lbrda_Current folio_10Q

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 March 31, 2018

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 April 16, 2018 was:

 

 

 

 

Series A common stock

 

26,306,408

Series B common stock

 

2,455,179

Series C common stock

 

152,582,266

 

 

 

 


 

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-19

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

I-27

Item 4.  Controls and Procedures

I-27

 

 

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)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(amounts in thousands)

 

Assets

    

 

    

    

    

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,088

 

81,257

 

Other current assets

 

 

1,797

 

2,797

 

Total current assets

 

 

79,885

 

84,054

 

Investment in Charter, accounted for using the equity method (note 5)

 

 

11,866,434

 

11,835,613

 

Other tangible and intangible assets, net

 

 

11,179

 

12,073

 

Other assets

 

 

49

 

49

 

Total assets

 

$

11,957,547

 

11,931,789

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

2,703

 

5,381

 

Deferred revenue and other current liabilities

 

 

2,515

 

5,168

 

Total current liabilities

 

 

5,218

 

10,549

 

Debt (note 6)

 

 

497,764

 

497,370

 

Deferred income tax liabilities

 

 

939,821

 

932,593

 

Other liabilities

 

 

3,349

 

4,376

 

Total liabilities

 

 

1,446,152

 

1,444,888

 

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 26,306,408 shares at March 31, 2018 and 26,301,755 shares at December 31, 2017

 

 

263

 

262

 

Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,455,179 shares at March 31, 2018 and December 31, 2017

 

 

25

 

25

 

Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 152,582,266 shares at March 31, 2018 and 152,563,229 shares at December 31, 2017

 

 

1,526

 

1,526

 

Additional paid-in capital

 

 

7,940,438

 

7,907,900

 

Accumulated other comprehensive earnings, net of taxes

 

 

8,424

 

8,424

 

Retained earnings

 

 

2,560,719

 

2,568,764

 

Total equity

 

 

10,511,395

 

10,486,901

 

Commitments and contingencies (note 8)

 

 

 

 

 

 

Total liabilities and equity

 

$

11,957,547

 

11,931,789

 

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 

 

 

 

March 31,

 

 

 

2018

    

2017

 

 

 

(amounts in thousands, except per share amounts)

 

Revenue:

 

 

 

 

 

 

Software sales

 

$

11,791

 

3,008

 

Service

 

 

 —

 

132

 

Total revenue

 

 

11,791

 

3,140

 

Operating, including stock-based compensation (note 7)

 

 

466

 

615

 

Selling, general and administrative, including stock-based compensation (note 7)

 

 

6,727

 

5,544

 

Research and development, including stock-based compensation (note 7)

 

 

1,443

 

2,390

 

Depreciation and amortization

 

 

909

 

953

 

 

 

 

9,545

 

9,502

 

Operating income (loss)

 

 

2,246

 

(6,362)

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(5,037)

 

(4,555)

 

Dividend and interest income

 

 

225

 

338

 

Share of earnings (losses) of affiliates (note 5)

 

 

9,302

 

18,922

 

Gain (loss) on dilution of investment in affiliate (note 5)

 

 

(26,757)

 

(32,138)

 

Realized and unrealized gains (losses) on financial instruments, net (note 4)

 

 

 —

 

981

 

Other, net

 

 

 —

 

(1)

 

Net earnings (loss) before income taxes

 

 

(20,021)

 

(22,815)

 

Income tax benefit (expense)

 

 

4,951

 

8,370

 

Net earnings (loss) attributable to Liberty Broadband shareholders

 

$

(15,070)

 

(14,445)

 

Basic net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 3)

 

$

(0.08)

 

(0.08)

 

Diluted net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 3)

 

$

(0.08)

 

(0.08)

 

 

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 

 

 

 

March 31,

 

 

 

2018

    

2017

 

 

 

(amounts in thousands)

 

Net earnings (loss)

    

$

(15,070)

 

(14,445)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Share of other comprehensive earnings (loss) of equity affiliate

 

 

 —

 

124

 

Other comprehensive earnings (loss), net of taxes

 

 

 —

 

124

 

Comprehensive earnings (loss) attributable to Liberty Broadband shareholders

 

$

(15,070)

 

(14,321)

 

 

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)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2018

 

2017

 

 

 

(amounts in thousands)

 

Cash flows from operating activities:

    

 

    

    

    

 

Net earnings (loss)

 

$

(15,070)

 

(14,445)

 

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

909

 

953

 

Stock-based compensation

 

 

1,405

 

1,448

 

Share of (earnings) losses of affiliates, net

 

 

(9,302)

 

(18,922)

 

(Gain) loss on dilution of investment in affiliate

 

 

26,757

 

32,138

 

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

 

 

 —

 

(981)

 

Deferred income tax expense (benefit)

 

 

(4,950)

 

(8,380)

 

Other, net

 

 

394

 

87

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Current and other assets

 

 

1,282

 

 3

 

Payables and other liabilities

 

 

(5,121)

 

(1,502)

 

Net cash provided (used) by operating activities

 

 

(3,696)

 

(9,601)

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(14)

 

 —

 

Net cash provided (used) by investing activities

 

 

(14)

 

 —

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from settlements of financial instruments

 

 

 —

 

50,000

 

Other financing activities, net

 

 

541

 

1,745

 

Net cash provided (used) by financing activities

 

 

541

 

51,745

 

Net increase (decrease) in cash

 

 

(3,169)

 

42,144

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

81,257

 

205,728

 

Cash, cash equivalents and restricted cash, end of period

 

$

78,088

 

247,872

 

 

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, 2018

    

$

 —

 

262

 

25

 

1,526

 

7,907,900

    

8,424

    

2,568,764

    

10,486,901

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(15,070)

 

(15,070)

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

1,352

 

 —

 

 —

 

1,352

 

Issuance of common stock upon exercise of stock options

 

 

 —

 

 1

 

 —

 

 —

 

540

 

 —

 

 —

 

541

 

Cumulative effect of accounting change (note 2)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

1,223

 

1,223

 

Cumulative effect of accounting change at Charter

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

5,802

 

5,802

 

Noncontrolling interest activity at Charter

 

 

 —

 

 —

 

 —

 

 —

 

30,646

 

 —

 

 —

 

30,646

 

Balance at March 31, 2018

 

$

 —

 

263

 

25

 

1,526

 

7,940,438

 

8,424

 

2,560,719

 

10,511,395

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

I-6


 

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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’s common stock (the “Broadband Spin-Off”). At the time of the Broadband Spin-Off, Liberty Broadband was comprised of (i) Liberty’s former interest in Charter Communications, Inc. (“Legacy Charter”), (ii) Liberty’s former wholly-owned subsidiary TruePosition, Inc., (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“Time Warner Cable”), (iv) certain deferred tax liabilities, as well as liabilities related to 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. 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,” now known as Qurate Retail, Inc., 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 with GCI Liberty, Inc. (“GCI Liberty”) and A/N, Liberty Broadband controls 25.01% of the aggregate voting power of Charter. See note 5 for additional detail regarding these transactions and corresponding agreements.

The Company’s wholly owned subsidiary, Skyhook Holding, Inc. (“Skyhook”), focuses on the development and sale of Skyhook’s device-based location technology. Skyhook markets and sells two primary products: (1) a location determination service called the Precision Location Solution; and (2) a location intelligence and data insights service called Geospatial Insights.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2017, 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 Form 10-K for the year ended December 31, 2017. 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 the application of the equity method of accounting for investments in affiliates and accounting for income taxes to be its most significant estimates.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rate and implementing a territorial tax system.  In the prior year, we recognized the provisional tax impacts related to the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 31, 2017. We are still in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, continued analysis of the estimates and further guidance and interpretations on the application of the law. We expect to complete our analysis by December 2018.

Spin-Off Arrangements

Following the Broadband Spin-Off, Liberty and Liberty Broadband operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Broadband Spin-Off, Liberty (for accounting purposes a related party of the Company) and Liberty Broadband entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Broadband Spin-Off and to provide for an orderly transition. These agreements include a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

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. 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 which will be negotiated semi-annually. Under these various agreements, approximately $950 thousand and $746 thousand was reimbursable to Liberty for the three months ended March 31, 2018 and 2017, respectively.

(2) Recent Accounting Pronouncements

Accounting Standards Adopted January 1, 2018

Revenue from Contracts with Customers. As of January 1, 2018, the Company adopted the Accounting Standards Updates (“ASU”) amending revenue recognition guidance using the modified retrospective method for all contracts reflecting the aggregate effect of modifications prior to the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Upon adoption, we recognized a net cumulative effect of applying the new revenue guidance as a net increase to the opening balance of retained earnings of $1.2 million, as well as an increase to other current assets of $0.3 million, an increase to deferred income tax liabilities of $0.4 million and a decrease to deferred revenue and other current liabilities of $1.3 million, primarily due to changes in the timing of revenue recognition. The impact of the new accounting guidance to our condensed consolidated statement of operations was not meaningful for the three months ended March 31, 2018, and we do not expect it to be meaningful going forward.

Revenue Recognition

Skyhook earns revenue from the sale and integration of its Precision Location Solution (including the licensing of software and data components that make up that solution) and the licensing of Geospatial Insights data. In addition, Skyhook earns revenue through entering into licensing agreements with companies to utilize its underlying intellectual property.

Revenue is recognized upon transfer of control of promised products or services to its customers in an amount that reflects the consideration expected to be received in exchange for those products and services.

Skyhook sells its Precision Location Solution and Geospatial Insights data via fixed fee, usage basis or revenue share licensing arrangements. Revenue for fixed fee arrangements is recognized on a straight-line basis over the performance period. Revenue for usage based contracts or revenue share arrangements is recognized upon transfer of the service to its customers. Contracts with customers often include multiple products and services, which in general are not distinct within the context of the contract. Transaction prices of individual products and services are not allocated to specific performance obligations and are recognized ratably.

Skyhook recognizes fees received from intellectual property licensing at the inception of a license term for perpetual licenses when there are no ongoing performance obligations. Revenue recognition is deferred when there are ongoing performance obligations. In such circumstances, revenue would be allocated to the performance obligation and recognized upon the transfer of control of the promised product or service.

 

Deferred Revenue. At January 1, 2018, deferred revenue liabilities consisted of $4.5 million and $2.3 million, included in deferred revenue and other current liabilities, and other liabilities, respectively. Of this $6.8 million that was recorded as deferred revenue, $2.6 million was recognized as revenue during the three months ended March 31, 2018. At March 31, 2018, the related balance consisted of $1.9 million and $2.5 million, included in deferred revenue and other current liabilities, and other liabilities, respectively. Of this $4.4 million that was recorded as deferred revenue, we expect to recognize approximately 85% over the next one to three years.

 

Accounting Policies Elected. The Company has elected to exclude all taxes assessed by a governmental authority from the measurement of the transaction price.

 

Practical Expedients Utilized.  The Company has elected to apply the new revenue guidance only to those contracts that were not completed contracts as of December 31, 2017 and considered contract modifications that occurred prior to January 1, 2018 as combined with the original contract. Subsequent to January 1, 2018, the Company will consider each modification separately in accordance with the new guidance.

 

Significant Judgments. The Company estimates variable consideration at the most likely amount to which we expect to be entitled. This estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all historical, current and forecast information that is reasonably available to us.

 

Definition of a Business. As of January 1, 2018, the Company adopted the new guidance clarifying the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

businesses. Upon adoption, the standard impacts how the Company assesses acquisitions (or disposals) of assets or businesses.

Accounting Standards Not Yet Adopted

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance that allows an entity to elect to reclassify “stranded” tax effects in AOCI to retained earnings to address concerns related to accounting for certain provisions of the Tax Cuts and Jobs Act ("the Tax Act") enacted in December 2017. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of this new guidance on our consolidated financial statements.

 

(3) 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

 

 

 

ended

 

ended

 

 

    

March 31, 2018

    

March 31, 2017

 

 

 

(numbers of shares in thousands)

 

Basic WASO

 

181,316

 

181,771

 

Potentially dilutive shares (1)

 

1,398

 

1,274

 

Diluted WASO

 

182,714

 

183,045

 


(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.

 

 

 

 

(4) 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. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

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

 

$

65,521

 

65,521

 

 —

 

76,304

 

76,304

 

 —

 

Other Financial Instruments

Other financial instruments not measured at fair value on a recurring basis include trade receivables, trade payables, accrued and other current liabilities, current portion of debt and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value due to the short maturity of these instruments as reported on our condensed consolidated balance sheets. The carrying value of our long-term debt bears interest at a variable rate and therefore is also considered to approximate fair value.

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

 

 

 

March 31,

 

 

 

2018

 

2017

 

 

 

(amounts in thousands)

 

Derivative instruments (1)

 

 

 —

 

981

 

 

 

$

 —

 

981

 


(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. Subsequent to March 31, 2018, the Company entered into another zero-strike call option on 610,325 shares of Liberty Broadband Series C common stock and prepaid a premium of $47.8 million in April 2018.

 

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

Through a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter. The investment in Charter is accounted for as an equity method affiliate based on our ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of March 31, 2018, the carrying value of Liberty Broadband’s ownership in Charter was approximately $11,866 million. The market value of Liberty Broadband’s ownership in Charter as of March 31, 2018 was approximately $16,828 million, which represented an approximate economic ownership of 23% of the outstanding equity of Charter as of that date.

Pursuant to proxy agreements with GCI Liberty (see below) and A/N (the “GCI Liberty Proxy” and “A/N Proxy”, respectively), Liberty Broadband has an irrevocable proxy to vote certain shares of Charter common stock owned beneficially or of record by GCI Liberty and A/N 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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

In March 2018, Liberty Interactive completed its previously announced transactions with GCI Liberty and, in connection with the completion of these transactions, the proxy agreement with Liberty Interactive was assigned to GCI Liberty.

As a result of the A/N Proxy and the GCI Liberty Proxy, 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.

Additionally, 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 New Charter held by A/N, Liberty Broadband will have a right of first refusal (“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

The excess basis in our investment in Charter has increased to $3,037 million as of March 31, 2018 allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

Property and equipment

    

$

351

 

361

Customer relationships

 

 

693

 

689

Franchise fees

 

 

1,701

 

1,670

Trademarks

 

 

29

 

29

Goodwill

 

 

1,031

 

986

Debt

 

 

(99)

 

(98)

Deferred income tax liability

 

 

(669)

 

(662)

 

 

$

3,037

 

2,975

 

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 three months ended March 31, 2018, 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 $28.7 million and $12.1 million, net of related taxes, for the three months ended March 31, 2018 and 2017, 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 $26.8 million and $32.1 million during the three months ended March 31, 2018 and 2017, respectively. The dilution losses for the three months ended March 31, 2017 was 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 the new revenue guidance, as described in note 2, on January 1, 2018 using the modified retrospective transition method with a cumulative-effect adjustment to equity. The January 1, 2018 adoption cumulative-effect adjustment consisted of an increase to other noncurrent assets of $120 million, an increase to accounts payable and accrued liabilities of $71 million, an increase to deferred income tax liabilities of $11 million and an increase to total shareholders’ equity of $38 million.  Charter applied the cumulative-effect method to all contracts as of January 1, 2018.  Operating results for the three months ended March 31, 2018 are not materially different than results that would have been reported under previous guidance.

Summarized unaudited financial information for Charter is as follows (amounts in millions):

Charter condensed consolidated balance sheets

 

 

 

 

 

 

 

 

 

    

March 31, 2018

 

December 31, 2017

 

Current assets

 

$

2,398

 

2,555

 

Property and equipment, net

 

 

34,002

 

33,888

 

Goodwill

 

 

29,554

 

29,554

 

Intangible assets, net

 

 

78,634

 

79,270

 

Other assets

 

 

1,563

 

1,356

 

Total assets

 

$

146,151

 

146,623

 

Current liabilities

 

 

11,602

 

11,090

 

Deferred income taxes

 

 

17,351

 

17,314

 

Long-term debt

 

 

67,609

 

68,186

 

Other liabilities

 

 

2,464

 

2,502

 

Equity

 

 

47,125

 

47,531

 

Total liabilities and shareholders’ equity

 

$

146,151

 

146,623

 

Charter condensed consolidated statements of operations

 

 

 

 

 

 

 

Three months ended 

 

March 31,

 

2018

 

2017

Revenue

$

10,657

 

10,164

Cost and expenses:

 

 

 

 

Operating costs and expenses (excluding depreciation and amortization)

 

(6,836)

 

(6,579)

Depreciation and amortization

 

(2,710)

 

(2,550)

Other operating expenses, net

 

(69)

 

(94)

 

 

(9,615)

 

(9,223)

Operating income

 

1,042

 

941

Interest expense, net

 

(851)

 

(713)

Other income (expense), net

 

60

 

 8

Income tax benefit (expense)

 

(28)

 

(25)

Net income (loss)

 

223

 

211

Less: Net income attributable to noncontrolling interests

 

(55)

 

(56)

Net income (loss) attributable to Charter shareholders

$

168

 

155

 

 

 

 

 

 

 

 

 

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(6) Debt

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 both March 31, 2018 and December 31, 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 March 31, 2018. 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 this margin loan bore interest at a rate of 3.80% per annum at March 31, 2018. 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 two margin loan agreements entered into by a wholly-owned special purpose subsidiary of the Company on October 30, 2014 and two margin loan agreements entered into by another wholly-owned special purpose subsidiary of the Company on March 21, 2016. 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 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 March 31, 2018,  6.8 million shares of Charter with a value of $2.1 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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation for the three months ended March 31, 2018 and 2017 (amounts in thousands):

 

 

 

 

 

 

 

 

 

Three months

 

 

 

ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

Operating expense

    

$

 —

    

 1

 

Selling, general and administrative

 

 

1,388

 

1,220

 

Research and development

 

 

17

 

227

 

 

 

$

1,405

 

1,448

 

 

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 three months ended March 31, 2018.  

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. The volatility used in the calculation for Awards is based on the historical volatility of Liberty Broadband common stock and the implied volatility of publicly traded Liberty Broadband options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

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, 2018

 

404

 

$

33.16

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

Exercised

 

(5)

 

$

27.88

 

 

 

 

 

Forfeited/cancelled

 

 —

 

$

 —

 

 

 

 

 

Outstanding at March 31, 2018

 

399

 

$

33.24

 

1.7

 

$

21

Exercisable at March 31, 2018

 

397

 

$

33.19

 

1.7

 

$

20

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Weighted

    

    

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

remaining

 

Aggregate

 

 

 

 

 

 

 

contractual

 

intrinsic

 

 

Series C

 

WAEP

 

life

 

value

 

 

(in thousands)

 

 

 

 

(in years)

 

(in millions)

Outstanding at January 1, 2018

 

2,388

 

$

43.35

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

Exercised

 

(24)

 

$

28.57

 

 

 

 

 

Forfeited/cancelled

 

 —

 

$

 —

 

 

 

 

 

Outstanding at March 31, 2018

 

2,364

 

$

43.50

 

5.0

 

$

100

Exercisable at March 31, 2018

 

844

 

$

34.54

 

1.9

 

$

43

As of March 31, 2018, the total unrecognized compensation cost related to unvested Awards was approximately $9 million. Such amount will be recognized in the Company's condensed consolidated statements of operations over a weighted average period of approximately 1.5 years. 

As of March 31, 2018, 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

Long-Term Incentive Plans

 

Skyhook has a long-term incentive plan which provides for the granting of phantom stock appreciation rights (“PARs”) and phantom stock units (“PSUs”) to employees, directors, and consultants of Skyhook that is not significant to Liberty Broadband. As of both March 31, 2018 and December 31, 2017, $1.2 million are included in other liabilities for the fair value (Level 2) of the Company’s long-term incentive plan obligations.

(8) Commitments and Contingencies

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. 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.

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 72% and 67% of total revenue for the three months ended March 31, 2018 and 2017, 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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(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 or losses represent 10% or more of Liberty Broadband’s annual pre-tax earnings (losses).

Liberty Broadband evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and Adjusted OIBDA. In addition, Liberty Broadband reviews nonfinancial measures such as subscriber growth.

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 three months ended March 31, 2018, Liberty Broadband has identified the following consolidated company and equity method investment as its reportable segments:

·

Skyhook—a wholly owned subsidiary of the Company that provides the Precision Location Solution (a location determination service) and Geospatial Insights product (a location intelligence and data insights service).    

·

Charter—an equity method investment 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.

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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Performance Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

Adjusted

 

 

 

Adjusted

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

 

(amounts in thousands)

 

Skyhook

    

$

11,791

    

6,099

    

3,140

    

(2,560)

 

Charter

 

 

10,657,000

 

3,824,000

 

10,164,000

 

3,560,000

 

Corporate and other

 

 

 —

 

(1,539)

 

 —

 

(1,401)

 

 

 

 

10,668,791

 

3,828,560

 

10,167,140

 

3,556,039

 

Eliminate equity method affiliate

 

 

(10,657,000)

 

(3,824,000)

 

(10,164,000)

 

(3,560,000)

 

Consolidated Liberty Broadband

 

$

11,791

 

4,560

 

3,140

 

(3,961)

 

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

Total

 

Investments

 

Capital

 

 

 

assets

 

in affiliates

 

expenditures

 

 

 

(amounts in thousands)

 

Skyhook

    

$

24,312

    

    

14

 

Charter

 

 

146,151,000

 

 

2,183,000

 

Corporate and other

 

 

11,933,235

 

11,866,434

 

 

 

 

 

158,108,547

 

11,866,434

 

2,183,014

 

Eliminate equity method affiliate

 

 

(146,151,000)

 

 —

 

(2,183,000)

 

Consolidated Liberty Broadband

 

$

11,957,547

 

11,866,434

 

14

 

 

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

 

 

 

 

 

 

 

 

 

 

Three months

 

 

 

ended March 31,

 

 

 

2018

 

2017

 

 

 

 

(amounts in thousands)

 

Consolidated segment Adjusted OIBDA

    

$

4,560

    

(3,961)

 

Stock-based compensation

 

 

(1,405)

 

(1,448)

 

Depreciation and amortization

 

 

(909)

 

(953)

 

Operating income (loss)

 

 

2,246

 

(6,362)

 

Interest expense

 

 

(5,037)

 

(4,555)

 

Dividend and interest income

 

 

225

 

338

 

Share of earnings (loss) of affiliates, net

 

 

9,302

 

18,922

 

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

 

 

 —

 

981

 

Gain (loss) on dilution of investment in affiliate

 

 

(26,757)

 

(32,138)

 

Other, net

 

 

 —

 

(1)

 

Earnings (loss) before income taxes

 

$

(20,021)

 

(22,815)

 

 

 

 

 

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Table of Contents

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

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; new service and product offerings; the recoverability of our goodwill and other long-lived assets; the performance of our equity affiliate, Charter Communications, Inc. (“Charter”); 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. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but such statements necessarily involve risks and uncertainties and there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors (as they relate to our consolidated subsidiary and equity affiliate) that could cause actual results or events to differ materially from those anticipated:

·

Charter’s ability to 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, mobile, 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, 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);

·

Charter’s ability to develop and deploy new products and technologies, including mobile products, 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 the business of our equity affiliate and our operating subsidiary, 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 or Skyhook’s networks, information systems or properties and impair its operating activities or negatively impact their respective reputation;

·

the ability to retain and hire key personnel;

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·

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

·

the outcome of any pending or threatened litigation;

·

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 their and our respective debt instruments, any violation of which, if not cured in a timely manner, could trigger a default of other obligations under cross-default provisions; and

·

our ability to successfully monetize certain of our assets.

For additional risk factors, please see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. 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 and our Annual Report on Form 10-K for the year ended December 31, 2017. Additionally, see note 2 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 common stock (the “Broadband Spin-Off”). Liberty Broadband was formed in 2014 as a Delaware corporation. 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,  now known as Qurate Retail, Inc., 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 with GCI Liberty, Inc. 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.

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The Company’s wholly owned subsidiary, Skyhook Holding, Inc. (“Skyhook”), focuses on the development and sale of Skyhook’s device-based location technology. Skyhook markets and sells two primary products: (1) a location determination service called the Precision Location Solution; and (2) a location intelligence and data insights service called Geospatial Insights.

The financial information represents a consolidation of the historical financial information of Skyhook, Liberty Broadband’s interest in Charter 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.

Results of Operations—Consolidated—March 31, 2018 and 2017

Consolidated operating results:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

 

 

(amounts in thousands)

 

Revenue

    

$

11,791

    

3,140

 

Operating expense

 

 

466

 

614

 

Research and development

 

 

1,426

 

2,163

 

Selling, general and administrative

 

 

5,339

 

4,324

 

Stock-based compensation

 

 

1,405

 

1,448

 

Depreciation and amortization

 

 

909

 

953

 

Operating income (loss)

 

 

2,246

 

(6,362)

 

Less impact of stock-based compensation and depreciation and amortization

 

 

2,314

 

2,401

 

Adjusted OIBDA

 

$

4,560

 

(3,961)

 

 

Revenue

Revenue increased $8.7 million for the three months ended March 31, 2018,  as compared to the corresponding period in the prior year. The increase in revenue for the three months ended March 31, 2018 was due to a new license agreement entered into during the period. On February 16, 2018, 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 Skyhook. In exchange for this grant, the licensee agreed to pay a one-time lump sum payment of $8.5 million that was recognized as revenue during the three months ended March 31, 2018.

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

Operating expense and research and development expense decreased by $148 thousand and  $737 thousand, respectively, for the three months ended March 31, 2018, as compared to the corresponding period in the prior year, primarily as a result of headcount reductions and other cost containment measures taken by Skyhook in late 2017. Selling, general, and administrative expense increased by $1.0 million for the three months ended March 31, 2018, as compared to the corresponding period in the prior year, primarily as a result of increased legal expenses of $0.8 million and other costs associated with the license agreement, partially offset by decreased expenses resulting from headcount reductions and other cost containment measures taken by Skyhook in late 2017.

Stock-based compensation

The decrease in stock-based compensation expense of $43 thousand for the three months ended March 31, 2018, as compared to the corresponding period in the prior year, was primarily due to a reduction in the fair value of outstanding grants,  partially offset by additional grants of awards, and the ongoing vesting of outstanding grants.

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Depreciation and amortization

Depreciation and amortization expense decreased by $44 thousand during the three months ended March 31, 2018, as compared to the corresponding period in the prior year, due to certain assets becoming fully depreciated.

Operating income (loss)

Operating income increased $8.6 million for the three months ended March 31, 2018,  as compared to the corresponding period 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 increased $8.5 million during the three months ended March 31, 2018, as compared to the corresponding period in the prior year. The increase in Skyhook Adjusted OIBDA for the three months ended March 31, 2018, as compared to the corresponding period in the prior year, was due to the new license agreement entered into during the three months ended March 31, 2018, coupled with lower operating expenses resulting from headcount reductions and other cost containment measures discussed above, partially offset by increased legal expenses and other costs associated with the license agreement discussed above.

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Other Income and Expense

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