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Liberty Broadband Corp - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

 

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 September 30, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

Commission File Number 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
Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (720) 875-5700

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 filer ☒

 

Accelerated filer ☐

 

Non-accelerated filer ☐
(do not check if smaller
reporting company)

 

Smaller reporting company ☐

 

Emerging growth company ☐ 

 

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's common stock as of October 16, 2017 was:

 

 

 

 

Series A common stock

 

26,301,479

Series B common stock

 

2,455,179

Series C common stock

 

153,089,705

 

 

 

 


 

Table of Contents

Table of Contents

Part I - Financial Information 

 

 

 

Page No

Item 1. Financial Statements 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Balance Sheets (unaudited) 

I-2

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements of Operations (unaudited) 

I-3

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements of Comprehensive Earnings (Loss) (unaudited) 

I-4

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited) 

I-5

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statement of Equity (unaudited) 

I-6

LIBERTY BROADBAND CORPORATION Notes to Condensed Consolidated Financial Statements (unaudited) 

I-7

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

I-23

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

I-32

Item 4.  Controls and Procedures

I-32

 

 

Part II - Other Information 

 

 

Item 1.  Legal Proceedings

II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

II-1

Item 6.  Exhibits

II-2

 

 

SIGNATURES 

II-3

 

 

 

 

I-1


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Balance Sheets

(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

 

See accompanying notes to the condensed consolidated financial statements.

 

I-2


 

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LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Operations

(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


 

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LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(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


 

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LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

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


 

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LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statement of Equity

(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.

 

 

 

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

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 C 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 instruments 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 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 (“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 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.), 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 focus on the development and sale of the suite of location and context products, and are referred to collectively herein as “Skyhook.”

The accompanying (a) condensed consolidated balance sheet as of December 31, 2016, 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 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Form 10-K for the year ended December 31, 2016. 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, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on lease accounting. This guidance requires a company to recognize lease assets and lease liabilities arising from operating leases 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 solutions and collecting lease data.

In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity 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 its 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.

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 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.

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 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.

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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. 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 that will be negotiated semi-annually. Under these various agreements, approximately $814 thousand and $661 thousand was reimbursable to Liberty for the three months ended September 30, 2017 and 2016, respectively, and $2.4 million was reimbursable to Liberty for the nine months ended September 30, 2017 and 2016, respectively.

 

(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

 

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, the Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.

 

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Table of Contents

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

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

(amounts in thousands)

 

Cash equivalents

 

$

134,574

 

134,574

 

 —

 

198,011

 

198,011

 

 —

 

Derivative instruments (1)

 

$

 —

 

 —

 

 —

 

49,019

 

 —

 

49,019

 

_________________________

 

(1)

As of December 31, 2016, the Company had an outstanding zero-strike call option on 704,908 shares of Liberty Broadband Series C common stock which expired in March 2017. The Company prepaid a premium of $47.9 million in December 2016. Liberty Broadband exercised its option to settle the contract in cash in March 2017 for cash proceeds of $50.0 million. The Company accounted for the zero-strike call option as a financial instrument asset due to its settlement provisions. Subsequent to September 30, 2017, the Company entered into another zero-strike call option on 527,156 shares of Liberty Broadband Series C common stock. The Company prepaid a premium of $47.7 million in October 2017.    

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:

 

 

 

 

 

 

 

 

Volatility

 

21.1%

 

Interest rate

 

1.3%

 

Dividend yield

 

0.0%

 

Other Financial Instruments

Other financial instruments not measured at fair value on a recurring basis include trade receivables, trade payables, accrued 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.

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Table of Contents

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

 


(1)

As discussed in note 4, Time Warner Cable merged with Charter on May 18, 2016.  Therefore the Company no longer has an investment in Time Warner Cable as of May 18, 2016, and the unrealized gain (loss) related to our investment in Time Warner Cable is recorded through this date. In connection with the merger, the Company exchanged, in a tax-free transaction, its shares of Time Warner Cable for shares of Charter Class A common stock.

 

(2)

As of December 31, 2016, the Company had an outstanding zero-strike call option on 704,908 shares of Liberty Broadband Series C common stock which the Company exercised in March 2017. In April 2017, the Company entered into another zero-strike call option on 600,242 shares of Liberty Broadband Series C common stock. The Company prepaid a premium of $50.0 million in April 2017. Upon expiration in June 2017, the call option was rolled into a new zero-strike call option on 600,242 shares of Liberty Broadband Series C common stock.  Liberty Broadband exercised its option to settle the contract in cash in August 2017 for cash proceeds of $53.8 million.  The Company realized gains on the options outstanding and settled during the three and nine months ended September 30, 2017. 

(4) Investment in Charter Accounted for Using the Equity Method

In May 2013, Liberty 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) 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. The investment in Legacy Charter is accounted for as an equity method affiliate based on the 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 to the Broadband Spin-Off, 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, resulting in Charter, a former subsidiary of Legacy Charter, becoming the new publicly traded parent company. In connection with the Time Warner Cable Merger and the Bright House Transaction, Liberty Broadband completed the previously announced transactions described below:

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Table of Contents

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 investment 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 consummation of the Time Warner Cable Merger, Liberty Broadband purchased from Charter $4.3 billion of shares of Charter Class A common stock, par value $0.001 per share, at a price per share 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 Agreement

Pursuant to the Proxy and Right of First Refusal Agreement, dated May 23, 2015, as amended (the “Liberty Interactive Proxy Agreement”), by and between Liberty Broadband and Liberty Interactive, Liberty Interactive granted Liberty Broadband an irrevocable proxy to vote all shares of Charter common stock owned beneficially or of record by Liberty Interactive following the closing of the Time Warner Cable Merger, for a five year term subject to extension upon the mutual agreement of both parties, subject to certain limitations. So long as the Liberty Interactive Proxy Agreement is in effect, Liberty Broadband also has a right of first refusal (“ROFR”) to purchase all or a portion of any shares of Charter common stock which Liberty Interactive proposes to transfer, subject to certain limitations.

Transactions Completed 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. As a result of the A/N Proxy and the 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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 Class B Common 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 ROFR to purchase all or a portion of any such securities A/N proposes to transfer.  The 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 purposes the term “Charter” will be used to discuss both our previous and current holdings in Legacy Charter and Charter.  It is noted that the ticker symbol for the Class A common stock 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 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 $2,100 million as of September 30, 2017 and has been allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

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 property and equipment and customer relationships, respectively, and indefinite lives to franchise fees, trademarks and goodwill. The excess basis of outstanding debt is amortized over the contractual period using the effective interest rate method. The increase in excess basis for the nine months ended September 30, 2017, was primarily due to Charter’s share buyback program. The Company’s Share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $15.3 million and $18.5 million, net of related taxes, for the three months ended September 30, 2017 and 2016, respectively, and expenses of $44.0 million and $23.2 million, net of related taxes, for the nine months ended September 30, 2017 and 2016, 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 million and $16.3 million during the three months ended September 30, 2017 and 2016, respectively, and a dilution loss of $42.5 million and a dilution gain of $760.1 million during the nine months ended September 30, 2017 and 2016, respectively. The dilution gain 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 are attributable to stock option exercises by employees and other third parties at prices below Liberty Broadband’s book basis per share.

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Table of Contents

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

 

Current assets

 

$

4,132

 

3,300

 

Property and equipment, net

 

 

33,300

 

32,963

 

Goodwill

 

 

29,554

 

29,509

 

Intangible assets, net

 

 

79,905

 

81,924

 

Other assets

 

 

1,337

 

1,371

 

Total assets

 

$

148,228

 

149,067

 

Current liabilities

 

 

10,419

 

9,572

 

Deferred income taxes

 

 

26,576

 

26,665

 

Long-term debt

 

 

66,064

 

59,719

 

Other liabilities

 

 

2,591

 

2,745

 

Equity

 

 

42,578

 

50,366

 

Total liabilities and shareholders’ equity

 

$

148,228

 

149,067

 

Charter condensed consolidated statements of operations

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

    

Nine months ended

 

September 30,

 

September 30,

 

2017

 

2016

 

2017

 

2016

Revenue

$

10,458

 

10,037

 

30,979

 

18,728

Cost and expenses:

 

 

 

 

 

 

 

 

Operating costs and expenses (excluding depreciation and amortization)

 

(6,703)

 

(6,482)

 

(19,857)

 

(12,157)

Depreciation and amortization

 

(2,701)

 

(2,437)

 

(7,846)

 

(4,412)

Other operating expenses, net

 

(145)

 

(207)

 

(374)

 

(776)

 

 

(9,549)

 

(9,126)

 

(28,077)

 

(17,345)

Operating income

 

909

 

911

 

2,902

 

1,383

Interest expense, net

 

(788)

 

(724)

 

(2,250)

 

(1,771)

Other income (expense), net

 

(3)

 

79

 

(55)

 

429

Income tax benefit (expense)

 

(26)

 

(16)

 

(99)

 

3,135

Net income (loss)

 

92

 

250

 

498

 

3,176

Less: Net income attributable to noncontrolling interests

 

(44)

 

(61)

 

(156)

 

(108)

Net income (loss) attributable to Charter shareholders

$

48

 

189

 

342

 

3,068

 

 

 

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(5) Goodwill and Other Intangible Assets

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

 

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Table of Contents

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.

 

2017 Margin Loan Facility

 

On August 31, 2017, a bankruptcy remote wholly owned subsidiary of the Company (“SPV”), entered into a multi-draw margin loan credit facility (the “2017 Margin Loan Facility” and, the credit agreement governing such facility, the “2017 Margin Loan Agreement”) with Bank of America, N.A and the 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 $500 million as of September 30, 2017 and had $500 million available to be drawn until August 31, 2018. The maturity date of the loans under the 2017 Margin Loan Agreement is August 30, 2019 (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 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 these margin loans bore interest at a rate of 2.74% per annum at September 30, 2017. Interest 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.  

 

The 2017 Margin Loan Agreement contains various affirmative and negative covenants that restrict the activities of SPV (and, in some cases, the Company and its subsidiaries with respect to shares of Charter owned by the Company and its

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

subsidiaries). The 2017 Margin Loan Agreement does not include any financial covenants.  The 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 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 2017 Margin Loan Agreement. The 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 September 30, 2017, approximately 6.8 million shares of Charter with a value of $2.5 billion were pledged as collateral pursuant to the 2017 Margin Loan Agreement.

   

(7) Stock-Based Compensation

Liberty Broadband grants, to certain of its directors, employees and employees of its subsidiaries, restricted stock 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 nine months ended September 30, 2017 and 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Operating expense

    

$

 3

    

 4

    

 5

    

 2

 

Selling, general and administrative

 

 

1,429

 

1,596

 

4,032

 

4,363

 

Research and development

 

 

67

 

136

 

339

 

217

 

 

 

$

1,499

 

1,736

 

4,376

 

4,582

 

 

Liberty Broadband – Grants of Stock Options

There were no options to purchase shares of Series A, Series B or Series C common stock granted during the nine months ended September 30, 2017.  

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, the 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.  The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject option.

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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

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

Exercised

 

(49)

 

$

26.85

 

 

 

 

 

Forfeited/cancelled

 

 —

 

$

 —

 

 

 

 

 

Outstanding at September 30, 2017

 

405

 

$

33.15

 

2.2

 

$

25

Exercisable at September 30, 2017

 

402

 

$

33.06

 

2.2

 

$

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

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 September 30, 2017, the total unrecognized compensation cost related to unvested Awards was approximately $11 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2 years. 

As of September 30, 2017, Liberty Broadband reserved 2.8 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.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(8) 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. 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, aggregated 57% and 85% of total revenue for the three months ended September 30, 2017 and 2016, respectively, and 57% and 64% of total revenue for the nine months ended September 30, 2017 and 2016, 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) 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 represent 10% or more of Liberty Broadband’s annual pre-tax earnings.

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.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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, including each business’s ability to service debt and fund capital expenditures. 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 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 nine months ended September 30, 2017, Liberty Broadband has identified the following consolidated subsidiary and equity method investment as its reportable segments:

·

Skyhook—a wholly owned subsidiary of the Company that provides a Wi-Fi based location platform focused on providing positioning technology and contextual location intelligence solutions. 

·

Charter—an equity method investment of the Company that is one of the largest providers of cable services in the United States, offering a variety of entertainment, information and communications solutions to residential and commercial customers.

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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. 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 schedule 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

 

 

 

 

Adjusted

 

 

 

Adjusted

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

(amounts in thousands)

 

Skyhook

    

$

9,643

    

(6,839)

    

27,413

    

1,234

 

Charter

 

 

30,979,000

 

10,946,000

 

18,728,000

 

5,963,000

 

Corporate and other

 

 

 

(5,423)

 

 

(7,170)

 

 

 

 

30,988,643

 

10,933,738

 

18,755,413

 

5,957,064

 

Eliminate equity method affiliate

 

 

(30,979,000)

 

(10,946,000)

 

(18,728,000)

 

(5,963,000)

 

Consolidated Liberty Broadband

 

$

9,643

 

(12,262)

 

27,413

 

(5,936)

 

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

Total

 

Investments

 

Capital

 

 

 

assets

 

in affiliates

 

expenditures

 

 

 

(amounts in thousands)

 

Skyhook

    

$

26,136

    

    

27

 

Charter

 

 

148,228,000

 

 

6,096,000

 

Corporate and other

 

 

9,455,758

 

9,326,871

 

 

 

 

 

157,709,894

 

9,326,871

 

6,096,027

 

Eliminate equity method affiliate

 

 

(148,228,000)

 

 —

 

(6,096,000)

 

Consolidated Liberty Broadband

 

$

9,481,894

 

9,326,871

 

27

 

 

The following table provides a reconciliation of consolidated segment Adjusted OIBDA to Operating income (loss) and Earnings (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

Stock-based compensation

 

 

(1,499)

 

(1,736)

 

(4,376)

 

(4,582)

 

Depreciation and amortization

 

 

(942)

 

(971)

 

(2,844)

 

(2,935)

 

Operating income (loss)

 

 

(5,787)

 

6,624

 

(19,482)

 

(13,453)

 

Interest expense

 

 

(5,518)

 

(4,090)

 

(14,899)

 

(10,547)

 

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

 

Gain (loss) on dilution of investment in affiliate

 

 

(3,718)

 

(16,331)

 

(42,515)

 

760,074

 

Other, net

 

 

 9

 

 5

 

11

 

112

 

Earnings (loss) before income taxes

 

$

(17,197)

 

5,444

 

(45,531)

 

1,404,051

 

 

 

 

 

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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 offerings; the return on our investment in, and performance of, Charter Communications, Inc. (“Charter”); Charter’s ongoing integration of its acquired operations; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; 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. 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 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:

·

Charter’s ability to promptly, efficiently and effectively integrate acquired operations;

·

the ability of Charter to sustain and grow revenue and cash flow from operations by offering video, Internet, voice, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in its markets and to maintain and grow its customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;

·

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, video provided over the Internet by (i) market participants that have not historically competed in the multichannel video business, (ii) traditional multichannel video distributors, and (iii) content providers that have historically licensed cable networks to multichannel video distributors, and providers of advertising over the Internet;

·

general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;

·

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);

·

the development and deployment of new products and technologies, including wireless products, Charter’s cloud-based user interface, Spectrum Guide®, and downloadable security for set top boxes and any other cloud-based consumer services and service platforms;

·

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 effects of governmental regulation on our business or potential business combination transactions 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 the Time Warner Cable Merger and the Bright House Transaction (each as defined below and collectively, the “Transactions”);

·

any events that disrupt Charter’s networks, information systems or properties and impair its operating activities and negatively impact its reputation;

·

the ability of suppliers and vendors to deliver products, equipment, software and services;

·

the outcome of any pending or threatened litigation;

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·

changes in the nature of key strategic relationships with partners, vendors and joint venturers;

·

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 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;

·

our ability to successfully monetize certain of our assets; and

·

the ability to retain and hire key personnel.

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. 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 to 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.

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, 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”, “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 pursuant to proxy agreements entered into with Liberty Interactive and A/N, 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.), 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

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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 focus on the development and sale of the suite of location and context products, and are referred to collectively herein as “Skyhook.”

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, as “Liberty Broadband,” “the Company,” “us,” “we” and “our” here and in the notes to the accompanying condensed consolidated financial statements.

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Results of Operations—Consolidated—September 30, 2017 and 2016

Consolidated operating results:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(amounts in thousands)

 

Revenue

    

$

3,430

    

20,616

    

9,643

    

27,413

 

Operating expense

 

 

643

 

778

 

1,963

 

2,097

 

Research and development

 

 

1,373

 

2,248

 

5,875

 

7,823

 

Selling, general and administrative

 

 

4,760

 

8,259

 

14,067

 

23,429

 

Stock-based compensation

 

 

1,499

 

1,736

 

4,376

 

4,582

 

Depreciation and amortization

 

 

942

 

971

 

2,844

 

2,935

 

Operating income (loss)

 

 

(5,787)

 

6,624

 

(19,482)

 

(13,453)

 

Less impact of stock-based compensation and depreciation and amortization

 

 

2,441

 

2,707

 

7,220

 

7,517

 

Adjusted OIBDA

 

$

(3,346)

 

9,331

 

(12,262)

 

(5,936)

 

 

Revenue

Revenue decreased $17.2 million and  $17.8 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in the prior year. The decrease in revenue for both the three and nine months ended September 30, 2017, as compared to the same periods in the prior year, was 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 as revenue during the three months ended September 30, 2016.

Operating expense, research and development, and selling, general and administrative expenses

Operating expense decreased by $135 thousand and $134 thousand for the three and nine months ended September 30, 2017, 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 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. Selling, general, and administrative expense decreased by $3.5 million and $9.4 million for the three and nine months ended September 30, 2017, 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 same periods in the prior year. Legal expenses 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 compensation expense of $237 thousand and $206 thousand for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year, were primarily due to adjustments made to certain outstanding awards in 2016 which increased their value, partially offset by additional grants of awards, and the ongoing vesting of outstanding grants. 

Depreciation and amortization

Depreciation and amortization expense decreased by $29 thousand and $91 thousand during the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year, due to certain assets becoming fully depreciated.

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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

We define Adjusted OIBDA as revenue less operating expenses and selling, general and administrative expenses (excluding stock-based compensation). 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, including each business’s ability to service debt and fund capital expenditures. 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 million and $6.3 million during the three and nine months ended September 30, 2017, respectively, as compared to the same 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 decrease 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 nine months ended September 30, 2017, as compared to the corresponding periods in the prior year,  was due to the new license agreement entered into during the three months ended September 30, 2016, partially offset by lower operating expenses as discussed above.

Other Income and Expense

Components of Other income (expense) are presented in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(amounts in thousands)

 

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

 

 

(5,280)

 

19,046

 

25,109

 

570,178

 

Realized and unrealized gains (losses) on financial instruments, net

 

 

2,675

 

 —

 

5,026

 

92,990

 

Gain (loss) on dilution of investment in affiliate

 

 

(3,718)

 

(16,331)

 

(42,515)

 

760,074

 

Other, net

 

 

 9

 

 5

 

11

 

112

 

 

 

$

(11,410)

 

(1,180)

 

(26,049)

 

1,417,504

 

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Interest expense

Interest expense increased  $1.4 million and $4.4 million during the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The increase was primarily due to an increase in LIBOR 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 for the nine months ended September 30, 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. 

Share of earnings (losses) of affiliates

Share of earnings of affiliates decreased $24.3 million and $545.1 million during the three and nine months ended September 30, 2017, 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 million and $18.5 million, net of related taxes, for the three months ended September 30, 2017 and 2016, respectively, and expenses of $44.0 million and $23.2 million for the nine months ended September 30, 2017 and 2016, respectively, due to the amortization related to the excess basis of assets with identifiable useful lives and debt. The decrease in the share of earnings of affiliates in the three and nine months ended September 30, 2017, as compared to the same 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).

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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma

 

 

 

Three months ended

 

 

 

Nine months ended

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

September 30,

 

 

 

September 30,

 

 

 

2017

 

2016

 

 

 

2017

 

2016

 

 

 

2016

 

 

 

(amounts in millions)

 

 

 

 

 

Revenue

    

$

10,458

    

10,037

 

 

    

30,979

    

18,728

 

 

 

29,748

 

Operating expenses, excluding stock-based compensation

 

 

(6,784)

 

(6,608)

 

 

 

(20,033)

 

(12,765)

 

 

 

 

 

Adjusted OIBDA

 

 

3,674

 

3,429

 

 

 

10,946

 

5,963

 

 

 

10,092

 

Depreciation and amortization

 

 

(2,701)

 

(2,437)

 

 

 

(7,846)

 

(4,412)

 

 

 

 

 

Stock-based compensation

 

 

(64)

 

(81)

 

 

 

(198)

 

(168)

 

 

 

 

 

Operating income

 

 

909

 

911

 

 

 

2,902

 

1,383

 

 

 

2,813

 

Other expenses, net

 

 

(791)

 

(645)

 

 

 

(2,305)

 

(1,342)

 

 

 

 

 

Net earnings (loss) before income taxes

 

 

118

 

266

 

 

 

597

 

41

 

 

 

 

 

Income tax benefit (expense)

 

 

(26)

 

(16)

 

 

 

(99)

 

3,135

 

 

 

 

 

Net earnings (loss)

 

$

92

 

250

 

 

 

498

 

3,176

 

 

 

 

 

 

Charter net earnings decreased  $158 million and $2,678 million for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year.

Charter’s revenue increased $421 million and $12,251 million for the three and nine months ended September 30, 2017, 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 as well as price adjustments, offset by a decrease in basic video

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customers and advertising sales, and in the nine month period due to the Transactions which increased total revenue by approximately $11.4 billion. On a pro forma basis, assuming the Transactions occurred as of January 1, 2015, total revenue growth was 4.1% for the nine months ended September 30, 2017, compared to the corresponding period in 2016.

 

The increase in revenue during the three and nine months ended September 30, 2017 was partially offset by the net impact of an increase in operating expenses, excluding stock-based compensation of $176 million and $7,268 million, respectively. The increase in operating expenses was primarily attributable to the Transactions. Operating costs also increased due to an increase in programming costs as a result of contractual rate adjustments, including renewals and increases in amounts paid for retransmission consents, higher expanded basic package customers and higher pay-per-view events, offset by synergies as a result of the Transactions.  Charter expects programming expenses to 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 does not expect to be able to fully pass the cost increases on to its customers without a potential loss of customers.

 

Charter’s Adjusted OIBDA for the three and nine months ended September 30, 2017 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.

 

Depreciation and amortization expense increased $264 million and $3,434 million during the three and nine months ended September 30, 2017, 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 same periods in the prior year primarily due to the Transactions. 

 

Charter’s results were also impacted by an increase in other expenses, net of $146 million and $963 million for the three and nine months ended September 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, 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 period in the prior year. The decrease in other pension benefits during the three months ended September 30, 2017, as compared to the corresponding period in the prior year, was primarily due to a third quarter 2017 remeasurement as a result of significant lump sum settlement payments to participants. The decrease in other pension benefits during the nine months ended September 30, 2017, as compared to the corresponding period in the prior year, was primarily as a result of a $675 million pension curtailment gain offset by an $157 million net remeasurement loss recognized in 2016 that resulted from an amendment 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. 

 

Income tax expense increased $10 million and $3,234 million for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. Income tax expense for the three and nine months ended September 30, 2017, was reduced by approximately $17 million and $88 million, respectively, due to the recognition of excess tax benefits resulting from share based compensation as a component of the provision for income taxes following the prospective application of Accounting Standard Update 2016-09. Income tax expense for the three months ended September 30, 2016 was also impacted by a change 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 was a result of a reduction of substantially all of Legacy Charter’s preexisting valuation allowance associated with its deferred tax assets of approximately $3.3 billion as certain of the deferred tax liabilities that were assumed 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 $2.7 million and $88.0 million for the three and nine months ended September 30, 2017, 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 during the three and nine months ended September 30, 2017 is primarily attributable to a gain on 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.

Income tax benefit (expense)

During the three and nine months ended September 30, 2017, we had an income tax benefit of $7.3 million and $18.2 million, respectively, and the effective rate was approximately 42.6% and 40.1%, respectively.  For the three and nine months ended September 30, 2016, we had an income tax expense of $1.7 million and $532.3 million, respectively, and the effective tax rate was approximately 30.4% and 37.9%,  respectively. The difference between the effective income tax rate of 42.6% and the U.S. Federal income tax rate of 35% for the three months ended September 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 40.1% and the U.S. Federal income tax rate of 35% for the nine months ended September 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 is primarily due to the effect of state income taxes.

Liquidity and Capital Resources

As of September 30, 2017,  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 subsidiaries (to the extent such cash exceeds the working capital needs of the subsidiaries), proceeds from asset sales, monetization of our investments, debt borrowings, equity issuances, and dividend and interest receipts.

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As of September 30, 2017,  Liberty Broadband had a cash balance of $135 million.

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

 

 

(amounts in thousands)

 

Cash flow information

    

 

    

    

    

 

Net cash provided (used) by operating activities

 

$

(23,596)

 

(5,033)

 

Net cash provided (used) by investing activities

 

$

(13)

 

(4,990,687)

 

Net cash provided (used) by financing activities

 

$

(46,694)

 

4,599,682

 

 

The increase in cash used by operating activities in the nine months ended September 30, 2017, as compared to the same period in the prior year, was primarily driven by the increase in operating loss, as well as the timing of differences in cash receipts and payments.

During the nine months ended September 30, 2016, net cash flows from investing activities were primarily related to transactions in connection with the Time Warner Cable Merger and the Bright House Transaction, as discussed in note 4 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 additional shares of Liberty Broadband Series C common stock to purchase $4.3 billion in shares 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. 

The projected use of our cash will be primarily to fund any operational needs of our subsidiary, to service debt, to fund potential investment opportunities, and refinance Liberty Broadband’s margin loans that come due in 2019. We expect our potential sources of liquidity (discussed above) and corporate cash to cover corporate expenses and future obligations. 

 

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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 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 achieving 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 achieving 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/or (iii) entering into interest rate swap arrangements when we deem appropriate. As of September 30, 2017, our debt is comprised of the following amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

Fixed rate debt

 

Principal

    

Weighted avg

    

Principal

    

Weighted avg

 

amount

 

interest rate

 

amount

 

interest rate

 

(dollar amounts in millions)

 

$

500

 

2.7%

 

$

 —

 

NA

 

 

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 September 30, 2017 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 September 30, 2017 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

Item 1. Legal Proceedings

Our Annual Report on Form 10-K for the year ended December 31, 2016 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, 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 September 30, 2017, no shares of Liberty Broadband Series A or 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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Item 6. Exhibits

(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):

 

 

 

10.1

    

Margin Loan Agreement, dated as of August 31, 2017, among LBC Cheetah 6, LLC, as Borrower, various lenders and Bank of America, N.A., as Calculation Agent and Bank of America, N.A., as Administrative Agent.*

31.1

 

Rule 13a-14(a)/15d-14(a) Certification*

31.2

 

Rule 13a-14(a)/15d-14(a) Certification*

32

 

Section 1350 Certification**

101.INS

 

XBRL Instance Document*

101.SCH

 

XBRL Taxonomy Extension Schema Document*

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document*

101.LAB

 

XBRL Taxonomy Label Linkbase Document*

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document*

101.DEF

 

XBRL Taxonomy Definition Document*


*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.

 

 

 

 

 

    

LIBERTY BROADBAND CORPORATION

 

 

 

Date: November 1, 2017

 

By:

/s/ GREGORY B. MAFFEI

 

 

 

Gregory B. Maffei

President and Chief Executive Officer

 

 

 

 

Date: November 1, 2017

 

By:

/s/ MARK D. CARLETON

 

 

 

Mark D. Carleton

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

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