weighted average number of common shares outstanding (“WASO”) for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. The basic and diluted EPS calculations are based on the following weighted average number of shares of outstanding common stock.
| | | | | | | | | |
| | Liberty Broadband Common Stock | | ||||||
| | Three months | | Three months | | Six months | | Six months |
|
| | ended | | ended | | ended | | ended | |
|
| June 30, 2020 |
| June 30, 2019 |
| June 30, 2020 |
| June 30, 2019 |
|
| | (numbers of shares in thousands) | | ||||||
Basic WASO |
| 181,925 |
| 181,450 |
| 181,914 |
| 181,409 | |
Potentially dilutive shares (1) |
| 921 |
| 1,382 |
| 913 |
| 1,340 | |
Diluted WASO |
| 182,846 |
| 182,832 |
| 182,827 |
| 182,749 | |
|
|
|
|
|
|
|
|
|
|
|
| Liberty Broadband Common Stock |
| ||||||
|
| Three months |
| Three months |
| Nine months |
| Nine months |
|
|
| ended |
| ended |
| ended |
| ended |
|
|
| September 30, 2017 |
| September 30, 2016 |
| September 30, 2017 |
| September 30, 2016 |
|
|
| (numbers of shares in thousands) |
| ||||||
Basic WASO |
| 181,846 |
| 181,621 |
| 181,795 |
| 142,170 |
|
Potentially dilutive shares (1) |
| 1,485 |
| 970 |
| 1,369 |
| 666 |
|
Diluted WASO |
| 183,331 |
| 182,591 |
| 183,164 |
| 142,836 |
|
________
(1) Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.
(3) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As of September 30, 2017, theThe Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.
I-9
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company’s assets and (liabilities) measured at fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| September 30, 2017 |
| December 31, 2016 |
| |||||||||||||||||||||||
|
|
|
|
| Quoted prices |
| Significant |
|
|
| Quoted prices |
| Significant |
| ||||||||||||||
|
|
|
|
| in active |
| other |
|
|
| in active |
| other |
| ||||||||||||||
|
|
|
|
| markets for |
| observable |
|
|
| markets for |
| observable |
| ||||||||||||||
|
|
|
|
| identical assets |
| inputs |
|
|
| identical assets |
| inputs |
| ||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||
| | June 30, 2020 | | December 31, 2019 |
| |||||||||||||||||||||||
| | | | | Quoted prices | | Significant | | | | Quoted prices | | Significant |
| ||||||||||||||
| | | | | in active | | other | | | | in active | | other |
| ||||||||||||||
| | | | | markets for | | observable | | | | markets for | | observable |
| ||||||||||||||
| | | | | identical assets | | inputs | | | | identical assets | | inputs |
| ||||||||||||||
Description |
| Total |
| (Level 1) |
| (Level 2) |
| Total |
| (Level 1) |
| (Level 2) |
| | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) |
| ||
|
| (amounts in thousands) |
| |||||||||||||||||||||||||
| | (amounts in thousands) |
| |||||||||||||||||||||||||
Cash equivalents |
| $ | 134,574 |
| 134,574 |
| — |
| 198,011 |
| 198,011 |
| — |
| | $ | 11,598 | | 11,598 | | — | | 48,174 | | 48,174 | | — | |
Derivative instruments (1) |
| $ | — |
| — |
| — |
| 49,019 |
| — |
| 49,019 |
|
_________________________
|
|
The fair value of Level 2 derivative instruments were derived from a Black-Scholes model using observable market data as the significant inputs. The inputs used in the model during the period outstanding (exclusive of the applicable trading price of Liberty Broadband Series C common stock and the strike prices associated with the call options) were as follows:
| |||
| |||
|
Other Financial Instruments
Other financial instruments not measured at fair value on a recurring basis include trade receivables, trade payables, accrued and other current liabilities, current portion of debt and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value due to the short maturity of these instruments as reported on our condensed consolidated balance sheets. The carrying value of our long-term debt bears interest at a variable rate and therefore is also considered to approximate fair value.
I-10
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Realized and Unrealized Gains (Losses) on Financial Instruments
Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||||||
|
| September 30, |
| September 30, |
| ||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||
|
| (amounts in thousands) |
| ||||||||
Time Warner Cable investment (1) |
| $ | — |
| — |
|
| — |
| 92,990 |
|
Derivative instruments (2) |
|
| 2,675 |
| — |
|
| 5,026 |
| — |
|
|
| $ | 2,675 |
| — |
|
| 5,026 |
| 92,990 |
|
|
|
|
|
(4) Investment in Charter Accounted for Using the Equity Method
In May 2013,Through a number of prior years’ transactions, Liberty Broadband has acquired approximately 26.9 million shares of Legacy Charter common stock and approximately 1.1 million warrants to purchase shares of Legacy Charter common stock for approximately $2.6 billion, which represented an approximate 27% beneficial ownership (including the warrants on an as if converted basis)interest in Legacy Charter at the time of purchase and price per share of $95.50. Liberty funded the purchase with a combination of cash on hand of approximately $1.2 billion and new margin loan arrangements. Liberty allocated the purchase price between the shares of common stock and the warrants acquired in the transaction by determining the fair value of the publicly traded warrants and allocating the remaining balance to the shares acquired, which resulted in an initial excess basis in the investment of $2,532 million.Charter. The investment in Legacy Charter is accounted for as an equity method affiliate based on theour voting and ownership interest obtained and the board seats held by individuals appointed by Liberty.
During May 2014, Liberty purchased 897 thousand Legacy Charter shares for approximately $124.5 million. During November 2014, subsequent toBroadband. As of June 30, 2020, the Broadband Spin-Off,carrying and market value of Liberty Broadband exercised all of its outstanding warrants to purchase shares of Legacy Charter common stock for approximately $52 million.
On May 18, 2016, the Time Warner Cable Merger was completed, which resulted in Legacy Charter and Time Warner Cable becoming wholly owned subsidiaries of Charter. Also on May 18, 2016, the previously announced Bright House Transaction was completed. In connection with these transactions, Legacy Charter underwent a corporate reorganization, resultingBroadband’s ownership in Charter a former subsidiary of Legacy Charter, becoming the new publicly traded parent company. In connection with the Time Warner Cable Mergerwas approximately $12,307 million and the Bright House Transaction,$27,597 million, respectively. Liberty Broadband completed the previously announced transactions described below:
I-11
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Transactions Completed in Connection with the Time Warner Cable Merger
Charter Investment Agreement
On May 18, 2016, Liberty Broadband completed its previously announced investmentBroadband’s ownership in Charter in accordance with the investment agreement dated May 23, 2015 by and among Liberty Broadband, Legacy Charter and Charter (the “Charter Investment Agreement”). Pursuant to the Charter Investment Agreement, immediately following the consummationis 26.4% of the Time Warner Cable Merger, Liberty Broadband purchased from Charter $4.3 billion of sharesoutstanding equity of Charter Class A common stock, par value $0.001 per share, at a price per shareas of $195.70 following adjustment by the applicable exchange ratio. As a result, Liberty Broadband received approximately 22.0 million shares of Charter Class A common stock. Liberty Broadband funded its purchase of these shares of Charter Class A common stock with proceeds from the issuance of Liberty Broadband Series C common stock.
Charter Contribution Agreement
Also on May 18, 2016, shares of Time Warner Cable common stock held by Liberty Broadband and Liberty Interactive were exchanged, in a tax-free transaction, for shares of Charter Class A common stock which resulted in each of Liberty Broadband and Liberty Interactive receiving one share of Charter Class A common stock for each share of Time Warner Cable common stock so exchanged. In the exchange, Liberty Broadband received approximately 2.4 million shares of Charter Class A common stock, with a fair value of $531.9 million.
Liberty Interactive Proxy AgreementJune 30, 2020.
Pursuant to the Proxyproxy agreements with GCI Liberty and Right of First Refusal Agreement, dated May 23, 2015, as amendedA/N (the “Liberty Interactive Proxy Agreement”)“GCI Liberty Proxy” and “A/N Proxy”, by and betweenrespectively), Liberty Broadband and Liberty Interactive, Liberty Interactive granted Liberty Broadbandhas an irrevocable proxy to vote allcertain shares of Charter common stock owned beneficially or of record by GCI Liberty Interactive following the closing of the Time Warner Cable Merger,and A/N, for a five year term expiring May 18, 2021, subject to extension upon the mutual agreement of both parties, subject to certain limitations. So long as
Liberty Broadband’s overall voting interest (23.4% at June 30, 2020) is diluted by the Liberty Interactive Proxy Agreement isoutstanding A/N interest in effect, Liberty Broadband also has a right of first refusal (“ROFR”) to purchase all or a portion of any sharessubsidiary of Charter common stock which Liberty Interactive proposes to transfer, subject to certain limitations.
Transactions Completedbecause the A/N interest has voting rights in Connection with the Bright House Transaction
Second Amended and Restated Stockholders Agreement
On May 18, 2016, pursuant to the Stockholders Agreement, upon the closing of the Bright House Transaction, Liberty Broadband purchased from Charter approximately 3.7 million additional shares of Charter Class A common stock at a price per share of $191.33 following adjustment by the applicable exchange ratios, for an aggregate purchase price of $700 million. Liberty Broadband funded its $700 million purchase in shares of Charter through cash on hand and margin loan draws, as discussed in note 6.
Proxy and Right of First Refusal Agreement
In connection with the Bright House Transaction, on May 18, 2016, A/N and Liberty Broadband entered into a proxy and right of first refusal agreement, as amended (“A/N Proxy”), pursuant to which A/N granted Liberty Broadband a five-year proxy to vote shares of Charter held by A/N, capped at a number of shares representing 7% of the voting power of Charter’s outstanding shares.Charter. As a result of the A/N Proxy and the GCI Liberty Interactive Proxy, Agreement, Liberty Broadband controls 25.01% of the aggregate voting power of Charter following the completion of the Time Warner Cable Merger and the Bright House Transaction and is Charter’s largest stockholder.
I-12
TableLiberty’s equity ownership in Charter (on a fully diluted basis) is capped at the greater of Contents26% or the cap on its voting interest. Liberty’s voting interest in Charter is capped at the greater of (x) 25.01% (or 0.01% above the person or group holding the highest voting percentage of Charter) and (y) 23.5% increased 1-for-one to a maximum of 35% for each permanent reduction in A/N’s equity interest in Charter below 15%. As of June 30, 2020, Liberty does not believe it has exceeded the cap on its equity ownership in Charter.
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
SoAdditionally, so long as the A/N Proxy is in effect, if A/N proposes to transfer common units of Charter Communications Holdings, LLC (which units are exchangeable into Charter shares and which will, under certain circumstances, result in the conversion of certain shares of ClassCharter class B Common Stockcommon stock into Charter shares) or Charter shares, in each case, constituting either (i) shares representing the first 7.0% of the outstanding voting power of Charter held by A/N or (ii) shares representing the last 7.0% of the outstanding voting power of Charter held by A/N, Liberty Broadband will have a ROFRright of first refusal (“ROFR”) to purchase all or a portion of any such securities A/N proposes to transfer. The
I-10
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
purchase price per share for any securities sold to Liberty Broadband pursuant to the ROFR will be the volume-weighted average price of Charter shares for the two trading day period before the notice of a proposed sale by A/N, payable in cash. Certain transfers are permitted to affiliates of A/N, subject to the transferee entity entering into an agreement assuming the transferor’s obligations under the A/N Proxy.
Investment in Charter
For discussion purposesDuring the term “Charter” will be usedsix months ended June 30, 2020, Liberty Broadband exercised its preemptive right to discuss both our previous and current holdings in Legacy Charter and Charter. It is noted that the ticker symbol for thepurchase an aggregate of approximately 35 thousand shares of Charter’s Class A common stock for an aggregate purchase price of each of Legacy Charter and Charter are the same, and that in connection with the Time Warner Cable Merger, Legacy Charter underwent a corporate reorganization, resulting$14.9 million.
Investment in Charter a former subsidiary of Legacy Charter, becoming the new publicly traded parent company.
As of September 30, 2017, the carrying value of Liberty Broadband’s ownership in Charter was approximately $9,327 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2017 was approximately $19,651 million, which represented an approximate economic ownership of 22% of the outstanding equity of Charter as of that date.
The excess basis is $2,100in our investment in Charter of $4,555 million as of SeptemberJune 30, 2017 and has been2020 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):
| | | | | |
| | | June 30, | | December 31, |
| | | 2020 | | 2019 |
Property and equipment |
| $ | 236 | | 225 |
Customer relationships | |
| 1,180 | | 1,043 |
Franchise fees | |
| 2,182 | | 1,996 |
Trademarks | |
| 29 | | 29 |
Goodwill | |
| 1,883 | | 1,630 |
Debt | |
| (70) | | (9) |
Deferred income tax liability | |
| (885) | | (817) |
| | $ | 4,555 | | 4,097 |
|
|
|
|
|
Property and equipment |
| $ | 174 |
|
Customer relationships |
|
| 346 |
|
Franchise fees |
|
| 1,170 |
|
Trademarks |
|
| 29 |
|
Goodwill |
|
| 1,046 |
|
Debt |
|
| (20) |
|
Deferred income tax liability |
|
| (645) |
|
|
| $ | 2,100 |
|
Upon acquisition, Liberty Broadband ascribed remaining useful lives of 7 years and 13 years to propertyProperty and equipment and customer relationships have weighted average remaining useful lives of approximately 5 years and 9 years, respectively, and indefinite lives to franchise fees, trademarks and goodwill.goodwill have indefinite lives. The excess basis of outstanding debt is amortized over the contractual period using the effective interest ratestraight-line method. The increase in excess basis for the ninesix months ended SeptemberJune 30, 2017, was primarily due to Charter’s share buyback program. The Company’s Shareshare of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $15.3$41.7 million and $18.5$30.4 million, net of related taxes, for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and expenses of $44.0$81.8 million and $23.2$56.0 million, net of related taxes, for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt.
The Company had a dilution loss of $3.7$46.0 million and $16.3 million during the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and a dilution loss of $42.5$105.3 million and a dilution gain of $760.1$57.7 million during the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The dilution gainlosses for the nine months ended September 30, 2016 is primarily attributable to Liberty Broadband’s investment basis in Charter at a price per share below the new equity issued in the Time Warner Cable Merger. The dilution losses during the other periods presented arewere attributable to stock option exercises by employees and other third parties at prices below Liberty Broadband’s book basis per share.
I-13I-11
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Accounting Change
Charter adopted Accounting Standards Update (“ASU”) 2016-09 on January 1, 2017. Upon adoption of ASU 2016-09, Charter recognized excess tax benefits of approximately $136 million in deferred tax assets that were previously not recognized in a cumulative-effect adjustment to retained earnings. The impact of this entry on the Company’s equity is reflected in the line item Cumulative effect of accounting change at Charter in the accompanying condensed consolidated statement of equity.
Summarized unaudited financial information for Charter is as follows (amounts in millions):
Charter condensed consolidated balance sheets
|
|
|
|
|
|
| ||||||
|
| September 30, 2017 |
| December 31, 2016 |
| |||||||
| | | | | | | ||||||
|
| June 30, 2020 | | December 31, 2019 |
| |||||||
Current assets |
| $ | 4,132 |
| 3,300 |
| | $ | 4,770 | | 6,537 | |
Property and equipment, net |
|
| 33,300 |
| 32,963 |
| |
| 34,074 | | 34,591 | |
Goodwill |
|
| 29,554 |
| 29,509 |
| |
| 29,554 | | 29,554 | |
Intangible assets, net |
|
| 79,905 |
| 81,924 |
| |
| 73,808 | | 74,775 | |
Other assets |
|
| 1,337 |
| 1,371 |
| |
| 2,930 | | 2,731 | |
Total assets |
| $ | 148,228 |
| 149,067 |
| | $ | 145,136 | | 148,188 | |
Current liabilities |
|
| 10,419 |
| 9,572 |
| | | 9,142 | | 12,385 | |
Deferred income taxes |
|
| 26,576 |
| 26,665 |
| |
| 17,789 | | 17,711 | |
Long-term debt |
|
| 66,064 |
| 59,719 |
| |
| 77,663 | | 75,578 | |
Other liabilities |
|
| 2,591 |
| 2,745 |
| |
| 4,141 | | 3,703 | |
Equity |
|
| 42,578 |
| 50,366 |
| |
| 36,401 | | 38,811 | |
Total liabilities and shareholders’ equity |
| $ | 148,228 |
| 149,067 |
| | $ | 145,136 | | 148,188 | |
Charter condensed consolidated statements of operations
|
|
|
|
|
|
|
|
| ||||||||
| Three months ended |
| Nine months ended | |||||||||||||
| September 30, |
| September 30, | |||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | |||||||||
| | | | | | | | | ||||||||
| Three months ended |
| Six months ended | |||||||||||||
| June 30, | | June 30, | |||||||||||||
| 2020 | | 2019 | | 2020 | | 2019 | |||||||||
Revenue | $ | 10,458 |
| 10,037 |
| 30,979 |
| 18,728 | $ | 11,696 | | 11,347 | | 23,434 | | 22,553 |
Cost and expenses: |
|
|
|
|
|
|
|
| | | | | | | | |
Operating costs and expenses (excluding depreciation and amortization) |
| (6,703) |
| (6,482) |
| (19,857) |
| (12,157) |
| 7,297 | | 7,244 | | 14,729 | | 14,480 |
Depreciation and amortization |
| (2,701) |
| (2,437) |
| (7,846) |
| (4,412) |
| 2,428 | | 2,500 | | 4,925 | | 5,050 |
Other operating expenses, net |
| (145) |
| (207) |
| (374) |
| (776) | ||||||||
|
| (9,549) |
| (9,126) |
| (28,077) |
| (17,345) | ||||||||
Other operating (income) expenses, net |
| 2 | | 62 | | 9 | | 57 | ||||||||
| | 9,727 | | 9,806 | | 19,663 | | 19,587 | ||||||||
Operating income |
| 909 |
| 911 |
| 2,902 |
| 1,383 | | 1,969 | | 1,541 | | 3,771 | | 2,966 |
Interest expense, net |
| (788) |
| (724) |
| (2,250) |
| (1,771) |
| (957) | | (945) | | (1,937) | | (1,870) |
Other income (expense), net |
| (3) |
| 79 |
| (55) |
| 429 | | 30 | | (126) | | (296) | | (190) |
Income tax benefit (expense) |
| (26) |
| (16) |
| (99) |
| 3,135 |
| (166) | | (84) | | (195) | | (203) |
Net income (loss) |
| 92 |
| 250 |
| 498 |
| 3,176 | | 876 | | 386 | | 1,343 | | 703 |
Less: Net income attributable to noncontrolling interests |
| (44) |
| (61) |
| (156) |
| (108) | | (110) | | (72) | | (181) | | (136) |
Net income (loss) attributable to Charter shareholders | $ | 48 |
| 189 |
| 342 |
| 3,068 | $ | 766 | | 314 | | 1,162 | | 567 |
I-14
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
(5) Goodwill and Other Intangible AssetsDebt
There were no changes in the carrying amount of goodwill during the nine months ended September 30, 2017.
Intangible assets subject to amortization are comprised of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| |||||||||
|
| Gross |
|
|
| Net |
| Gross |
|
|
| Net |
| |
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| |
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| |
Acquired patents |
| $ | 10,823 |
| (9,633) |
| 1,190 |
| 10,823 |
| (8,450) |
| 2,373 |
|
Customer relationships |
|
| 10,213 |
| (6,463) |
| 3,750 |
| 10,213 |
| (5,440) |
| 4,773 |
|
Tradename |
|
| 2,838 |
| (1,809) |
| 1,029 |
| 2,838 |
| (1,528) |
| 1,310 |
|
Capitalized software |
|
| 857 |
| (763) |
| 94 |
| 850 |
| (710) |
| 140 |
|
|
| $ | 24,731 |
| (18,668) |
| 6,063 |
| 24,724 |
| (16,128) |
| 8,596 |
|
Skyhook’s patents are amortized straight-line over three and a half years and Skyhook’s tradename and customer relationship are amortized straight-line over five and a half years. Capitalized software intangible assets are amortized over three to five years. Amortization expense was $842 thousand and $850 thousand for the three months ended September 30, 2017 and 2016, respectively, and $2.5 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively.
The estimated future amortization expense for the next five years related to intangible assets with definite lives as of September 30, 2017 is as follows (amounts in thousands):
|
|
|
|
|
Remainder of 2017 |
| $ | 841 |
|
2018 |
| $ | 2,575 |
|
2019 |
| $ | 1,776 |
|
2020 |
| $ | 871 |
|
2021 |
| $ | — |
|
(6) Debt
Outstanding debt at September 30, 2017 and December 31, 2016 is summarized as follows:
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
|
| (amounts in thousands) | ||
2014 Margin Loans | $ | — |
| 400,000 |
2016 Margin Loans |
| — |
| 200,000 |
2017 Margin Loans |
| 500,000 |
| — |
Deferred loan costs |
| (3,025) |
| (1,488) |
| $ | 496,975 |
| 598,512 |
Less debt classified as current |
| — |
| (400,000) |
Total long-term debt | $ | 496,975 |
| 198,512 |
I-15
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
2014 Margin Loans
On October 30, 2014, in connection with and prior to the effectiveness of the Broadband Spin-Off, a wholly-owned special purpose subsidiary of the Company (“BroadbandSPV”) entered into two margin loan agreements (the “2014 Margin Loan Agreements”) with each of the lenders party thereto. The 2014 Margin Loan Agreements permitted BroadbandSPV, subject to certain funding conditions, to borrow term loans up to an aggregate principal amount equal to $400 million (the “2014 Margin Loans”). The maximum borrowing capacity of $400 million under the 2014 Margin Loan Agreements was outstanding at December 31, 2016. The maturity date of the 2014 Margin Loans was October 30, 2017, accordingly the debt was classified as current as of December 31, 2016. Borrowings under the 2014 Margin Loan Agreements bore interest at the three-month LIBOR rate plus a per annum spread of 1.55%, and had an unused commitment fee of 0.25% per annum based on the average daily unused portion of the 2014 Margin Loans. Interest was payable quarterly in arrears beginning on December 31, 2014. On August 31, 2017, the outstanding borrowings of $400 million were repaid, as discussed below.
2016 Margin Loans
On March 21, 2016, a wholly-owned special purpose subsidiary of the Company (“Cheetah 5”), entered into two margin loan agreements (the “2016 Margin Loan Agreements” and together with the 2014 Margin Loan Agreements, the “Margin Loan Agreements”) with each of the lenders party thereto. The 2016 Margin Loan Agreements permitted Cheetah 5, subject to certain funding conditions, to borrow initial term loans up to an aggregate principal amount equal to $200 million and delayed draw loans (the “Draw Loans”) up to an aggregate principal amount equal to $100 million, for an aggregate total of $300 million (collectively the “2016 Margin Loans”). Cheetah 5 had borrowed $200 million as of December 31, 2016 and had $100 million available to be drawn until September 21, 2017. The maturity date of the 2016 Margin Loans was March 21, 2018, accordingly the debt was classified as noncurrent as of December 31, 2016. Borrowings under the 2016 Margin Loans bore interest at the applicable LIBOR rate plus 2.10% per annum and had an unused commitment fee of 0.5% per annum based on the average daily unused portion of the Draw Loans. Interest was payable quarterly in arrears beginning on March 31, 2016. The proceeds of the 2016 Margin Loans were used for the Company’s additional investment in Charter during May 2016, as discussed in note 4. On August 31, 2017, the outstanding borrowings of $200 million were repaid, as discussed below.
Amended 2017 Margin Loan Facility
On August 31, 2017,19, 2019, a bankruptcy remote wholly owned subsidiary of the Company (“SPV”), entered into aAmendment No. 2 to its multi-draw margin loan credit facility (the “2017“Amended 2017 Margin Loan Facility” and, the credit agreement governing such facility, the “2017“Amended 2017 Margin Loan Agreement”) with BankWilmington Trust, National Association as the successor administrative agent, BNP Paribas, Dublin Branch, as the successor calculation agent, and the
I-12
Table of America, N.A and the Contents
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
lenders thereunder. SPV is permitted, subject to certain funding conditions, to borrow term loans up to an aggregate principal amount equal to $1.0 billion. SPV will also have the ability from time to time to request additional loans in an aggregate principal amount of up to $1.0 billion on an uncommitted basis subject to certain conditions. SPV had borrowed $500Outstanding borrowings under the facility were $575 million as of SeptemberJune 30, 20172020 and had $500December 31, 2019. As of June 30, 2020, SPV was permitted to borrow an additional $425 million, available towhich may be drawn untilthrough August 31, 2018.19, 2020. The maturity date of the loans under the Amended 2017 Margin Loan Agreement is August 30, 201924, 2021 (except for any incremental loans incurred thereunder to the extent SPV and the incremental lenders agree to a later maturity date). Accordingly, the debt is classified as noncurrent as of September 30, 2017. Borrowings under the Amended 2017 Margin Loan Agreement bear interest at the three-month LIBOR rate plus a per annum spread of 1.5%, unless it is unlawful for the applicable lender to fund or maintain loans based on LIBOR or there are material restrictions on the applicable lender to do so, in which case borrowings under the 2017 Margin Loan Agreement will either (a) bear interest at 0.5% plus the higher of (i) the federal funds rate plus ½ of 1%, (ii) the prime rate and (iii) LIBOR plus 1% for each day during such period or (b) be prepaid.. Borrowings outstanding under thesethis margin loansloan bore interest at a rate of 2.74%1.81% per annum at SeptemberJune 30, 2017. Interest2020 and is payable quarterly in arrears beginning on September 29, 2017. SPV used available cash and a portion of the proceeds of the loans under the 2017 Margin Loan Facility to repay the Margin Loan Agreements. Borrowings may also be used for distribution as a dividend or a return of capital, for the purchase of margin stock and for general corporate purposes. arrears.
The Amended 2017 Margin Loan Agreement contains various affirmative and negative covenants that restrict the activities of the SPV (and, in some cases, the Company and its subsidiaries with respect to shares of Charter owned by the Company and its
I-16
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
subsidiaries). The Amended 2017 Margin Loan Agreement does not include any financial covenants. The Amended 2017 Margin Loan Agreement also contains restrictions related to additional indebtedness and events of default customary for margin loans of this type.
SPV’s obligations under the Amended 2017 Margin Loan Agreement are secured by first priority liens on a portion of the Company’s ownership interest in Charter, sufficient for SPV to meet the loan to value requirements under the Amended 2017 Margin Loan Agreement. The Amended 2017 Margin Loan Agreement indicates that no lender party shall have any voting rights with respect to the shares transferred, except to the extent that a lender party buys any shares in a sale or other disposition made pursuant to the terms of the loan agreements.As of SeptemberJune 30, 2017, approximately2020, 6.8 million shares of Charter with a value of $2.5$3.5 billion were pledged as collateral pursuant to the Amended 2017 Margin Loan Agreement.
(7)(6) Stock-Based Compensation
Liberty Broadband grants, to certain of its directors, employees and employees of its subsidiaries, restricted stock, restricted stock units (“RSUs”) and stock options to purchase shares of its common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three months |
| Nine months |
| |||||||||||||||
|
| ended |
| ended |
| |||||||||||||||
|
| September 30, |
| September 30, |
| |||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||
| | | | | | | | | | | ||||||||||
| | Three months | | Six months |
| |||||||||||||||
| | ended | | ended |
| |||||||||||||||
| | June 30, | | June 30, |
| |||||||||||||||
| | 2020 | | 2019 | | 2020 | | 2019 |
| |||||||||||
Operating expense |
| $ | 3 |
| 4 |
| 5 |
| 2 |
|
| $ | 12 |
| 11 |
| 13 |
| 48 | |
Selling, general and administrative |
|
| 1,429 |
| 1,596 |
| 4,032 |
| 4,363 |
| |
| 1,921 | | 2,512 | | 3,721 |
| 5,091 | |
Research and development |
|
| 67 |
| 136 |
| 339 |
| 217 |
| ||||||||||
|
| $ | 1,499 |
| 1,736 |
| 4,376 |
| 4,582 |
| ||||||||||
| | $ | 1,933 | | 2,523 | | 3,734 |
| 5,139 | |
Liberty Broadband – Grants of Stock OptionsAwards
During the six months ended June 30, 2020, Liberty Broadband granted 100 thousand options to purchase shares of Series C Liberty Broadband common stock to our CEO. Such options had a GDFV of $27.39 per share and vest on December 31, 2020.
I-13
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
There were no0 options to purchase shares of Series A or Series B or Series C common stock granted during the ninesix months ended SeptemberJune 30, 2017. 2020.
During the six months ended June 30, 2020, Liberty Broadband granted 2 thousand time-based RSUs of Series C Liberty Broadband common stock to our CEO. The RSUs had a GDFV of $120.71 per share and cliff vest on December 10, 2020. This RSU grant was issued in lieu of our CEO receiving 50% of his remaining base salary for the last 3 quarters of calendar year 2020, and he has waived his right to receive the other 50%, in each case, in light of the ongoing financial impact of COVID-19.
The Company calculates the GDFV for all of its equity classified awards and any subsequent remeasurement of its liability classified awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. Since Liberty Broadband common stock has not traded on the stock market for a significant length of time, theThe volatility used in the calculation for Awards is based on a blend of the historical volatility of Liberty Broadband and Charter common stock and the implied volatility of publicly traded Liberty Broadband and Charter options; as the most significant asset within Liberty Broadband, the volatility of Charter was considered in the overall volatility of Liberty Broadband.stock. The Company uses a zero0 dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject option.options.
I-17
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Liberty Broadband – Outstanding Awards
The following tables present the number and weighted average exercise price (“WAEP”) of Awards to purchase Liberty Broadband common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
| Weighted |
|
|
| ||||||||||
|
|
|
|
|
| average |
|
| ||||||||||||
|
|
|
|
|
| remaining |
| Aggregate | ||||||||||||
|
|
|
|
|
| contractual |
| intrinsic | ||||||||||||
|
| Series A |
| WAEP |
| life |
| value | ||||||||||||
|
| (in thousands) |
|
|
| (in years) |
| (in millions) | ||||||||||||
Outstanding at January 1, 2017 |
| 454 |
| $ | 32.47 |
|
|
|
| |||||||||||
| | | | | | | | | ||||||||||||
|
|
|
|
| |
| Weighted |
|
| | ||||||||||
| | | | | | | average | | | | ||||||||||
| | | | | | | remaining | | Aggregate | |||||||||||
| | | | | | | contractual | | intrinsic | |||||||||||
| | Series A | | WAEP | | life | | value | ||||||||||||
| | (in thousands) | | | | (in years) | | (in millions) | ||||||||||||
Outstanding at January 1, 2020 |
| 4 | | $ | 47.92 | | | | | |||||||||||
Granted |
| — |
| $ | — |
|
|
|
|
| — | | $ | — | | | | | ||
Exercised |
| (49) |
| $ | 26.85 |
|
|
|
|
| (3) | | $ | 51.83 | | | | | ||
Forfeited/cancelled |
| — |
| $ | — |
|
|
|
| | — | | $ | — | | | | | ||
Outstanding at September 30, 2017 |
| 405 |
| $ | 33.15 |
| 2.2 |
| $ | 25 | ||||||||||
Exercisable at September 30, 2017 |
| 402 |
| $ | 33.06 |
| 2.2 |
| $ | 25 | ||||||||||
Outstanding at June 30, 2020 |
| 1 | | $ | 40.92 |
| 1.8 | | $ | — | ||||||||||
Exercisable at June 30, 2020 |
| 1 | | $ | 40.92 |
| 1.8 | | $ | — |
| | | | | | | | | | |
|
|
|
|
| |
| Weighted |
|
| |
| | | | | | | average | | | |
| | | | | | | remaining | | Aggregate | |
| | | | | | | contractual | | intrinsic | |
| | Series C | | WAEP | | life | | value | ||
| | (in thousands) | | | | | (in years) | | (in millions) | |
Outstanding at January 1, 2020 |
| 1,932 | | $ | 61.43 | | | | | |
Granted |
| 109 | | $ | 112.93 | | | | | |
Exercised |
| (6) | | $ | 51.81 | | | | | |
Forfeited/cancelled | | — | | $ | — | | | | | |
Outstanding at June 30, 2020 |
| 2,035 | | $ | 64.21 |
| 4.9 | | $ | 122 |
Exercisable at June 30, 2020 |
| 1,617 | | $ | 50.00 |
| 4.5 | | $ | 120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
| average |
|
|
|
|
|
|
|
|
|
| remaining |
| Aggregate | |
|
|
|
|
|
|
| contractual |
| intrinsic | |
|
| Series C |
| WAEP |
| life |
| value | ||
|
| (in thousands) |
|
|
|
| (in years) |
| (in millions) | |
Outstanding at January 1, 2017 |
| 2,467 |
| $ | 42.45 |
|
|
|
|
|
Granted |
| — |
| $ | — |
|
|
|
|
|
Exercised |
| (94) |
| $ | 27.08 |
|
|
|
|
|
Forfeited/cancelled |
| — |
| $ | — |
|
|
|
|
|
Outstanding at September 30, 2017 |
| 2,373 |
| $ | 43.06 |
| 5.4 |
| $ | 124 |
Exercisable at September 30, 2017 |
| 851 |
| $ | 33.59 |
| 2.3 |
| $ | 52 |
As of SeptemberJune 30, 2017,2020, the total unrecognized compensation cost related to unvested Awards was approximately $11 million.$9.9 million. Such amount will be recognized in the Company's condensed consolidated statements of operations over a weighted average period of approximately 22.5 years.
As of SeptemberJune 30, 2017,2020, Liberty Broadband reserved 2.82.0 million shares of Series A and Series C common stock for issuance under exercise privileges of outstanding stock Awards.
Skyhook Equity Incentive Plans
Skyhook issued 3.3 million phantom stock appreciation rights (“PARs”) and no phantom stock units (“PSUs”) during the nine months ended September 30, 2017. As of September 30, 2017, the fair value of outstanding PARs and PSUs was approximately $2.4 million. As of September 30, 2017, $1.6 million (Level 3) is included in Other current liabilities in the accompanying condensed consolidated balance sheet for the fair value of Skyhook’s vested long-term incentive plan obligations.
I-18I-14
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Skyhook Equity Incentive Plans
(8)Long-Term Incentive Plans
Skyhook has a long-term incentive plan which provides for the granting of phantom stock appreciation rights and phantom stock units to employees, directors, and consultants of Skyhook that is not significant to Liberty Broadband. As of June 30, 2020 and December 31, 2019, $1.0 million and $1.2 million, respectively, are included in other liabilities for the fair value (Level 2) of the Company’s long-term incentive plan obligations.
(7) Commitments and Contingencies
Leases
Skyhook leases various properties under operating leases expiring at various times through 2018. Skyhook’s two principal facilities are under lease through December 2017 and December 2019, respectively. Including amounts due to Liberty under the facilities sharing agreement, the Company’s total rental expense was $368 thousand and $452 thousand for each of the three months ended September 30, 2017 and 2016, respectively, and $890 thousand and $1.0 million for each of the nine months ended September 30, 2017 and 2016, respectively.
General Litigation
In the ordinary course of business, the Company and its consolidated subsidiary are parties to legal proceedings and claims involving alleged infringement of third-party intellectual property rights, defamation, and other claims, including infringement of the intellectual property rights of the Company and its consolidated subsidiary by third parties.claims. Although it is reasonably possible that the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. 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 condensed consolidated financial statements.
Indemnification Claims
In the normal course of business, Skyhook provides indemnification to certain customers against specified claims that might arise against those customers from the use of Skyhook’s products. To date, Skyhook has not made any significant reimbursements to any of its customers for any losses related to these indemnification provisions. However, four such claims are currently pending. Skyhook is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations, although Skyhook’s liabilities in certain of those arrangements are customarily limited in various respects, including monetarily. Accordingly, no accrual was recorded related to indemnification claims as of September 30, 2017 or December 31, 2016.
Certain Risks and Concentrations
The Skyhook business is subject to certain risks and concentrations including dependence on relationships with its customers. The Company’s largest customers, that accounted for greater than 10% of revenue individually, aggregated 57%60% and 85%70% of total revenue for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and 57%59% and 64%72% of total revenue for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
Off-Balance Sheet Arrangements
Liberty Broadband did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.
(9)
(8) Segment Information
Liberty Broadband identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA or total assets and (B) those equity method affiliates whose share of earnings or losses represent 10% or more of Liberty Broadband’s annual pre-tax earnings.earnings (losses).
Liberty Broadband evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and Adjusted OIBDA. In addition, Liberty Broadband reviews nonfinancial measures such as subscriber growth.
I-19
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
For segment reporting purposes, Liberty Broadband defines Adjusted OIBDA as revenue less operating expenses and selling, general and administrative expenses (excluding stock-based compensation). Liberty Broadband believes this measure is an important indicator of the operational strength and performance of its businesses includingby identifying those items that are not directly a reflection of each business’s ability to service debt and fund capital expenditures.business’ performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be
I-15
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
considered in addition to, but not as a substitute for, operating income, net earnings, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty Broadband generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.
For the ninesix months ended SeptemberJune 30, 2017,2020, Liberty Broadband has identified the following consolidated subsidiarycompany and equity method investment as its reportable segments:
| Skyhook—a wholly owned subsidiary of the Company that provides |
| Charter—an equity method investment |
I-20
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Liberty Broadband’s operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments that are also consolidated companies are the same as those described in the Company’s summary of significant accounting policies in the Company’s annual financial statements.statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. We have included amounts attributable to Charter in the tables below. Although Liberty Broadband owns less than 100% of the outstanding shares of Charter, 100% of the Charter amounts are included in the scheduletables below and subsequently eliminated in order to reconcile the account totals to the Liberty Broadband condensed consolidated financial statements.
Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, |
| |||||||
|
| 2017 |
| 2016 |
| |||||
|
|
|
|
| Adjusted |
|
|
| Adjusted |
|
|
| Revenue |
| OIBDA |
| Revenue |
| OIBDA |
| |
|
|
| (amounts in thousands) |
| ||||||
Skyhook |
| $ | 3,430 |
| (980) |
| 20,616 |
| 11,422 |
|
Charter |
|
| 10,458,000 |
| 3,674,000 |
| 10,037,000 |
| 3,429,000 |
|
Corporate and other |
|
| — |
| (2,366) |
| — |
| (2,091) |
|
|
|
| 10,461,430 |
| 3,670,654 |
| 10,057,616 |
| 3,438,331 |
|
Eliminate equity method affiliate |
|
| (10,458,000) |
| (3,674,000) |
| (10,037,000) |
| (3,429,000) |
|
Consolidated Liberty Broadband |
| $ | 3,430 |
| (3,346) |
| 20,616 |
| 9,331 |
|
| | | | | | | | | | | ||||||||||
| | Three months ended June 30, |
| |||||||||||||||||
| | 2020 | | 2019 |
| |||||||||||||||
| | | | | Adjusted | | | | Adjusted |
| ||||||||||
| | Revenue | | OIBDA | | Revenue | | OIBDA |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Nine months ended September 30, |
| |||||||||||||||||
|
| 2017 |
| 2016 |
| |||||||||||||||
|
|
|
| Adjusted |
|
|
| Adjusted |
| |||||||||||
|
| Revenue |
| OIBDA |
| Revenue |
| OIBDA |
| |||||||||||
|
| (amounts in thousands) |
| |||||||||||||||||
| | | (amounts in thousands) |
| ||||||||||||||||
Skyhook |
| $ | 9,643 |
| (6,839) |
| 27,413 |
| 1,234 |
|
| $ | 4,114 |
| (1,045) |
| 3,747 |
| (876) | |
Charter |
|
| 30,979,000 |
| 10,946,000 |
| 18,728,000 |
| 5,963,000 |
| |
| 11,696,000 | | 4,487,000 | | 11,347,000 | | 4,123,000 | |
Corporate and other |
|
| — |
| (5,423) |
| — |
| (7,170) |
| |
| — | | (6,362) | | — | | (3,298) | |
|
|
| 30,988,643 |
| 10,933,738 |
| 18,755,413 |
| 5,957,064 |
| ||||||||||
| |
| 11,700,114 | | 4,479,593 | | 11,350,747 | | 4,118,826 | | ||||||||||
Eliminate equity method affiliate |
|
| (30,979,000) |
| (10,946,000) |
| (18,728,000) |
| (5,963,000) |
| |
| (11,696,000) | | (4,487,000) | | (11,347,000) | | (4,123,000) | |
Consolidated Liberty Broadband |
| $ | 9,643 |
| (12,262) |
| 27,413 |
| (5,936) |
| | $ | 4,114 | | (7,407) | | 3,747 | | (4,174) | |
| | | | | | | | | | |
| | Six months ended June 30, |
| |||||||
| | 2020 | | 2019 |
| |||||
| | | | Adjusted | | | | Adjusted |
| |
| | Revenue | | OIBDA | | Revenue | | OIBDA |
| |
| | (amounts in thousands) |
| |||||||
Skyhook |
| $ | 8,218 |
| (1,767) |
| 7,205 |
| (2,069) | |
Charter | |
| 23,434,000 |
| 8,876,000 |
| 22,553,000 |
| 8,183,000 | |
Corporate and other | |
| — |
| (10,621) |
| — |
| (5,222) | |
| |
| 23,442,218 |
| 8,863,612 |
| 22,560,205 |
| 8,175,709 | |
Eliminate equity method affiliate | |
| (23,434,000) |
| (8,876,000) |
| (22,553,000) |
| (8,183,000) | |
Consolidated Liberty Broadband | | $ | 8,218 |
| (12,388) |
| 7,205 |
| (7,291) | |
I-21I-16
LIBERTY BROADBAND CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
Other Information
| | | | | | | | | ||||||||
| | June 30, 2020 |
| |||||||||||||
| | Total | | Investments | | Capital |
| |||||||||
| | assets | | in affiliates | | expenditures |
| |||||||||
|
|
|
|
|
|
|
|
| ||||||||
|
| September 30, 2017 |
| |||||||||||||
|
| Total |
| Investments |
| Capital |
| |||||||||
|
| assets |
| in affiliates |
| expenditures |
| |||||||||
|
| (amounts in thousands) |
| |||||||||||||
| | (amounts in thousands) |
| |||||||||||||
Skyhook |
| $ | 26,136 |
| — |
| 27 |
|
| $ | 18,912 |
| — |
| 35 | |
Charter |
|
| 148,228,000 |
| — |
| 6,096,000 |
| |
| 145,136,000 |
| — |
| 3,338,000 | |
Corporate and other |
|
| 9,455,758 |
| 9,326,871 |
| — |
| |
| 12,316,487 |
| 12,306,593 |
| — | |
|
|
| 157,709,894 |
| 9,326,871 |
| 6,096,027 |
| ||||||||
| |
| 157,471,399 |
| 12,306,593 |
| 3,338,035 | | ||||||||
Eliminate equity method affiliate |
|
| (148,228,000) |
| — |
| (6,096,000) |
| |
| (145,136,000) |
| — |
| (3,338,000) | |
Consolidated Liberty Broadband |
| $ | 9,481,894 |
| 9,326,871 |
| 27 |
| | $ | 12,335,399 |
| 12,306,593 |
| 35 | |
The following table provides a reconciliation of consolidated segment Adjusted OIBDA to Operating income (loss) and Earnings (loss) before income taxes:
| | | | | | | | | | | ||||||||||
| | Three months ended | | Six months |
| |||||||||||||||
| | June 30, | | ended June 30, |
| |||||||||||||||
| | 2020 | | 2019 | | 2020 |
| 2019 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three months |
| Nine months |
| |||||||||||||||
|
| ended September 30, |
| ended September 30, |
| |||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||
|
|
| (amounts in thousands) |
| ||||||||||||||||
Consolidated segment Adjusted OIBDA |
| $ | (3,346) |
| 9,331 |
| (12,262) |
| (5,936) |
| ||||||||||
| | | (amounts in thousands) |
| ||||||||||||||||
Adjusted OIBDA |
| $ | (7,407) |
| (4,174) |
| (12,388) |
| (7,291) | | ||||||||||
Stock-based compensation |
|
| (1,499) |
| (1,736) |
| (4,376) |
| (4,582) |
| |
| (1,933) | | (2,523) | | (3,734) |
| (5,139) | |
Depreciation and amortization |
|
| (942) |
| (971) |
| (2,844) |
| (2,935) |
| |
| (492) | | (469) | | (985) |
| (937) | |
Operating income (loss) |
|
| (5,787) |
| 6,624 |
| (19,482) |
| (13,453) |
| | | (9,832) | | (7,166) | | (17,107) | | (13,367) | |
Interest expense |
|
| (5,518) |
| (4,090) |
| (14,899) |
| (10,547) |
| | | (5,131) | | (6,342) | | (10,992) |
| (12,885) | |
Dividend and interest income |
|
| 422 |
| 190 |
| 1,219 |
| 4,697 |
| ||||||||||
Share of earnings (loss) of affiliates |
|
| (5,280) |
| 19,046 |
| 25,109 |
| 570,178 |
| ||||||||||
Realized and unrealized gains (losses) on financial instruments, net |
|
| 2,675 |
| — |
| 5,026 |
| 92,990 |
| ||||||||||
Share of earnings (loss) of affiliates, net | |
| 158,128 | | 45,400 | | 219,810 |
| 80,249 | | ||||||||||
Gain (loss) on dilution of investment in affiliate |
|
| (3,718) |
| (16,331) |
| (42,515) |
| 760,074 |
| |
| (46,001) | | (16,322) | | (105,326) |
| (57,725) | |
Other, net |
|
| 9 |
| 5 |
| 11 |
| 112 |
| |
| 28 | | 406 | | 191 |
| 829 | |
Earnings (loss) before income taxes |
| $ | (17,197) |
| 5,444 |
| (45,531) |
| 1,404,051 |
| | $ | 97,192 | | 15,976 | | 86,576 |
| (2,899) | |
I-22I-17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; new service and product offerings; future expenses; the return on our investment in, and performance of our equity affiliate, Charter Communications, Inc. (“Charter”), and its expectations related to COVID-19 (as defined below); Charter’s ongoing integration of its acquired operations; the recoverability of our goodwill and other long-lived assets;Potential Combination (as defined below); our projected sources and uses of cash; indebtedness; and the anticipated non-material impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but such statements necessarily involve risks and uncertainties and there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors (as they relate to our consolidated subsidiary and equity affiliate) that could cause actual results or events to differ materially from those anticipated:
| The impact of the novel coronavirus (“COVID-19”) pandemic and local, state and federal governmental responses to the pandemic on the economy, our customers, our vendors, and our businesses generally; |
● | Charter’s ability |
|
|
| the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, digital subscriber line providers, fiber to the home providers, |
|
|
| Charter’s ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents); |
|
|
| any events that disrupt Charter’s or Skyhook’s networks, information systems or properties and impair their operating activities or negatively impact their respective reputation; |
● | the effects of governmental regulation on the business of Charter and Skyhook, including costs, disruptions and possible limitations on Charter’s operating flexibility related to, and its ability to comply with, regulatory conditions applicable to Charter as a result of previous mergers; |
● | general business conditions, economic uncertainty or downturn, including the impacts of the COVID-19 pandemic to unemployment levels and the level of activity in the housing sector; |
● | failure to protect the security of personal information about the customers of our operating subsidiary and equity affiliate, subjecting us to costly government enforcement actions or private litigation and reputational damage; |
| changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings; |
| the |
|
|
| the ability of suppliers and vendors to deliver products, equipment, software and services; |
| the outcome of any pending or threatened litigation; |
I-23I-18
| changes in the nature of key strategic relationships with partners, vendors and joint |
| the availability and access, in general, of funds to meet debt obligations prior to or when they become due and to fund operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; |
| the ability of Charter and our company to comply with all covenants in their and our respective debt instruments, any violation of which, if not cured in a timely manner, could trigger a default of other obligations under cross-default provisions; and |
| our ability to successfully monetize certain of our |
|
|
For additional risk factors, please see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2019 and Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto. Additionally, see note 1 tothereto and our Annual Report on Form 10-K for the accompanying condensed consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an impact on our financial statements.year ended December 31, 2019.
Overview
During May 2014, the board of directors of Liberty Media Corporation and its subsidiaries (“Liberty”) authorized management to pursue a plan to spin-off to its stockholders common stock of a wholly-owned subsidiary, Liberty Broadband Corporation (“Liberty Broadband” or the “Company”), and to distribute subscription rights to acquire shares of Liberty Broadband’s Series C common stock (the “Broadband Spin-Off”). At the time of the Broadband Spin-Off,stock. Liberty Broadband was comprisedformed in 2014 as a Delaware corporation.
Through a number of (i) Liberty’s formerprior years’ transactions, Liberty Broadband has acquired an interest in Charter Communications, Inc. (“Legacy Charter”), (ii) Liberty’s former wholly-owned subsidiary TruePosition, Inc., (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“Time Warner Cable”, “TWC”, or “Legacy TWC”), (iv) certain deferred tax liabilities, as well as liabilities related to the Time Warner Cable written call options and (v) initial indebtedness, pursuant to margin loans entered into prior to the completion of the Broadband Spin-Off. The Broadband Spin-Off was accounted for at historical cost due to the pro rata nature of the distribution to holders of Liberty common stock.
On May 18, 2016, Time Warner Cable merged with Legacy Charter (the “Time Warner Cable Merger”). In connection with the Time Warner Cable Merger, Legacy Charter underwent a corporate reorganization, resulting in CCH I, LLC, a former subsidiary of Legacy Charter (“Charter”), becoming the new publicly traded parent company. Also on May 18, 2016, the previously announced acquisition of Bright House Networks, LLC (“Bright House”) from Advance/Newhouse Partnership (“A/N”) by Charter (the “Bright House Transaction”) was completed. In connection with the Time Warner Cable Merger and Bright House Transaction, Liberty Broadband entered into certain agreements with Legacy Charter, Charter, Liberty Interactive Corporation (“Liberty Interactive”) and Time Warner Cable. In connection with the Time Warner Cable Merger and Bright House Transaction, Liberty Broadband exchanged its shares of Time Warner Cable for shares of Charter and purchased additional shares of Charter. As a result, and pursuantPursuant to proxy agreements entered into with GCI Liberty InteractiveInc. (“GCI Liberty”) and A/N,Advance/Newhouse Partnership, Liberty Broadband controls 25.01% of the aggregate voting power of Charter. In addition, in connection with the Time Warner Cable Merger, Liberty Broadband funded its purchase of shares of Charter Class A common stock using proceeds of $4.4 billion related to subscriptions for approximately 78.3 million newly issued shares of Liberty Broadband Series C common stock.
The Company’s wholly owned subsidiary, Skyhook Holding, Inc. (formerly known as TruePosition, Inc.(“Skyhook”), was originally incorporated to provide technology for locating wireless phones and other mobile devices through a passive network overlay system using its patented U-TDOA technology (“U-TDOA service”). In February 2014, Skyhook Holding, Inc. acquired 100% of the outstanding common shares of Skyhook Wireless, Inc., which operates a global location network containing billions of geolocated Wi-Fi access points and cell towers that serve as the reference infrastructure for providing
I-24
location services. In 2015, one of Skyhook Holding, Inc.’s customers, a wireless carrier utilizing the legacy U-TDOA service which accounted for approximately 80% - 90% of consolidated revenue at the time, gave notice that it planned to discontinue use of the U-TDOA service and did not intend to renew its contract, which expired on December 31, 2015. The loss of this customer had a material adverse effect on Skyhook Holding, Inc.’s business. As a result of the loss of this wireless carrier customer, further changes in the regulatory environment and a shift in the overall market for the legacy U-TDOA service, Skyhook Holding, Inc. ceased making further investment in its U-TDOA products. In 2016, Skyhook Holding, Inc. and Skyhook Wireless, Inc. combined operations in order to focusfocuses on the development and sale of Skyhook’s device-based location technology. Skyhook markets and sells two primary products: (1) a location determination service called the suite ofPrecision Location Solution; and (2) a location intelligence and context products, and are referred to collectively herein as “Skyhook.”data insights service called Geospatial Insights.
The financial information represents a consolidation of the historical financial information of Skyhook, Liberty Broadband’s interest in Charter Liberty Broadband’s former minority equity investment in Time Warner Cable and certain deferred tax liabilities. This financial information refers to the consolidation of the aforementioned subsidiary, investments, and financial instruments,Liberty Broadband Corporation as “Liberty Broadband,” “the Company,” “us,” “we” and “our” here and in the notes to the accompanying condensed consolidated financial statements.
On June 29, 2020, Liberty Broadband announced that a special committee of independent and disinterested directors formed by its board of directors, and a special committee of independent and disinterested directors formed by the board of directors of GCI Liberty, have informed Liberty Broadband and GCI Liberty that the special committees have reached a preliminary understanding regarding a possible exchange ratio (“Possible Exchange Ratio”) for a potential business combination transaction between Liberty Broadband and GCI Liberty (the “Potential Combination”), in which Liberty Broadband would acquire all of the outstanding shares of Series A common stock, Series B common stock, and Series A Cumulative Redeemable Preferred Stock of GCI Liberty in a stock-for-stock merger. The special committees of each of GCI Liberty and Liberty Broadband also reached a preliminary understanding with John C. Malone, Chairman of the Board of each of GCI Liberty and Liberty Broadband relating to the Potential Combination. Prior to any negotiations, including any discussions regarding a Possible Exchange Ratio or regarding any arrangements with Mr. Malone, the special committees of GCI Liberty and Liberty Broadband were formed and agreed with each other and with Mr. Malone that any Potential
I-25I-19
Combination would be subject to and conditioned upon (i) the negotiation by, and approval of, each special committee and (ii) approval by a non-waivable vote of the holders of a majority of the voting power of the outstanding shares of each company not held by Mr. Malone or any other interested parties.
The Company expects that there will be continued discussions between and among the special committees and Mr. Malone regarding a Potential Combination and related matters, including the negotiation of mutually acceptable transaction agreements. There can be no assurance, however, that any discussions that occur hereafter will result in the entry into definitive agreements concerning a Potential Combination or, if such definitive agreements are reached, that such definitive agreements will contain transaction terms consistent with those described above, nor can there be any assurance that a Potential Combination will ultimately be consummated. Discussions concerning a Potential Combination may be terminated at any time and without prior notice. Liberty Broadband does not intend to disclose developments with respect to the foregoing unless and until the special committees and the boards of directors of each of GCI Liberty and Liberty Broadband have approved a specific transaction, if any, except as may be required by law. Additional information regarding the Potential Combination can be found in the Current Report on Form 8-K filed by Liberty Broadband on June 29, 2020.
In December 2019, Chinese officials reported a novel coronavirus outbreak. COVID-19 has since spread through China and internationally. On March 11, 2020, the World Health Organization assessed COVID-19 as a global pandemic, causing many countries throughout the world to take aggressive actions, including imposing travel restrictions and stay-at-home orders, closing public attractions and restaurants, and mandating social distancing practices. During this time, Skyhook has maintained function of all departments and service has been uninterrupted. Skyhook’s business results for the first and second quarters of 2020 were largely unaffected by the pandemic; however, Skyhook cannot predict the ultimate impact of COVID-19 on its business, including its customer renewals, ability to generate new business and its ability to collect on payments from customers.
As the COVID-19 pandemic continues to significantly impact the United States, Charter has continued to deliver services uninterrupted by the pandemic. Because Charter has invested significantly in its network and through normal course capacity increases, Charter has been able to respond to the significant increase in network activity from the private and public response to COVID-19 as Charter does its part as a major provider of Internet services in the United States by, among other things, enabling social distancing through telecommuting and e-learning across its footprint of 41 states. Charter has invested significantly in its self-service infrastructure, and customers have accelerated the adoption of its self-installation and digital self-service capabilities. Charter’s front-line service infrastructure in call centers and field operations continues to experience higher service transaction volume and is performing well. Much of that increase in activity has been driven by increased demand for its connectivity services to residential, healthcare, government and educational customers. The response to Charter’s Remote Education Offer (“REO”) pursuant to which new customers with students or educators in the household were eligible to receive Internet service for free for 60 days generated 448,000 new Internet customers as of June 30, 2020, of which 288,000 had rolled off the promotional period by the end of the quarter while 160,000 remained within their free period. The REO program ended June 30, 2020 and is no longer being offered to new customers.
Charter also participated in the Federal Communications Commission's Keep Americans Connected (“KAC”) Pledge, pausing collection efforts and related disconnects for residential and small and medium business (“SMB”) customers with COVID-19 related payment challenges through June 30, 2020. Approximately 700,000 residential and SMB customers requested protection from disconnection under this program of which, at the peak of the program approximately 222,000 customers would have been disconnected under Charter’s normal collection policies. In an effort to assist these COVID-19 impacted customers with overdue balances, Charter waived approximately $85 million of receivables which was recorded as a reduction of revenue during the three and six months ended June 30, 2020. Any remaining balance will be paid over the next twelve months with continued service.
In addition, Charter has offered a seasonal plan at reduced rates to SMB and Enterprise hospitality customers that have requested a reduced level of service due to temporary business closure or because these customers have reduced their service offering to their own customers.
Charter cannot predict the ultimate impact of COVID-19 on its business, including the depth and duration of the economic impact to household formation and growth and its residential and business customers’ ability to pay for its products and services – including the impact of extended unemployment benefits and other stimulus packages. Charter expects that some of the COVID-19 programs discussed above may result in incremental churn and bad debt during the remainder of the
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year. In addition, there is uncertainty regarding the impact of government emergency declarations, the ability of suppliers and vendors to provide products and services to Charter, the pace of new housing construction, changes in business spend in its local and national ad sales business, the effects to employees’ health and safety and resulting reorientation of its work activities, and the risk of limitations on the deployment and maintenance of services (including by limiting customer support and on-site service repairs and installations).
Results of Operations—Consolidated—SeptemberJune 30, 20172020 and 20162019
Consolidated operating results:
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| (amounts in thousands) |
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Revenue |
| $ | 3,430 |
| 20,616 |
| 9,643 |
| 27,413 |
|
| $ | 4,114 |
| 3,747 |
| 8,218 |
| 7,205 | |
Operating expense |
|
| 643 |
| 778 |
| 1,963 |
| 2,097 |
| |
| 2,512 | | 2,216 | | 4,979 |
| 4,432 | |
Research and development |
|
| 1,373 |
| 2,248 |
| 5,875 |
| 7,823 |
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Selling, general and administrative |
|
| 4,760 |
| 8,259 |
| 14,067 |
| 23,429 |
| |
| 9,009 | | 5,705 | | 15,627 |
| 10,064 | |
Stock-based compensation |
|
| 1,499 |
| 1,736 |
| 4,376 |
| 4,582 |
| |
| 1,933 | | 2,523 | | 3,734 |
| 5,139 | |
Depreciation and amortization |
|
| 942 |
| 971 |
| 2,844 |
| 2,935 |
| |
| 492 | | 469 | | 985 |
| 937 | |
Operating income (loss) |
|
| (5,787) |
| 6,624 |
| (19,482) |
| (13,453) |
| | | (9,832) | | (7,166) | | (17,107) |
| (13,367) | |
Less impact of stock-based compensation and depreciation and amortization |
|
| 2,441 |
| 2,707 |
| 7,220 |
| 7,517 |
| | | 2,425 | | 2,992 | | 4,719 | | 6,076 | |
Adjusted OIBDA |
| $ | (3,346) |
| 9,331 |
| (12,262) |
| (5,936) |
| | $ | (7,407) | | (4,174) | | (12,388) |
| (7,291) | |
Revenue
Revenue decreased $17.2increased $0.4 million and $17.8$1.0 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the samecorresponding periods in the prior year. The decreaseincrease in revenue for both the three and ninesix months ended SeptemberJune 30, 2017,2020, as compared to the samecorresponding periods in the prior year, was primarily due to a new license agreement entered into during 2016 with no similar event occurring in 2017. On September 1, 2016, Skyhook entered into a license agreement pursuant to which Skyhook agreed to grant to the licensee a perpetual, non-exclusive, non-transferable, worldwide license to patents and patent applications owned by the companies. In exchange for this grant, the licensee agreed to pay a one-time lump sum payment of $17.5 million that was recognized asincreased revenue during the three months ended September 30, 2016.from existing customers.
Operating expense research and development, and selling, general and administrative expenses
Operating expense decreasedincreased by $135 thousand$0.3 million and $134 thousand$0.5 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the same periods in the prior year. Research and development expense decreased by $875 thousand and $1.9 million for the three and nine months ended September 30, 2017, respectively, as compared to the samecorresponding periods in the prior year, primarily as a result of headcount reductionsdue to increased personnel and other cost containment measures taken by Skyhook related to the run-off of the U-TDOA business.cloud computing costs. Selling, general, and administrative expense decreasedincreased by $3.5$3.3 million and $9.4$5.6 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the same periods in the prior year, primarily as a result of headcount reductions and other cost containment measures taken by Skyhook related to the run-off of the U-TDOA business coupled with reduced legal expenses of $1.3 million and $3.5 million, respectively, compared to the samecorresponding periods in the prior year. Legal expensesThe increases in the current year have not been as significant due to a decrease in activity associated with license sales in the current period.
Stock-based compensation
The decrease in stock-based compensationselling, general and administrative expense of $237 thousand and $206 thousand forduring the three and ninesix months ended SeptemberJune 30, 2017, respectively, as2020, compared to the corresponding periods in the prior year, were primarily due to adjustments madeincreased professional service fees at the corporate level of $2.9 million and $5.3 million, respectively.
Stock-based compensation
The decrease in stock-based compensation expense of $0.6 million and $1.4 million for the three and six months ended June 30, 2020, respectively, as compared to certain outstanding awardsthe corresponding periods in 2016 which increased theirthe prior year, was primarily due to a decrease in the value partially offset by additional grants of awards, andrestricted stock units of Liberty Broadband Series C common stock granted during the ongoing vestingfirst half of outstanding grants. 2020.
Depreciation and amortization
Depreciation and amortization expense decreased by $29 thousand and $91 thousandremained flat during the three and ninesix months ended SeptemberJune 30, 2017,2020, as compared to the corresponding periods in the prior year.
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Operating income (loss)
Operating loss increased $2.7 million and $3.7 million for the three and six months ended June 30, 2020, respectively, as compared to the corresponding periods in the prior year due to certain assets becoming fully depreciated.
I-26
Operating income (loss)
Operating loss increased $12.4 million and $6.0 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in the prior year due to the items discussed above.
Adjusted OIBDA
To provide investors with additional information regarding our financial results, we also disclose Adjusted OIBDA, which is a non-GAAP financial measure. We define Adjusted OIBDA as revenue less operating expensesincome (loss) plus depreciation and selling, generalamortization, stock-based compensation, separately reported litigation settlements, restructuring, acquisition and administrative expenses (excluding stock-based compensation).other related costs and impairment charges. Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses includingby identifying those items that are not directly a reflection of each business’s ability to service debt and fund capital expenditures.business’ performance or indicative of ongoing business trends. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to generally accepted accounting principles in the United States (“GAAP”). Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 9 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Operating income (loss) and Earnings (loss) before income taxes.
Adjusted OIBDA decreased $12.7$3.2 million and $6.3$5.1 million during the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the samecorresponding periods in the prior year. Adjusted OIBDA for the three months ended September 30, 2017 and 2016, includes $2.4 million and $2.1 million of corporate selling, general and administrative costs, respectively. Adjusted OIBDA for the nine months ended September 30, 2017 and 2016, includes $5.4 million and $7.2 million of corporate selling, general and administrative costs, respectively. The decreasedecreases in corporate selling, general and administrative costs for the nine months ended September 30, 2017, as compared to same periods in the prior year, was primarily due to decreased legal expenses. Legal expenses decreased in the current year due to legal expenses associated with the Transactions in 2016. The decrease in Skyhook Adjusted OIBDA for the three and ninesix months ended SeptemberJune 30, 2017,2020, as compared to the corresponding periods in the prior year, waswere due primarily to the new license agreement entered into during the three months ended September 30, 2016,increases in operating and selling, general and administrative expenses, partially offset by lower operating expensesthe increases in revenue, as discussed above.
Other Income and Expense
Components of Other income (expense) are presented in the table below.
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Interest expense |
| $ | (5,518) |
| (4,090) |
| (14,899) |
| (10,547) |
| | $ | (5,131) | | (6,342) | | (10,992) |
| (12,885) | |
Dividend and interest income |
|
| 422 |
| 190 |
| 1,219 |
| 4,697 |
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Share of earnings (losses) of affiliates |
|
| (5,280) |
| 19,046 |
| 25,109 |
| 570,178 |
| |
| 158,128 | | 45,400 | | 219,810 |
| 80,249 | |
Realized and unrealized gains (losses) on financial instruments, net |
|
| 2,675 |
| — |
| 5,026 |
| 92,990 |
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Gain (loss) on dilution of investment in affiliate |
|
| (3,718) |
| (16,331) |
| (42,515) |
| 760,074 |
| |
| (46,001) | | (16,322) | | (105,326) |
| (57,725) | |
Other, net |
|
| 9 |
| 5 |
| 11 |
| 112 |
| |
| 28 | | 406 | | 191 |
| 829 | |
|
| $ | (11,410) |
| (1,180) |
| (26,049) |
| 1,417,504 |
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| | $ | 107,024 | | 23,142 | | 103,683 |
| 10,468 | |
I-27
Interest expense
Interest expense increased $1.4decreased $1.2 million and $4.4$1.9 million during the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the corresponding periods in the prior year. The increase was primarily due to an increasedecreases were driven by a decrease in LIBORour weighted average interest rate during the current periods as compared to corresponding periods in the prior year.
Dividend and interest income
Dividend and interest income increased $232 thousand and decreased $3.5 million during the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The increase in dividend and interest income for the three months ended September 30, 2017, as compared to the same period in the prior year, was the result of increased interest income due to higher short-term marketable securities rates during the third quarter of 2017, partially offset by lower cash balances. The decrease in dividend and interest income foradditional amounts outstanding on the nine months ended September 30,Amended 2017 as compared to the same period in the prior year, was the result of a loss of dividend income due to the Time Warner Cable Merger during May 2016. Margin Loan Facility.
Share of earnings (losses) of affiliates
Share of earnings of affiliates decreased $24.3increased $112.7 million and $545.1$139.6 million during the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the corresponding periods in the prior year. The Company’s Share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $15.3$41.7 million and $18.5$30.4 million, net of related taxes, for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and expenses of $44.0$81.8 million and $23.2$56.0 million, net of related taxes, for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, due to
I-22
the increase in amortization related toof the excess basis of assets with identifiable useful lives and debt.debt, which was primarily due to Charter’s share buyback program. The decreasechange in the share of earnings of affiliates in the three and ninesix months ended SeptemberJune 30, 2017,2020, as compared to the samecorresponding periods in the prior year, was primarily the result of the Time Warner Cable Merger and related transactions during May 2016 (see note 4 to the accompanying condensed consolidated financial statements).corresponding change in net income at Charter.
The following is a discussion of Charter’s results of operations. In order to provide a better understanding of Charter’s operations, we have included a summarized presentation of Charter’s results from operations, as well as pro forma information for the period ended September 30, 2016 as if the Transactions had been completed on January 1, 2015. operations.
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Revenue |
| $ | 10,458 |
| 10,037 |
|
|
| 30,979 |
| 18,728 |
|
|
| 29,748 |
|
| $ | 11,696 |
| 11,347 | | 23,434 |
| 22,553 | |
Operating expenses, excluding stock-based compensation |
|
| (6,784) |
| (6,608) |
|
|
| (20,033) |
| (12,765) |
|
|
|
|
| |
| (7,209) | | (7,224) | | (14,558) |
| (14,370) | |
Adjusted OIBDA |
|
| 3,674 |
| 3,429 |
|
|
| 10,946 |
| 5,963 |
|
|
| 10,092 |
| |
| 4,487 | | 4,123 | | 8,876 |
| 8,183 | |
Depreciation and amortization |
|
| (2,701) |
| (2,437) |
|
|
| (7,846) |
| (4,412) |
|
|
|
|
| |
| (2,428) | | (2,500) | | (4,925) |
| (5,050) | |
Stock-based compensation |
|
| (64) |
| (81) |
|
|
| (198) |
| (168) |
|
|
|
|
| |
| (90) | | (82) | | (180) |
| (167) | |
Operating income |
|
| 909 |
| 911 |
|
|
| 2,902 |
| 1,383 |
|
|
| 2,813 |
| |
| 1,969 | | 1,541 | | 3,771 |
| 2,966 | |
Other expenses, net |
|
| (791) |
| (645) |
|
|
| (2,305) |
| (1,342) |
|
|
|
|
| |
| (927) | | (1,071) | | (2,233) |
| (2,060) | |
Net earnings (loss) before income taxes |
|
| 118 |
| 266 |
|
|
| 597 |
| 41 |
|
|
|
|
| |
| 1,042 | | 470 | | 1,538 |
| 906 | |
Income tax benefit (expense) |
|
| (26) |
| (16) |
|
|
| (99) |
| 3,135 |
|
|
|
|
| |
| (166) | | (84) | | (195) |
| (203) | |
Net earnings (loss) |
| $ | 92 |
| 250 |
|
|
| 498 |
| 3,176 |
|
|
|
|
| | $ | 876 | | 386 | | 1,343 |
| 703 | |
Charter net earnings decreased $158increased $490 million and $2,678$640 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the corresponding periods in the prior year.
Charter’s revenue increased $421$349 million and $12,251$881 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the corresponding periods in the prior year, primarily due to increases in the number of residential Internet and commercial business customers, price adjustments as well as price adjustments,an increase in Charter’s mobile service offset by a decrease in basic video
I-28
customers and advertising sales, and in the nine month period due$85 million of waived receivables related to the Transactions which increased total revenue by approximately $11.4 billion. On a pro forma basis, assumingKAC program.
During the Transactions occurred as of January 1, 2015, total revenue growth was 4.1% for the ninethree months ended SeptemberJune 30, 2017,2020, operating expenses, excluding stock-based compensation, decreased $15 million as compared to the corresponding period in 2016.the prior year. Operating costs decreased primarily due to lower regulatory, connectivity and produced content costs, offset by increased mobile device costs and mobile service and operating costs, as well as rising costs to service customers and programming costs.
The increase in revenue duringDuring the three and ninesix months ended SeptemberJune 30, 2017 was partially offset by the net impact of an increase in2020, operating expenses, excluding stock-based compensation, of $176increased $188 million and $7,268 million, respectively. The increase in operating expenses was primarily attributableas compared to the Transactions.corresponding period in the prior year. Operating costs also increased primarily due to an increase inincreased mobile device costs and mobile service and operating costs, as well as rising costs to service customers and programming costs, partially offset by lower regulatory, connectivity and produced content costs.
Programming costs increased as a result of contractual rate adjustments, including renewals and increases in amounts paid for retransmission consents, higher expanded basic packageconsent partly offset by lower video customers and a higher pay-per-view events, offset by synergies as a resultmix of lower cost video packages within Charter’s video customer base during the Transactions.three and six months ended June 30, 2020. Charter expects programming expenses towill continue to increase in future periods due to a variety of factors, including annual increases imposed by programmers with additional selling power as a result of media consolidation, increased demands by owners of broadcast stations for payment for retransmission consent or linking carriage of other services to retransmission consent, and additional programming, particularly new services. Charter has been unable to fully pass these increases on to its customers nor does notit expect to be able to fully passdo so in the cost increases on to its customersfuture without a potential loss of customers.
Costs to service customers increased primarily due to higher labor costs resulting from COVID-19 related wage increases and flex time benefits along with 6.3% customer growth partially offset by lower medical costs and one-time payroll tax credits. Bad debt expense increased only slightly given the revenue write-off associated with the KAC program and better collections enhanced by government stimulus benefits.
I-23
Regulatory, connectivity and produced content costs decreased due to timing of sports rights fees driven by delayed games due to COVID-19 and lower regulatory pass-through fees offset by higher original programming costs and costs of video devices sold to customers during the three and six months ended June 30, 2020.
Charter’s Adjusted OIBDA for the three and ninesix months ended SeptemberJune 30, 20172020 increased as a result of the discussion above. On a pro forma basis, Charter’s Adjusted OIBDA increased by $854 million for the nine months ended September 30, 2017, as a result of the discussion above, offset by increases in programming, marketing and transition costs which was offset by decreases in all other operating expense categories.reasons described above.
Depreciation and amortization expense increased $264decreased $72 million and $3,434$125 million during the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the same periods in the prior year. The increase in depreciation and amortization expense was primarily the result of higher capital expenditures in the current year, as well as additional depreciation and amortization related to the Transactions, inclusive of the incremental amounts as a result of the higher fair values recorded in acquisition accounting. Stock-based compensation expense decreased $17 million and increased $30 million during the three and nine months ended September 30, 2017, respectively, compared to the samecorresponding periods in the prior year primarily due to the Transactions. a decrease in depreciation and amortization as certain assets acquired in acquisitions become fully depreciated offset by an increase in depreciation as a result of more recent capital expenditures.
Charter’s results were also impacted by an increase in other expenses, net of $146which decreased $144 million and $963increased $173 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively. The increase in other expenses, net was primarily due to (i) decreases of $30 million and $524 million in other pension benefits for the three months and nine months ended September 30, 2017 and 2016,2020, respectively, and (ii) $64 million and $479 million of additional interest expense that was recognized during the three and nine months ended September 30, 2017, respectively, in each case, as compared to the same periodcorresponding periods in the prior year. The decrease in other pension benefits duringexpenses, net for the three months ended SeptemberJune 30, 2017,2020, as compared to the corresponding period in the prior year, was primarily due to increased gains on financial instruments, offset by increased interest expense and a third quarter 2017 remeasurement as a resultloss on extinguishment of significant lump sum settlement payments to participants.debt. The decreaseincrease in other pension benefits duringexpenses, net for the ninesix months ended SeptemberJune 30, 2017,2020, as compared to the corresponding period in the prior year, was primarily asdue to increased losses on financial instruments, increased interest expense and a resultloss on extinguishment of a $675 million pension curtailment gaindebt, partially offset by an $157 million net remeasurement loss recognized in 2016 that resulted from an amendmenta decrease to the plans made subsequent to the Time Warner Cable Merger. The increase in interest expense that was recognized during the three and nine months ended September 30, 2017, respectively, as compared to the same period in the prior year, was associated with debt assumed from Legacy TWC and an increase in weighted average debt outstanding primarily due to the issuance of notes in 2017. other expense.
Income tax expense increased $10$82 million and $3,234decreased $8 million for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the corresponding periods in the prior year. Income tax expense forincreased during the three and nine months ended SeptemberJune 30, 2017, was reduced2020 compared to the corresponding period in 2019 primarily as a result of higher pretax income offset by approximately $17 million and $88 million, respectively, due to theincreased recognition of excess tax benefits resulting from share basedshare-based compensation as a component of the provision for income taxes following the prospective application of Accounting Standard Update 2016-09.during 2020. Income tax expense fordecreased during the threesix months ended SeptemberJune 30, 2016 was also impacted by a change2020 compared to the corresponding period in a state tax law that resulted in approximately $44 million of tax benefit. Income tax benefit for the nine months ended September 30, 2017 was2019 primarily as a result of a reductionincreased recognition of substantially allexcess tax benefits resulting from share-based compensation during 2020 and an internal entity simplification that increased expense in 2019 offset by higher pretax income in 2020.
Gain (loss) on dilution of Legacy Charter’s preexisting valuation allowance associated with its deferred tax assetsinvestment in affiliate
The loss on dilution of approximately $3.3 billion as certain of the deferred tax liabilities that were assumedinvestment in connection with the closing of the Time Warner Cable Merger will reverse and provide a source of future taxable income.
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Realized and unrealized gains (losses) on financial instruments, net
Realized and unrealized gains on financial instruments, net declined $2.7affiliate increased by $29.7 million and $88.0$47.6 million forduring the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, as compared to the corresponding periods in the prior year. The realized gains during the three and nine months ended September 30, 2017 were related to the zero-strike call options (see discussion in note 3 to the accompanying condensed consolidated financial statements). During the three months ended September 30, 2016, there were no net realized or unrealized gains (losses) as we exited the derivative and Time Warner Cable shares were exchanged for Charter shares during the second quarter of 2016. The net realized and unrealized gain of $93.0 million for the nine months ended September 30, 2016, was attributable to gains in the fair value of our investment in Time Warner Cable, due to increases in the Time Warner Cable stock price during the period.
Gain (loss) on dilution of investment in affiliate
The loss on dilution of investment in affiliate improved $12.6 million during the three months ended September 30, 2017, as compared to the same period in the prior year, primarily due to a decrease of issuances of Charter common stock from the exercise of stock options held by employees and other third parties, at prices below Liberty Broadband’s book basis per share. The loss on dilution of investment in affiliate declined $802.6 million during the nine months ended September 30, 2017, as compared to the same period in the prior year, primarily due to the Company’s increased basis in Charter as a result of the Transactions during 2016, along with an increase in issuance of Charter common stock from the exercise of stock options held by employees and other third parties, at prices below Liberty Broadband’s book basis per share. As Liberty Broadband’s ownership in Charter changes due to exercises of Charter warrants and stock options, a loss is recorded with the effective sale of common stock, because the exercise price of Charter warrants or stock options is typically lower than the book value of the Charter shares held by Liberty Broadband.
Other, net
Other, net decreased $0.4 million and $0.6 million during the three and ninesix months ended SeptemberJune 30, 2017 is2020, respectively, as compared to the corresponding periods in the prior year. The decrease was primarily attributabledue to decreases in dividend and interest income as a gain onresult of lower interest rates and lower cash balances in the sale of certain fixed assets at Skyhook during the year, partially offset by tax penalties. Other, net during the three and nine months ended September 30, 2016 was attributable to a gain on the sale of shares of a certain Skyhook cost investment.current year.
Income tax benefit (expense)
During the three and ninesix months ended SeptemberJune 30, 2017,2020, we had an income tax benefitexpense of $7.3$25.0 million and $18.2$22.2 million, respectively, and the effective rate was approximately 42.6%25.7% and 40.1%, respectively.25.6%. For the three and ninesix months ended SeptemberJune 30, 2016,2019, we had an income tax expense of $1.7$3.9 million and $532.3an income tax benefit of $0.7 million, respectively, and the effective tax rate was approximately 30.4%24.6% and 37.9%22.4%, respectively. The differencedifferences between the effective income tax rate of 42.6%rates and the U.S. Federal income tax rate of 35%21% for the three and six months ended SeptemberJune 30, 2017 is primarily due to the effect of state income taxes2020 and unrealized gain attributable to the Company’s own stock which is not recognized for tax purposes. The difference between the effective income tax rate of 40.1% and the U.S. Federal income tax rate of 35% for the nine months ended SeptemberJune 30, 2017, is primarily due to the effect of state income taxes and unrealized gain attributable to the Company’s own stock which is not recognized for tax purposes. The difference between the effective income tax rate of 30.4% and the U.S. Federal income tax rate of 35% for the three months ended September 30, 2016 is primarily due to the effect of state income taxes. The difference between the effective income tax rate of 37.9% and the U.S. Federal income tax rate of 35% for the nine months ended September 30, 2016 is2019 were primarily due to the effect of state income taxes.
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Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2020, substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, cash generated by the operating activities of our privately-owned subsidiaries (to the extent such cash exceeds the working capital needs of the subsidiaries)subsidiaries and is not otherwise restricted), proceeds from asset sales, monetization of our investments, outstanding debt borrowings,facilities, including $425 million available to be drawn under the Amended 2017 Margin Loan Facility (as defined in note 5 to the accompanying condensed consolidated financial statements) until August 19, 2020, debt and equity issuances, and dividend and interest receipts.
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As of SeptemberJune 30, 2017,2020, Liberty Broadband had a cash balance of $135$17 million.
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| $ | (13) |
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| | $ | (14,945) |
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Net cash provided (used) by financing activities |
| $ | (46,694) |
| 4,599,682 |
| | $ | (1,919) | �� | 4,155 | |
The increasedecrease in cash used by operating activities in the ninesix months ended SeptemberJune 30, 2017,2020, as compared to the samecorresponding period in the prior year, was primarily driven by the increase in operating loss, as well as theincome and by timing of differences in cash receipts and payments.working capital accounts.
During the ninesix months ended SeptemberJune 30, 2016,2020, net cash flows fromused by investing activities were primarily relatedfor the exercise of preemptive rights to transactions in connection with the Time Warner Cable Merger and the Bright House Transaction, as discussed in note 4purchase an aggregate of the accompanying condensed consolidated financial statements.
During the nine months ended September 30, 2017, net cash flows from financing activities were primarily related to the net debt repayments of $103 million and settlement of the zero-strike call options (see notes 3 and 6 to the accompanying condensed consolidated financial statements).
During the nine months ended September 30, 2016, net cash flows from financing activities were primarily related to the Company’s issuance of $4.4 billion in additionalapproximately 35 thousand shares of Liberty Broadband Series CCharter’s Class A common stock tofor an aggregate purchase $4.3 billion in sharesprice of New Charter, in addition to net borrowings of $200.0 million under two margin loan agreements, entered into on March 21, 2016, between a subsidiary of the Company and the lenders thereto. $14.9 million.
The projected use of our cash will be primarily to fund any operational needs of our subsidiary, to service debt, to reimburse Liberty for amounts due under various agreements, to fund potential investment opportunities, and refinance Liberty Broadband’s margin loans, that come dueunder its Amended 2017 Margin Loan Facility, maturing in 2019.2021. We expect our potentialcorporate cash and other available sources of liquidity (discussed above) and corporate cash to cover corporate expenses and future obligations.for the foreseeable future.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities. Market risk refers to the risk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our borrowing and investment activities, which could include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We expect to manage our exposure to interest rates by achievingmaintaining what we believe is an appropriate mix of fixed and variable rate debt. We believe this best protects us from interest rate risk. We anticipate achievingIn the future, we could achieve this mix by (i) issuing fixed rate debt that we believe has a low stated interest rate and significant term to maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and/orand (iii) entering into interest rate swap arrangements when we deem appropriate. As of SeptemberJune 30, 2017,2020, our debt is comprised of the following amounts:
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Our stock in Charter (our equity method affiliate) is publicly traded and not reflected at fair value in our balance sheet. Our investment in Charter is also subject to market risk that is not directly reflected in our financial statements.
We are exposed to changes in stock prices primarily as a result of our significant holdings in publicly traded securities. We continually monitor changes in stock markets, in general, and changes in the stock prices of our holdings, specifically. We believe that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. We periodically use equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments are recorded at fair value based on option pricing models.
Item 4. Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were effective as of SeptemberJune 30, 20172020 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in the Company's internal control over financial reporting that occurred during the three and nine months ended SeptemberJune 30, 20172020 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
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PART II—OTHER INFORMATION
Our Annual Report on Form 10-K for the year ended December 31, 20162019 includes "Legal Proceedings" under Item 3 of Part I. Other than as described in Part II, Item 1. Legal Proceedings of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017,March 31, 2020, there have been no material changes from the legal proceedings described in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of Liberty Broadband Series A, B or C common stock during the period.
During the three months ended SeptemberJune 30, 2017,2020, no shares of Liberty Broadband Series A orcommon stock and no shares of Series C common stock were surrendered by certain of our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock.
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(a) | Exhibits |
Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
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101.INS | | XBRL Instance Document* - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document* |
101.LAB | | Inline XBRL Taxonomy Label Linkbase Document* |
101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document* |
101.DEF | | Inline XBRL Taxonomy Definition Document* |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
*Filed herewith
**Furnished herewith
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SIGNATURES
Pursuant to the requirements 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.
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| LIBERTY BROADBAND CORPORATION | |
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Date: | | By: | /s/ GREGORY B. MAFFEI |
| | | Gregory B. Maffei President and Chief Executive Officer |
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Date: | | By: | /s/ |
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Chief
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