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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, 2019

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: (720875-5700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Series A common stock

LBRDA

The Nasdaq Stock Market LLC

Series C common stock

LBRDK

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 

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 15, 2019 was:

Series A

Series B

Series C

Liberty Broadband Corporation Common Stock

26,375,382

2,452,520

152,723,099

Table of Contents

Table of Contents

Part I - Financial Information

f

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 Cash Flows (unaudited)

I-4

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements of Equity (unaudited)

I-5

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-26

Item 4. Controls and Procedures

I-26

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,

 

2019

2018

 

(amounts in thousands)

 

Assets

    

    

    

    

Current assets:

Cash and cash equivalents

$

46,546

 

83,103

Derivative instruments

45,897

Other current assets

 

2,508

 

1,471

Total current assets

 

94,951

 

84,574

Investment in Charter, accounted for using the equity method (note 4)

 

12,067,329

 

12,004,376

Other assets

 

9,767

 

9,487

Total assets

$

12,172,047

 

12,098,437

Liabilities and Equity

Current liabilities:

Accounts payable and accrued liabilities

$

4,070

 

3,504

Deferred revenue and other current liabilities

 

7,734

 

4,691

Total current liabilities

 

11,804

 

8,195

Debt (note 5)

572,619

522,928

Deferred income tax liabilities

972,005

965,829

Other liabilities

3,447

2,867

Total liabilities

1,559,875

 

1,499,819

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 26,375,382 shares at September 30, 2019 and 26,311,681 shares at December 31, 2018

264

263

Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,452,520 shares at September 30, 2019 and 2,454,520 shares at December 31, 2018

25

25

Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 152,721,350 shares at September 30, 2019 and 152,591,939 shares at December 31, 2018

1,527

1,526

Additional paid-in capital

7,926,662

7,938,357

Accumulated other comprehensive earnings, net of taxes

 

7,778

 

7,778

Retained earnings

 

2,675,916

 

2,650,669

Total equity

 

10,612,172

 

10,598,618

Commitments and contingencies (note 7)

Total liabilities and equity

$

12,172,047

 

12,098,437

See accompanying notes to the condensed consolidated financial statements.

I-2

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

Three months ended 

Nine months ended

 

September 30,

September 30,

 

2019

    

2018

    

2019

2018

 

(amounts in thousands, except per share amounts)

Revenue:

Software sales

$

3,713

3,518

10,918

18,680

Total revenue

3,713

3,518

10,918

18,680

Operating costs and expenses

Operating, including stock-based compensation (note 6)

2,323

1,926

6,803

 

5,864

Selling, general and administrative, including stock-based compensation (note 6)

8,507

5,187

23,662

 

17,428

Depreciation and amortization

471

501

1,408

 

2,309

11,301

7,614

31,873

 

25,601

Operating income (loss)

(7,588)

(4,096)

(20,955)

 

(6,921)

Other income (expense):

Interest expense

(6,123)

(5,967)

(19,008)

(17,039)

Share of earnings (losses) of affiliates (note 4)

61,633

84,739

141,882

 

126,952

Gain (loss) on dilution of investment in affiliate (note 4)

(11,219)

(3,203)

(68,944)

 

(35,165)

Realized and unrealized gains (losses) on financial instruments, net (note 3)

(433)

5,678

(433)

 

3,659

Other, net

350

250

1,179

 

668

Net earnings (loss) before income taxes

36,620

77,401

33,721

 

72,154

Income tax benefit (expense)

(9,124)

(17,762)

(8,474)

 

(17,005)

Net earnings (loss) attributable to Liberty Broadband shareholders

$

27,496

59,639

25,247

 

55,149

Basic net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2)

$

0.15

0.33

0.14

0.30

Diluted net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2)

$

0.15

0.33

0.14

0.30

See accompanying notes to the condensed consolidated financial statements.

I-3

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

Nine months ended

September 30,

 

2019

2018

 

(amounts in thousands)

 

Cash flows from operating activities:

    

    

    

    

Net earnings (loss)

$

25,247

 

55,149

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

Depreciation and amortization

 

1,408

 

2,309

Stock-based compensation

 

7,670

 

4,198

Share of (earnings) losses of affiliates, net

 

(141,882)

 

(126,952)

(Gain) loss on dilution of investment in affiliate

 

68,944

 

35,165

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

 

433

 

(3,659)

Deferred income tax expense (benefit)

 

8,474

 

16,650

Other, net

 

1,016

 

1,183

Changes in operating assets and liabilities:

Current and other assets

 

(927)

 

861

Payables and other liabilities

 

2,385

 

(983)

Net cash provided (used) by operating activities

 

(27,232)

 

(16,079)

Cash flows from investing activities:

Capital expended for property and equipment

 

(75)

 

(35)

Net cash provided (used) by investing activities

 

(75)

 

(35)

Cash flows from financing activities:

Borrowings of debt

50,000

158,000

Repayments of debt

(133,000)

Payments from issuances of financial instruments

(46,330)

(142,824)

Proceeds from settlements of financial instruments

96,483

Payment to former parent under tax sharing agreement related to net settlement of Awards

(16,090)

Other financing activities, net

3,170

(534)

Net cash provided (used) by financing activities

 

(9,250)

 

(21,875)

Net increase (decrease) in cash

 

(36,557)

 

(37,989)

Cash, cash equivalents and restricted cash, beginning of period

 

83,103

 

81,257

Cash, cash equivalents and restricted cash, end of period

$

46,546

 

43,268

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements 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, 2019

    

$

263

25

1,526

7,938,357

    

7,778

    

2,650,669

    

10,598,618

Net earnings (loss)

 

 

 

25,247

 

25,247

Stock-based compensation

7,515

7,515

Issuance of common stock upon exercise of stock options

1

1

4,418

4,420

Payment to former parent under tax sharing agreement related to net settlement of Awards

(16,090)

(16,090)

Noncontrolling interest activity at Charter

(7,538)

(7,538)

Balance at September 30, 2019

$

264

25

1,527

7,926,662

 

7,778

 

2,675,916

 

10,612,172

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 June 30, 2019

$

264

25

1,527

7,929,046

7,778

2,648,420

10,587,060

Net earnings (loss)

27,496

27,496

Stock-based compensation

2,505

2,505

Issuance of common stock upon exercise of stock options

265

265

Noncontrolling interest activity at Charter

(5,154)

(5,154)

Balance at September 30, 2019

$

264

25

1,527

7,926,662

7,778

2,675,916

10,612,172

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Consolidated Statements of Equity (continued)

(unaudited)

Accumulated

Additional

other

Preferred

Common stock

paid-in

comprehensive

Retained

Stock

Series A

  

Series B

  

Series C

  

capital

earnings

earnings

Total equity

(amounts in thousands)

Balance at January 1, 2018

$

262

25

1,526

7,907,900

    

8,424

    

2,568,764

    

10,486,901

Net earnings (loss)

 

 

55,149

 

55,149

Other comprehensive earnings (loss)

(646)

(646)

Stock-based compensation

4,055

4,055

Issuance of common stock upon exercise of stock options

1

715

716

Cumulative effect of accounting change

1,223

1,223

Cumulative effect of accounting change at Charter

10,729

10,729

Noncontrolling interest activity at Charter

27,168

27,168

Balance at September 30, 2018

$

263

25

1,526

7,939,838

 

7,778

 

2,635,865

 

10,585,295

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 June 30, 2018

$

263

25

1,526

7,940,118

8,252

2,571,299

10,521,483

Net earnings (loss)

59,639

59,639

Other comprehensive earnings (loss)

(474)

(474)

Stock-based compensation

1,352

1,352

Issuance of common stock upon exercise of stock options

128

128

Cumulative effect of accounting change at Charter

4,927

4,927

Noncontrolling interest activity at Charter

(1,760)

(1,760)

Balance at September 30, 2018

$

263

25

1,526

7,939,838

7,778

2,635,865

10,585,295

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

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”). These financial statements refer to Liberty Broadband Corporation as “Liberty Broadband,” “the Company,” “us,” “we” and “our” in the notes to the condensed consolidated financial statements.

Through a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter Communications, Inc. (“Charter”). Pursuant to proxy agreements with GCI Liberty, Inc. (“GCI Liberty”) and Advance/Newhouse Partnership (“A/N”), Liberty Broadband controls 25.01% of the aggregate voting power of Charter.

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, 2018, 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, 2018. 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.

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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 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, amounts reimbursable to Liberty were approximately $0.7 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively, and $18.6 million and $2.6 million for the nine months ended September 30, 2019 and 2018, 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, 2019

    

September 30, 2018

    

September 30, 2019

    

September 30, 2018

 

(numbers of shares in thousands)

Basic WASO

 

181,522

 

181,328

 

181,409

 

181,322

Potentially dilutive shares (1)

 

1,451

 

1,244

 

1,377

 

1,264

Diluted WASO

 

182,973

 

182,572

 

182,786

 

182,586

(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

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

The Company’s assets and (liabilities) measured at fair value are as follows:

September 30, 2019

December 31, 2018

 

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

$

36,459

36,459

67,329

67,329

Derivative instruments (1)

$

45,897

 

 

45,897

 

 

 

(1)As of September 30, 2019, the Company had an outstanding zero-strike call option on 460,675 shares of Liberty Broadband Series C common stock. The Company paid a premium of $46.3 million in September 2019 for the zero-strike call option. The Company accounted for the zero-strike call option as a financial instrument asset due to its settlement provisions, which is recorded at fair value.

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 prices associated with the call options) were as follows:

 

Range

Volatility

 

22.0

%

-

22.0

%

Interest rate

 

2.1

%

-

2.1

%

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 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.

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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,

 

2019

2018

2019

2018

 

(amounts in thousands)

 

Derivative instruments (1)

$

(433)

5,678

(433)

3,659

$

(433)

5,678

(433)

 

3,659

(1)In April 2018, the Company entered into a zero-strike call option on 610,325 shares of Liberty Broadband Series C common stock and prepaid a premium of $47.8 million. Liberty Broadband exercised its option to settle the contract in cash in June 2018 for cash proceeds of $46.5 million, and recognized a realized loss on the options as of June 30, 2018. In June 2018, the Company entered into another zero-strike call option on 632,911 shares of Liberty Broadband Series C common stock. Upon expiration, the zero-strike call option was rolled into a new zero-strike call option on 621,920 shares of Liberty Broadband Series C common stock and the Company prepaid a premium of $48.6 million in August 2018. The Company recognized a realized and unrealized gain upon expiration of the option in August 2018 and recognized an unrealized gain on the outstanding option as of September 30, 2018. In September 2019, the Company entered into a zero-strike call option on 460,675 shares of Liberty Broadband Series C common stock and prepaid a premium of $46.3 million.

(4) 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 voting and ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of September 30, 2019, the carrying value of Liberty Broadband’s ownership in Charter was approximately $12,067 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2019 was approximately $22,284 million, which represented an approximate economic ownership of 25.2% of the outstanding equity of Charter as of that date.

Pursuant to proxy agreements with GCI Liberty 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, for a five year term expiring May 18, 2021, subject to extension upon the mutual agreement of both parties, subject to certain limitations.

Liberty Broadband’s overall voting interest is diluted by the outstanding A/N interest in a subsidiary of Charter because the A/N interest has voting rights in Charter. 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 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 Charter 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 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.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 of $3,767 million as of September 30, 2019 is allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

September 30,

December 31,

2019

2018

Property and equipment

    

$

251

328

Customer relationships

 

906

721

Franchise fees

 

1,927

1,821

Trademarks

 

29

29

Goodwill

 

1,460

1,202

Debt

 

(41)

(105)

Deferred income tax liability

 

(765)

(698)

$

3,767

3,298

Property and equipment and customer relationships have weighted average remaining useful lives of approximately 5 years and 9 years, respectively, and franchise fees, trademarks and goodwill have indefinite lives. The excess basis of outstanding debt is amortized over the contractual period using the straight-line method. The increase in excess basis for the nine months ended September 30, 2019, was primarily due to Charter’s share buyback program and repayment of debt. The Company’s share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $32.7 million and $30.2 million, net of related taxes, for the three months ended September 30, 2019 and 2018, respectively, and expenses of $88.7 million and $88.1 million, net of related taxes, for the nine months ended September 30, 2019 and 2018, 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 $11.2 million and $3.2 million during the three months ended September 30, 2019 and 2018, respectively, and a dilution loss of $68.9 million and $35.2 million during the nine months ended September 30, 2019 and 2018, respectively. The dilution losses for the periods presented were 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)

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

Charter condensed consolidated balance sheets

    

September 30, 2019

December 31, 2018

 

Current assets

$

3,477

2,944

Property and equipment, net

 

34,218

35,126

Goodwill

 

29,554

29,554

Intangible assets, net

 

75,278

76,884

Other assets

 

2,740

1,622

Total assets

$

145,267

146,130

Current liabilities

11,982

12,095

Deferred income taxes

 

17,609

17,389

Long-term debt

 

71,390

69,537

Other liabilities

 

3,764

2,837

Equity

 

40,522

44,272

Total liabilities and shareholders’ equity

$

145,267

146,130

Charter condensed consolidated statements of operations

Three months ended

    

Nine months ended

September 30,

September 30,

2019

2018

2019

2018

Revenue

$

11,450

10,892

34,003

32,403

Cost and expenses:

Operating costs and expenses (excluding depreciation and amortization)

 

7,435

7,012

21,915

20,721

Depreciation and amortization

 

2,415

2,482

7,465

7,784

Other operating (income) expenses, net

 

14

18

71

116

9,864

9,512

29,451

28,621

Operating income

1,586

1,380

4,552

3,782

Interest expense, net

 

(963)

(901)

(2,833)

(2,630)

Other income (expense), net

(30)

214

(220)

172

Income tax benefit (expense)

 

(126)

(109)

(329)

(178)

Net income (loss)

467

584

1,170

1,146

Less: Net income attributable to noncontrolling interests

(80)

(91)

(216)

(212)

Net income (loss) attributable to Charter shareholders

$

387

493

954

934

(5) Debt

Amended 2017 Margin Loan Facility

On August 19, 2019, a bankruptcy remote wholly owned subsidiary of the Company (“SPV”), entered into Amendment No. 2 to its multi-draw margin loan credit facility (the “Amended 2017 Margin Loan Facility” and, the credit agreement governing such facility, the “Amended 2017 Margin Loan Agreement”) with Wilmington Trust, National Association as the successor administrative agent, BNP Paribas, Dublin Branch, as the successor calculation agent, and the

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

lenders thereunder. SPV is permitted, subject to certain funding conditions, to borrow term loans up to an aggregate principal amount equal to $1.0 billion. SPV will also have the ability from time to time to request additional loans in an aggregate principal amount of up to $1.0 billion on an uncommitted basis subject to certain conditions. SPV had borrowed $575 million and $525 million as of September 30, 2019 and December 31, 2018, respectively. SPV had $425 million available to be drawn until August 19, 2020. The maturity date of the loans under the Amended 2017 Margin Loan Agreement is August 24, 2021 (except for any incremental loans incurred thereunder to the extent SPV and the incremental lenders agree to a later maturity date). Borrowings under the Amended 2017 Margin Loan Agreement bear interest at the three-month LIBOR rate plus a per annum spread of 1.5%. Borrowings outstanding under this margin loan bore interest at a rate of 3.60% per annum at September 30, 2019. 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 Amended 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.

The Amended 2017 Margin Loan Agreement contains various affirmative and negative covenants that restrict the activities of the SPV (and, in some cases, the Company and its subsidiaries with respect to shares of Charter owned by the Company and its subsidiaries). The Amended 2017 Margin Loan Agreement does not include any financial covenants.  The Amended 2017 Margin Loan Agreement also contains restrictions related to additional indebtedness and events of default customary for margin loans of this type.

SPV’s obligations under the Amended 2017 Margin Loan Agreement are secured by first priority liens on a portion of the Company’s ownership interest in Charter, sufficient for SPV to meet the loan to value requirements under the Amended 2017 Margin Loan Agreement. The Amended 2017 Margin Loan Agreement indicates that no lender party shall have any voting rights with respect to the shares transferred, except to the extent that a lender party buys any shares in a sale or other disposition made pursuant to the terms of the loan agreements. As of September 30, 2019, 6.8 million shares of Charter with a value of $2.8 billion were pledged as collateral pursuant to the Amended 2017 Margin Loan Agreement.

 

(6) 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, 2019 and 2018 (amounts in thousands):

Three months

Nine months

 

ended

ended

 

September 30,

September 30,

 

2019

2018

2019

2018

 

Operating expense

    

$

12

    

15

    

60

    

42

Selling, general and administrative

 

2,519

1,382

7,610

 

4,156

$

2,531

1,397

7,670

 

4,198

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

Liberty Broadband – Grants of Stock Options

During the nine months ended September 30, 2019, Liberty Broadband granted 41 thousand options to purchase shares of Series C Liberty Broadband common stock and 25 thousand performance-based restricted stock units (“RSUs”) of Series C Liberty Broadband common stock to our CEO. Such options had a GDFV of $25.46 per share. The RSUs had a GDFV of $88.99 per share at the time they were granted. The options vest on December 31, 2019 and the RSUs cliff vest  one year from the month of grant, subject to satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. When the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The probability of satisfying the performance objectives is assessed at the end of each reporting period.

There were no options to purchase shares of Series A or Series B common stock granted during the nine months ended September 30, 2019.

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